Two recent articles on “top financial advisors” have left me slack-jawed with disgust.
The first was in my local daily paper, the Naples Daily News (that’s Naples, Florida rather than Napoli, Italia!):
“Thomas Moran, managing director of investments and a founding member of the Moran Edwards Asset Management Group of Wells Fargo Advisors in Naples, has been named by Barron’s as the top adviser in Southwest Florida.”
Hey, congrats to Mr. Moran! And what criteria were used to identify him as “the top adviser”?
“Factors taken into account include assets under management, revenue produced for the firm and regulatory record, according to Barron’s website.”
So Mr. Moran has a clean record (well, actually he’s had five client complaints lodged against him during his long career, but one can’t tell from the record whether any of these were justified or consequential). Anyway, he’s obviously first-rate when it comes to gathering assets and generating profits for his firm.
Are you wondering what I’m wondering? Which is: what about his clients’ returns? How have his clients fared, net of fees, transaction costs, and taxes compared to standard market index benchmarks? After all, once you’ve determined the appropriate allocation of assets for your circumstances and objectives, the easiest and cheapest way to implement your investments are through low-cost, low-turnover, passive index funds at shops like Vanguard or Fidelity Investments.
I have no idea what Mr. Moran’s record is. Perhaps it’s terrific. Perhaps not. The point is: why isn’t that the headline criterion for a “top investment advisor’?
And I have exactly the same problem with a similar article in the Financial Times, which undertook to rank the top 400 financial advisers in the United States.
The FT says that “The guiding principle behind the FT 400 is to focus on investors. We assessed financial advisers from the perspective of current and prospective clients.”
Now this sounds much more promising, right?
“The methodology is quantifiable and objective.” Excellent!
“In autumn 20143, the FT contacted the largest US brokerage firms to solicit advisers’ practice information and data for the firms’s most elite advisers.”
Wait a mo’: “the largest US brokerage firms . . .”? In other words, Morgan Stanley, Bank of America Merrill Lynch, J.P. Morgan, Goldman Sachs, UBS, and so on. Now, while it’s true that such firms control a very large percentage of the assets individuals have invested with “financial advisers”, it’s also true that none of these firms publish reports on their clients’ results, and that all of them have had multiple run-ins with the SEC for regulatory infractions (as indicated in the ADV reports you can easily find by clicking on “Investment Adviser Search” at www.adviserinfo.sec.gov). And let’s not forget that “financial advisers” at brokerage firms have no fiduciary responsibility to their clients. As Charley Ellis puts it in Winning the Loser’s Game, their job is to make money from you not for you.
As readers of my book, Simple, Smart Investing know, my advice is that yes, most individual investors should hire an investment professional to manage their money for them, but should also stay well clear of any of these large brokerage firms or “wealth management” divisions of investment banks in favor of much smaller, independent firms.
So, with its “focus on investors” what are the FT’s selection criteria?
“Areas considered include adviser assets under management, asset growth, years of experience, industry certification, Financial Industry Regulatory Authority compliance record and online accessibility.”
Again, not a peep about client performance.
Now, the financial advisers will argue that there’s no way to document client performance. They’ll say that all clients are different, with different goals, different circumstances, different needs. Blah, blah, blah. So are the goals, circumstances and needs of institutional investors like endowments, foundations and pension funds, but that doesn’t stop them measuring their performance against market benchmarks to see whether their investment decisions are adding value. In other words, there’s no reason whatsoever to prevent firms from measuring client performance in different asset classes and comparing it to standard benchmark indexes. The reason the firms don’t do so is because they know perfectly well that most clients would soon realize that they’re paying superior fees for inferior performance. That’s what I call a double whammy. And it’s precisely why these firms do not show their clients how their portfolios actually performed, net of all costs, compared to how they would have performed if invested in simple, low-cost, passive index funds.
After all, if clients of Morgan Stanley and Merrill Lynch and so on were consistently outperforming the market, don’t you think our TVs would be blaring this news at top volume?
In short, I find both these reports on “top financial advisers” profoundly misleading. And just in case you’re itching to argue that the success enjoyed by Mr. Moran or by the FT’s top 400 must surely indicate client satisfaction, let me conclude with a quotation from Professor Teresa Ghilarducci of the New School for Social Research, writing in The New York Times (July 21, 2012):
In my ad hoc retirement talks, I repeatedly hear about the “guy.” This is a for-profit investment adviser, often described as, “I have this guy who is pretty good, he always calls, doesn’t push me into investments.” When I ask how much the “guy” costs, or if the guy has fiduciary loyalty—to the client, not the firm—or if their investments do better than a standard low-fee benchmark [i.e., index fund], they invariably don’t know.
“They don’t know.” It’s amazing, when you think about it: in virtually every other field of human endeavor which is susceptible to performance measurement, from sports to business, we measure. Of course we do. How else can we answer the basic question: how did we do? But somehow financial service firms, whether “financial advisers” at brokerage firms or mutual fund companies, get away with not measuring their clients’ results against simple, readily available yardsticks. And their clients don’t know to ask.
And this travesty is exacerbated by newspaper rankings of “top financial advisers” focused on assets under management and revenue generated for the firm. So that old question is still sadly relevant today: Where are the customers’ yachts?