Measuring Quality With a Ruler

[pioneer woman]

As far as I'm concerned you have hit the nail on the head regarding the "importance" attached to Assets Under Management. While investment advising (not assets under management) is included in the services I offer, I spend far more time with clients on other areas of financial planning. Having 50 clients with Asset Under Management of $65 million still sounds "elitist" to me. When someone like Dave Ramsey creates the following he has, which starts with focusing on getting out of debt, I think the public is saying that they have concerns that we as Certified Financial Planners(r) are not meeting. While I don't agree with some of what he promotes, I will agree he is addressing a very large audience with more imminent needs, and certainly making a lot of money doing that.
I just read an article by Anthony Mirhaydari on msn.com addressing the need to increase the debt limit ceiling. What I found very interesting about the article was what the author had to say about the need to address the run away costs of health care, particularly for seniors (Medicare and Medicaid). Don't we as financial planners have a responsibility to bring such issues to our clients' attention and help them plan for this time in their lives - plan both "reactively" and "proactively"? Should helping our clients put together a plan to address their health issues be just as much a part of long-term care planning as advising them about long-term care insurance? This is only one example of why my focus in not on assets under management, but on helping my clients meet needs of all kinds throughout their lives.

[Nick Ray]

Why we measure what we measure?. If external validation is what you crave, then AUM is an truly important number.
If you have a good business plan, where your vision and mission are anchored to is what is most important to you and your clients, then AUM will occupy a part, but not the totality of your identity. For those who see their primary goal as serving others, then your measurements will take on a more meaningful and energizing motivation for your business practices.
Insofar as numbers go, the most meaningful measurements are these two: excellent cash flow management, and sustained profitability. Ultimately business success is based on serving customers well, making a profit and funding your education and retirement needs. Do that, and your numbers will be just fine -- regardless of AUM.

Nick Ray CLU RHU ChFC MBC
Business Coach

[FlatfeeSteve]

I think this pet peeve is just a small cousin of the pet peeve you wrote about in July 2006 about the unfairness of how advisors charge a percentage of those assets under management with no regard to the amount or quality of work they perform. I agreed with you then and got out of the AUM business and formed a flat fee firm regardless of assets with non-investment management charged on an ala carte basis. That article stirred up a firestorm then and would today if you re-ran it. My pet peeve is that you have a lot of advisors charging big fees, carrying big overhead, and thinking they are delivering that much in value. I really never understood why you didn't stay with that theme of how ridiculous it is to continue to pay a percentage of the AUM without any regard to the amount of work performed. Lawyers, accountants, architects, and many more professionals could not get away with charging on this basis but I think the public will eventually start to question the high fees charged by their advisors. Oh yes, most of those advisors don't deliver returns that exceed the relevant benchmarks. If I need financial or tax planning, I am going to hire a top quality CPA who will charge me on an hourly basis and not use a "financial planner" with much less credentials but who has a better marketing plan. My main method of making a decision is to ask if I would do myself what I am asking a client to do and that would not be to pay a percentage of assets for planning. Would you? Your article in 2006 was the final validation for my decision and I am glad I turned my back on such an unfair method of charging for my services, namely, a percentage of AUM. It sounds like we both have pet peeves to deal with. Being sixty-eight does have something to do with refusing to put up with the crap you have had to listen to at conferences and in magazines. I wish you well dealing with your pet peeves but my therapist wife would tell you that the best thing you can do is get them all out on the table.
Steve Renner

[AltusWealth]

Once again, Bob you are absolutely dead on correct. The focus on AUM allows planners to lose focus on the value they are creating for clients and promotes in the marketplace instead the mistaken belief that financial planning has no value (because planners don't charge a fee for those services).

Like employer-prepaid-medical care (it's not really "health insurance" although that's what people call it), the end-consumer has no idea what they are buying or what it is really worth. Costs escalate and overall value diminishes. The sooner we get away from this disaster, the more likely it will be that the FP industry can actually become a real profession.

[Stephen Winks]

Bob, you are absolutely correct.


The entire fiduciary debate revolves around this issue.



We are about to move to a new metric tied to advisory services and fiduciary standing from product management/distribution.



