What is a “best” advisor?
That’s the question on the mind of popular blogger, wealth manager and financial-planning speaker Michael Kitces.
He requested advisors’ insights on the topic on Facebook this week.
“We’ve all seen those lists of ‘Best Advisors’ that really just measure [assets under management] and/or revenue of the advisor, and nothing about their actual quality and whether they’re really the ‘best’ at anything or not,” Kitces wrote.
What is the best way to objectively measure who is the “best” in the business using an approach that publications can “scalably measure and implement?” he asked. “What else should be considered (that can be reasonably measured)?”
1. How Are the Clients Doing?
It’s time to include information on client retention, client surveys and basic planning criteria (such as the percent of working clients with disability insurance, the percent of clients with a three-month emergency fund, etc.), Paul Compeau, a founding partner at BridgeWise Financial Partners, commented on Kitces’ Facebook query.
2. Written Plans
Look at the percent “of clients with a written plan addressing risk management and a portfolio and savings rate aligned with the plan’s needs,” along with executed insurance and estate plans, suggested Beyond Wealth Management advisor Chris Drouin. Plus, consider the percent of clients who get a full update/review of these matters every 12-18 months.
Kitces’ caveat: “I fear that most advisors will say their clients have ‘a plan,’ regardless of how substantive it really is (vs. just being the output of planning software).”
3. Client Input
Ranking or rating “best advisors” must be left to the clients, says Hubris Global Wealth advisor Eric McLoyd. “The number of clients who met their overall financial goals and were prepared well for risks should be at least some of the factors considered.”
4. Comprehensive Planning
Measure top advisors based on the “implementation of a comprehensive plan that leaves no stones unturned, and accountability to implement the action items recommended by the plan,” according to Matlin Financial Services President Curtis Matlin.
For an even more “comprehensive” measuring stick, Matlin suggests looking at the Higher Standard of Care checklist developed by Ken Haman, the managing director of the AllianceBernstein Advisor Institute.
5. Performance Measures
Turn to performance metrics, such as the Sharpe ratio, information ratio and outcome results, suggests Glenn Moore of Gibraltar Financial.
Other metrics could include a look at five- and 10-year results tied to the stated goals and objectives that were defined at the start of the relationship. “Did you execute what you said you would do?” asked Moore.
Kitces’ feedback: “I’m fascinated by the potential of ‘did clients actually execute as planned?’ Unfortunately, virtually no advisors have tracked this historically, so we may have to wait five to 10 years to see who’s actually ‘best’ or not.”
6. Multiple Measures
“Pull together [information on] AUM, retention, client-service model, client satisfaction scores [and the] number of clients in [a] formal planning relationship,” suggested Trevor Jones of the Jones Group, a practice of Ameriprise Financial.
7. Follow the Money
Another criterion could include how payments are collected from clients, says Step-by-Step Communications President Teresa Vollenweider, who is not an advisor.
This type of analysis would look at whether or not there is a detailed invoice that clients can pay via check or credit cards, or if fees are taken directly from the client accounts.
At least one advisor says he values this analysis, but thinks talk of what precise measures should be used for listing top advisors is premature.
“This is a great question and until we have a set of standards to evaluate what is considered a plan there is no way” to answer it, according to Jason Ball of Ball Comprehensive Planning.
For Kitces, the “ideal” measuring stick should be “to actually ask/survey … clients themselves and see what they say.”
As he admits, unfortunately, it is “at best … costly for each advisory firm to hire a survey firm to evaluate their clients ‘just’ for the Barron’s survey.”
On the other hand, Kitces says, advisory firms “should theoretically want to survey clients periodically for feedback anyway, [right]?”
Consider another issue: the drawbacks of being part of the Barron’s Top 100 advisor list, as experienced by Richard Reyes of the Financial Quarterback, a wealth and business planning group.
“I was on one of those lists once 10 years ago, and the state came after me hard for being on the list as they were concerned what clients would perceive,” Reyes explained. “As a matter of fact, they gave me the list and asked me to point out others on the list they should consider [for a] ‘visit.’ I never gave them the information, but I will never be on a list ever again.”
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