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Measuring Quality With a Ruler
By Bob Veres
July 14, 2011
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I have a lot of pet peeves (is this a sign of getting older, that you collect more as the years go by?) but one of my biggest is how we, as a profession, tend to define other professionals by one number: their assets under management.
Every article tells you how many client dollars the firm being profiled manages, and there is at least one industry survey which ranks advisory firms based on their total AUM, from those in the billions down to those in the mere millions.
The implication is that those who work in a firm that manages billions are somehow more serious or important than the solo practitioner who has 50 clients and $65 million under management.
This not just writers who do this. At every conference I attend, advisors will exchange their AUM information the way big producers used to exchange their total GDC numbers at conferences some years ago, and whoever has the lower number (so goes the implication) is lower on the pecking order.
Of course, this AUM number doesn't communicate a lot of important things, like the quality of client service, investing acumen or talent, profitability or personal income, contribution to the profession -- and I would argue that those things are more important for evaluating the importance (or lack thereof) than the raw dollars in client accounts. It's like trying to measure the quality of something with a ruler; the results are meaningless and potentially misleading.
Meanwhile, the AUM measurement is gradually becoming a less accurate measure of the size of a firm -- which may be the only thing it WAS good for.
In the fairly near future, the advisory profession is going to tap into an interesting new market: people who have fairly high cash flow or income, but who haven't saved enough to need an asset manager. These people will pay for an advisor to help them do the things that everybody needs to do to accumulate wealth: set aside at least 15% of total income, create a diversified portfolio and stay invested without giving in to panic attacks.
Clients like this, paying on retainer, can be just as profitable as those who give you millions to manage -- but of course they don't add anything to your AUM total, and therefore don't boost your status with writers or peers.
Meanwhile, I can easily envision advisors moving a portion of the assets of their retired clients into immediate annuity arrangements, locking down their core expenses like food and shelter. That, too, will diminish AUM, even though these advisors may be billing on a retainer basis.
The point here is that I think we have a habit left over from the Big Producer days of the profession, which is not serving us well, and may be unconsciously steering us away from opportunities for your firms and your clients.
I know in my own articles, I seldom mention AUM, although I DO mention how many clients the firm works with, and how many advisors work with those clients, to give an idea of the size and scale of the operation.
Am I wrong here?
What do you think? Let me know.
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For more on planning, client service, practice management and marketing, or to join the Inside Information community, contact Bob Veres at Bob@BobVeres.com or go to http://www.bobveres.com/.
Is too much emphasis placed on assets under management and not enough on investing acumen and quality of client services?
While the recent FPA Convention provided some new and very interesting presentations and introduced some pretty high-brow concepts, Financial Planning columnist Bob Veres felt far too many of the presentations were bogged down by speakers who decided -- or were compelled -- to “dumb down” the material to appeal to the lowest common denominator. What did you think?
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I think we as advisors are going about our lobbying effort all wrong. More to the point: does it make sense for us to keep lobbying on behalf of the consumer or should we act like everybody else in the universe and lobby for things that would better serve our own interests?
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The time and energy that the advisor focuses on the client produces far more terminal wealth for that client than anything you can get from the traditional investment management services.
The royal wedding, eliminating the notorious mastermind of the Sept. 11 attacks--this is going to be a week to remember forever. But I also wonder whether it might represent another milestone.
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Some advisors are averse to even DISCUSSING the value of portfolio management, possibly believing that we all spend too much time talking as if financial planning and portfolio management are the same service--which they clearly are not.
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Ever since September 2008, clients are asking for more than you can possibly deliver: to keep track of the macro-economic big picture and help them get out of the market as soon as we start moving into another meltdown period. So the question is: How can we possibly respond to these lofty expectations?
The financial planning community has a lot of knowledge and wisdom – way more than any individual writer or commentator. But how do we tap the deep wisdom of the crowd to help us resolve important, complicated issues? Bob Veres, a columnist for Financial Planning magazine, is here to trigger conversations on important topics for advisors on issues and subjects facing the industry. First up: The regualtory standard.
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