Rather than brokers selling investment products with no ongoing accountability after a transaction is executed, advisers address and manage investment and administrative values on behalf of their clients in the client's best interest entailing significant ongoing fiduciary duties. These are the tangible quantifiable value(s) which are addressed and managed through advisory services which are not integral to commission sales.



It is literally not possible to add value through a series of disjoined unrelated transactions where is no mechanism in place that would inform the consumer whether the broker's recommendation improved overall portfolio return, reduced risk or enhanced the tqx efficiency, liquidity, cost structure, etc of the client's holdings as a whole.



Your pet pieve is about to become the new normal and rightly so.



SCW

[Bradly T.]

I believe Bob's peeve (shared by me) has to do with the value managed account advisors provide for their cost and the misplaced measurement of success by AUM. I still find it interesting that the model which creates the most income for the advisor and reduces the number of families each advisor need "serve" is somehow perceived and promoted as the model in the best interest of the client....which it MAY be but still the hypocracy is transparent to all - including clients and including the HNW. One must do nothing but manage money, cheaply and well for many (a fund manager actually), to be of value OR must do far more than manage a pocket of money; meaning true wealth managment, risk reduction, and financial planning as a key component to their managed money services.


Now, one who manages money cheaply, well, and for the many certainly does act "in the best interest of the clients' MONEY' but NOT necesarily or by regulation or obligation in the CLIENTS' best interest. Only wealth managers and financial planners actually CAN act in the CLIENT'S best interest as only they can KNOW what actually IS in their clients' best interest. I thought that was the point of the article and I didn't distinguish by the author he was promoting fee based AUM (as you are Mr. Winks). I believe he was promoting genuine value and lamenting the current "recognition" systems of perceived value/worth. While one can believe and argue (endlessly) about the sanctity of one model vs. the sins of another, it simply misses the point of what is in a client's best interest....which ultimately is a trusting relationship with an experienced and ethical PLANNER (regardless of that professional's business model or form of compensation).



I'll gladly argue that a skilled planner who allocates and gets paid commissions drives far more value and better outcomes than an RIA who does NOT provide planning as a core service. Planning is the key as is obviously supported by the other posters here. Once your promise of scale and cost is actually realized and delivered, so that small accounts and accumulators and distributions and multiple financial products can be wrapped in a UMA for EVERYBODY and not just millionaires, then try to toot your horn of superiority. For now, it's just elitist noise....and off point....again.

[Stephen Winks]

Bradley T,


You are ill informed on almost every point.



Planners are RIAs to the extent they charge a fee, but RIAs are not necessarily planners, nor is financial planning synonomous with fiduciary standing.



As for cost prohibiting advisers from serving smaller clients, only in your mind are UMAs synonomous with advice.



SCW

[Bradly T.]

Actually, many, perhaps most planners are certainly NOT RIAs and while planners are not generally under the Fiduciary standard as applied by the SEC (unless they are licensed and registered investment advisors), CFPs ARE under a fiduciary standard as defined and applied by the Board of Standards. If I am ill informed, then what are you?


As this is the Financial Planning discussion board FOR financial planners, (and you're NOT one), please refrain from telling us about our business. As the SEC works to harmonize standards of care for reps and advisors, and since Congress has reasonably judged financial planning does not require additional oversight by the SEC or FINRA or Congress, the discussions here are primarily focused on the discipline of planning and it's multiple applications in multiple business models....including trust departments, CPA and legal firms, banks, insurance agencies, BDs, and RIAs....all.



This particular thread is about the metrics of measuring the success and value of advisors, particularly registered investment advisors. And the peeve specified herein is as much about RIAs overcharging clients and under-delivering value for their cost as it is about the true benefits and value of planning, especially within that model, to earn those fees and truly act (or be equipped and able to act) in clients' best interest. All here are agreed (so far) that one cannot act in anyone's interests without the knowledge and relationship delivered through the planning process and that there is (or should be) far more value in "advice" than simply managing a pocket of client money by an allocation agreement and questionaire (which, by rule, actually does not require nor deliver actual advice - the RIA rules apply a fiduciary's obligation to the money under management only).



