RIA Rankings: Should We Care?

It’s rankings season, and we’re not dreaming of March Madness just around the corner and our chance to win a billion dollars.

We’re talking about the wealth management industry’s plethora of benchmarks: Barron’s Top 1000 Advisors, InvestmentNews’ Top RIAs, Financial-Planning’s Top 50 Fee-Only Advisors. The list goes on.

Since Wall Street’s instinct is that bigger is better, there’s glamor for both individual advisors and RIAs for topping these lists.

But do the rankings really matter?

After a career on Wall Street and now working with successful independent advisors, I see three points-of-view: 1) Rankings do matter; they reinforce the clients choice to hire an advisory firm; 2) Rankings are a distraction and don’t reveal anything meaningful; 3) Both points-of-view are valid. You can argue both sides of the argument.

Why Rankings Matter

With money mangers, it’s easy: Measure them by risk adjusted performance. For wealth managers, there is nothing so clear-cut, so we are already on a slippery slope.  Client assets indicate a vote of confident in an advisory firm’s services, but how much have the firms had to cut their fees to attract the assets?

Asset size is also beneficial for wealth advisors because it reduces services fees at the custodians and at reporting firms.  Many firms pass this benefit on to their clients, but some do not and pocket the fee reductions to increase their profitability.  Adding asset growth to the equation would enhance the surveys in our opinion.

Why They Don’t Matter

Is there a tipping point for money managers and wealth advisors when size becomes a detriment?  Numerous academic studies have been written that prove the importance of asset size when evaluating money managers. 

For wealth managers, we believe the advisor-to-client ratio is a better metric than asset size.  A larger client load can overwhelm the advisor and their service team, sacrificing client service.  When asked, wealthy clients consistently rank service at the top of their priority list.  I’ve never seen asset size top a client survey.

The Bottom Line

As much as anything, the rankings can be a Rorschach test. They can reflect your own thinking, rather than being objective. It’s useful, though, to consider the other side of the argument. Are we measuring the right thing? It is even possible to measure the things we really know matter – trust, service and knowledge?


You decide.

Comments

  1. Jeff SpearsMay 14, 2018 at 8:14 AM

    Seth has an opinion of rankings. http://sethgodin.typepad.com/seths_blog/2018/05/the-problem-with-forced-rankings.html

    ReplyDelete

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