Barron’s magazine has once again published one of its “top” financial advisors list. In it’s most recent list (April 28, 2014) , Barron’s proclaims that the “rankings have been a remarkable success.” My question is simple – a success for whom, the advisors or their customers?
Barron’s goes on to state that the lists are produced with the “goal of shining a spotlight on the best people in the business.” Once again I ask, best people for whom, their broker-dealer or their customers?”
These questions are perfectly valid given the criteria that Barron’s says it uses to select a “Barron’s advisor.” Barron’s states that its criteria includes an advisor’s assets under management, annual revenue generated, length of time in the business, client retention, and philanthropic work. They state that they also review an advisor’s regulatory record.
Interestingly, not one of the stated criteria focuses on the value an advisor provides for their clients. The criteria does however focus on assets under management and revenue generated, which provide a benefit for the advisor’s broker-dealer. Assets under management may speak to an advisor’s marketing skills, but does not provide information about their investment skills.
When one considers that historically 3 out of 4 stocks follow the general trend of the market, perhaps the more appropriate measure of an investment advisor’s value is how they performed in down markets. As an old Wall Street saying goes, “don’t tell me how much money you made, tell me how much you were able to keep.” However, the Barron’s article provides no specific data regarding such information.
Another interesting point is that the overwhelming majority of “Barron’s advisors” are affiliated with major broker-dealers. This raises obvious concerns given the history of abusive practices within the investment industry and the fact that unlike investment advisors, financial advisors are allowed to put their own financial interests ahead of their customers’ best interests.
Perhaps the most important disclosure of all is the disclosure that the list is on a “pay-to-play” basis, as advisors have to pay a fee to be listed. So, in truth, Barron’s list should more accurately be entitled, the “Top 1,200 Financial Advisors Who Were Willing to Pay Us Money to Call Them That.” There is no mention of how much each advisor was required to pay to become a “Barron’s Advisor”
Barron’s does state that money paid by each advisor has no bearing on an advisor’s ranking, and does not guarantee any future ranking. Each individual will have to draw their own conclusions as to the accuracy of that statement. Why require a payment from an advisor if the rankings are truly objective?
Neither investors nor financial advisors can control the markets. However, both investors and financial advisors can control costs and market risk, both of which are critical in successful investing. I previously wrote an article, “Determining the True Cost of Actively-managed Mutual Funds,” which addressed the fact that the true cost of actively managed mutual funds often recommended by financial advisors is significantly more than the stated expense. A similar evaluation of investment advisor’s fees often shows effective fees of 50 percent or more. Market risk is usually addressed by ensuring that one’s investment portfolio is effectively diversified.
The takeaway – while many publications provide financial advisor “best” lists, it is important to examine the criteria used in creating such list to determine the credibility one should give such a list. Any list that requires a payment to be included on the list is obviously suspect. Financial advisor lists that do not include criteria based on the benefits provided to a customer raise obvious issues. Investors are better served by making their own personal evaluation of a prospective or current financial advisor, using the Active Management Value Ratio to evaluate the true cost of investment recommendations and asking the advisor for documentation of their performance record during 2008, the most recent bear market.