And, finally, many of us who actually ARE planners have serious concerns about elitist, exclusionary business models which do not serve the vast majority of American households....by design and due to internal cost structures both.....and have no interest in doing so. We believe all families can benefit from planning, regardless of net worth or AUM, and that ALL business models can also benefit from incorporating our discipline. The discussion is NOT about which model is superior but rather it is about the superiority of financial planning as the primary value added service for every model. If you were a planner and/or had any client families financially dependent on your professional skills, perhaps you could better appreciate the issues at hand and better discern what the hell we're talking about here.

[Stephen Winks]

Bradley T,


Thanks for making my case, yet again. Yes you leave not doubt, you are ill informed.

[Bradly T.]

Glad to help. I understand how difficult is for someone that is not a planner to appreciate the importance of the discipline and the spectrum of practitioners who apply it for the benefit of clients' best interests. Thanks to the Noncoalition's efforts recently, the public and Congress are also confused since they've been misled to believe that planning is an element of portfolio construction and the securities industry. Your inability to grasp the value and spectrum of benefits available by planning is understandable. Your myopic point of view is well known by all here and your ability to point out character flaws of those you disagree with is a well established and frequently demonstrated virtue of yours.


So.....how should advisors be measured for expertise and value delivered? Dollars seems to be the standard today - dollars earned and dollars managed and dollars per advisor being the primary measure apparently today. Anyone want to get back on topic?

[Stephen Winks]

Bradley T,


To answer your question, advisers should be measured against client directives, professional imperatives as represented and their ability to act in the client's best interest based on objective, non-negotiable, unimpeachable fiduciary criteria of statute, case law and regulatory opinion letters. The later of which you deem a matter of opinion.



SCW

[Bradly T.]

I think you just said opinions are a matter of opinion.....? Or is it my opinion that opinions are opinions? What's your opinion?

[the observer]

Hi Bradly,

"[url=../blogs/assets-under-management-financial-advisor-measurement-2674189-1.html]Measuring Quality With a Ruler[/url]" assumes most Americans have enough to warrant whipping out a ruler in the first place, and if the AARP and other surveys are to be believed, the fees a fee-only RIA would charge would eat up the investment the average American wants to make annually. I say this as a fee-only RIA...

[Bradly T.]

Well.....they would theoretically. But in reality those clients in accumulation (small IRAs, 529s, etc.) could not find an RIA who would even consider taking on the expenses of these millions of small accounts. Now, many of my clients are retired and in distribution from an income with growth allocation with yields of 4-5.5% and a growth target of inflation (2-4%). Where's the RIA fee coming from here - half the income or over half the growth? So both access and cost are serious issues that would prevent some 70%+ of all households from services. Wirehouses are no less elitist and exclusive with similar minimum account sizes by registration (not by household). It appears to me that neither base business model has much interest in small investors or LNW (low net worth....like under $1mm investable). While the well heeled certainly deserve the attention they receive and the dog fight over which model best serves their interests is important I'm sure to somebody...............the result is that the majority of households' best interests are not even on the radar and certainly not under consideration by this magazine and others, all the AUM rankings, or the SEC I fear. Mutual funds democratized investing with the commissioned model (not trading commissions, purchase commissions) - and many RIAs HAVE lowered the earlier net worth targets to bring managed money to many upwardly mobile families.....but that still leaves alot of families out.


RIAs are really going to hate the "cost calculator" FINRA will require to compare management fees with loads over extended time frames. Reps have hated them a long time already. The world is about to find out the hypocracy of the universal declaration that what is obviously in the advisor's best interest is touted as being in the client's best interest (which of course it often is...but at a cost to now be compared). My biggest problem with mngd. money is not the actual cost to clients....I'm an old bucket guy with different time horizons and risk profiles for each bucket with multiple products from multiple institutions integrated in a laddered asset/income portfolio.....even clients with a million bucks don't go into any single account....EVER. I consider it very bad planning.



And now RIAs are overusing ETFs, vastly increasing portfolio risks (way beyond their understanding and way beyond any deviations known to humankind)....in the name of "cost" to better disguise the real source of cost.....their own. I feel sorry for you purists who do it right....you're going to pay the piper for all the unintended consequences delivered by the Noncoalition and Winks of the world. Those who have lied about the relative cost of ownership have brought this home to roost and I predict the RIA model will be losing market share going forward.

[Bradly T.]

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