Brooke’s note: This RIABiz column is riddled with potential conflict. First of all, RIABiz is at least obliquely in competition with Barron’s so any criticism of them that we publish needs to be looked at with some suspicion. Not only do both our publications have some overlap in covering advisors but we both publish lists that include advisors. See: 10 most influential RIA figures going into 2013 and how they’re reshaping the industry, Part 1. And, who knows, some day we, like Barron’s may even have a conference based on one of our lists. The author of this column, Jack Waymire, also has a potential conflict in the sense that his company earns revenues based, like Barron’s, on identifying top financial advisors. Even realizing all that, we are inclined to run this column and take our lumps. As the dispenser of the advisory version of papal blessings, Barron’s authority in saying who is best among advisors is all but free of critical observation. See: The top 10 things you need to know about the new Barron’s Top 100 List. Anybody on the list will tell you that they simply can’t afford to get booted by sounding off. Anybody not on the list doesn’t want to hazard not getting on the list by sounding off. Many providers will tell you the can’t criticize Barron’s because they want to be invited to the big RIA parties in Florida and gain access to such a concentration of top-notch prospects. So who is left to say something is a publication like ours and a Jack Waymire who operates in behind the curtain of advisor-rating operations. When we reached out to Barron’s, spokesman Matthew Barthell e-mailed back: “You have all the information we publicly disclose about our methodology and processes, and we don’t have any comment beyond that.” He went on to say: “Barron’s and Waymire’s company endeavor to identify good advisors—in that sense, we occupy the same competitive space, though we clearly go about it differently.”
Waymire explained the differences between Barron’s “Top Advisor” and his company’s advisor-rating activities this way: Paladin advisor research vets advisors for Worth magazine’s leading wealth advisors program that includes investment, legal and insurance advisors. Worth does not claim these advisors are the best in America. See: Worth magazine’s new owner rights ship by charging wealth managers for write-ups. It does disclose that Paladin vetted the advisors and the advisors pay Worth a fee to participate in the program.
Paladin’s registry service profiles advisors who scored in the 90th percentile or higher when paladin vetted the advisor’s credentials, ethics, business practices and services. advisors who score in the top 10% are eligible to be listed in paladin’s registry and directory. There is a very explicit diclosure on the Paladin site that a 5-star rating does not mean the advisor produced superior results in the past or in the future.
If a $5-million client informed you he was moving his assets to another advisor, your first two questions would probably be why. And to which advisor?
And what if your client responded he is moving his assets to an advisor on the Barron’s Top 1,000 U. S. Financial Advisors? Barron’s is a weekly newspaper that is owned by Dow Jones. Its focus is financial information, market developments, and publishing Best in America lists.
At that point it might be too late, but perhaps you would like some facts about the methodology used to build the Barron’s list. See: The top 10 things you need to know about the new Barron’s Top 1,000 List.
Barron’s has been producing Best Financial Advisors in America lists for 10 years. The advisors that fall under Barron’s “best” umbrella include stockbrokers, registered reps, RIAs and hybrids (RIAs or IARs who hold active securities licenses). Barron’s would like investors to believe it conducts comprehensive due diligence to arrive at its conclusions, the same as other publications that claim they have a unique methodology that identifies the best mutual funds, hedge funds, separately managed accounts, and securities. See: The SEC needs to clean up its semantics before accusing RIAs of inflating AUM.
Although Barron’s gives a broad outline of the criteria it uses (see below for Barron’s explanation), it is mysterious about its methods, saying that they are proprietary. So investors will never know exactly how Barron’s determined who ranked first, second, third, and so on. The only obvious measurement is the amount of assets that are controlled by the first, second, and third advisors on the Top 1,000 list.
Barron’s claims it validates the accuracy of advisor data by comparing them with information in regulatory databases, and through cross-checks with securities firms and conversations with individual advisors. See: Barron’s offers insight but declines interview about Top 100 study.
Barron’s website says the source of the data that it relies on for vetting is the financial advisors on its list. That makes sense, because there are no public databases that provide all of the necessary data for a comprehensive vetting process. The information has to come from advisors.
Barron’s does have a questionnaire with 102 questions they send to advisors. Most of the questions relate to clients, assets, and revenues. A few questions deal with compliance records and certifications, which reflect the ethics and competence of advisors.
In my opinion, Barron’s due-diligence claims are designed to sound comprehensive, but they are not close to being a complete vetting process. Here’s why:
• Regulatory databases, such as those of FINRA and the SEC, contain about 25% of the information you need to effectively vet a financial advisor.
• What is a cross-check with a securities firm? This deliberately vague term makes it sound as if the 1,000 Best Advisors are stockbrokers. What if the advisor is an RIA and there is no securities firm? And what data are being cross-checked?
• “Conversations with advisors” is also vague. Are the conversations with the advisor on the Barron’s list? Or, if it is with third party advisors, how did Barron’s get their names and what questions did it ask them?
Overseen, not heard
Barron’s states that the advisor ranking reflects the volume of assets overseen by the advisors and their teams, revenue generated for the firms, and the quality of the advisors’ practices.
Investors are supposed to believe that the advisors who manage the largest amounts of assets that produce the greatest amounts of revenue are the Best Advisors in America.
But since assets produce revenue, this is really one measurement. Second, assets and revenue may have nothing to do with the quality of the advisors’ services. More often than not, it means that the advisors are really good at marketing. However, many of the best financial advisors are not good at marketing. They are intellectual, analytical professionals who do a great job for their clients, but spend as little time and money as possible on marketing activities. And, how does Barron’s determine the quality of advisors’ practices when its questionnaire does not require that information? Does it conduct onsite visitations?
Barron’s use of the word “overseen” is also very telling. This Barron’s term is not used by the regulatory agencies, and it appears that advisors can include any type of asset in their AUM numbers: Discretionary, non-discretionary, managed, mutual fund assets, variable annuity assets, and assets in trading accounts. See: Which type of AUM is worth more to a buyer?.
Barron’s says: “Investment returns are not a component of rankings because an advisor’s returns are dictated largely by the risk tolerance of clients.”
This statement is largely correct, unless the advisor provides one money management service to multiple clients. This is why money managers have track records and financial advisors do not. See: 6 reasons why RIAS can’t — or don’t want to — have track records.
It is possible to create track records if advisors subdivide clients into categories — for example, younger clients with higher risk tolerances and retired clients with lower risk tolerances are in different categories. However, producing audited track records compliant with global investment performance standards would be very expensive.
The bottom line: There is no way to know if these advisors produce the best results or even if they produce competitive results. But, investors are supposed to believe they produce superior results because they are on Barron’s list and they are responsible for large amounts of assets. Even more alarming, there is no disclosure that says a listing does not guarantee superior results in the future.
I also could not find any professional profiles for the Best Advisors in America on the Barron’s website. The only information that is published by Barron’s are client and asset data. Critical information that describes education, certifications, experience, registrations, fiduciary status and method of compensation is nowhere to be found. See: Advisor spotlight: Haverford’s president hits the Barron’s list with the 'most unloved’ strategy.
Barron’s also does not disclose any potential conflicts of interest. For example, do the Best Advisors buy research and other services from Barron’s and Dow Jones? Whether they do or not, any potential conflicts of interest should be disclosed to investors who are relying on Barron’s objectivity to help them identify and select the best advisors in America.
Are the lists published to increase Barron’s circulation, create a market for Barron’s and Dow Jones research products, sell advertising, or provide an objective, sophisticated service investors can depend on when they select financial advisors? These objectives are not necessarily in conflict with each other, but investors deserve real due diligence and full transparency when they depend on Barron’s and the quality of its services. See: How exactly RIAs can leverage the new transparency as a marketing tool.
Final note: Here is Barron’s description of its methodology as stated on its 2013 Top Advisor Rankings by State web page: “The rankings are based on data provided by over 4,000 of the nation’s most productive advisors. Factors included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice, and philanthropic work. Investment performance isn’t an explicit component because not all advisors have audited results and because performance figures often are influenced more by clients’ risk tolerance than by an advisor’s investment-picking abilities. A ranking of 'N’ denotes “not ranked that year.”
Jack Waymire spent 28 years in the financial services industry. For 21 years he was president of an RIA that provided wealth management services to more than 50,000 individual and institutional investors. He is the author of “Who’s Watching Your Money?” and the founder of Paladin Registry, a website that provides free advisor research, ratings and reports to investors. He is a columnist for Worth magazine, a contributor to major financial websites, and is frequently quoted by the media.