What’s your AUM?

When financial planners meet at industry conferences, they need a quick shorthand way to gauge how relevant a conversation with this interesting stranger would be. So the first question I hear them ask is ... What’s your AUM?

Meanwhile, industry surveys rank the top wealth management and planning firms by their assets under management.

There are a variety of reasons that I think these behaviors are dysfunctional. I don’t believe size tells you much about the (far more important) quality of a firm, the nature of its service or advice. The question is even becoming a bit archaic, as a growing number of advisory firms don’t even charge based on assets under management any more.

Bob Veres

Let’s concede that there has to be an ice-breaker question or two that communicates a lot based on an answer or two. In this emerging age of big data, when TD Ameritrade and Pershing are developing systems that will give advisors access to their business metrics (and independent BDs are sure to follow), can we come up with something better than a crude AUM metric?

I posed the question to a number of thought leaders in the profession, hoping they would give me The Question that advisors could ask one another in a social setting or, failing that, The Metric by which we can more appropriately measure the relevance of lists of advisory firms.

The first thing I got back was sympathy for my quest. “The AUM question really doesn’t tell you very much,” says Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional. “You can have a $2-plus billion business that looks very different from another $2 billion firm, so that alone doesn’t give you enough commonality to begin to add value to each other.”

“AUM is definitely a crude measure,” admits Mark Tibergien, CEO of Pershing Advisor Solutions. “But in this day and age, it’s about the only number everybody knows from their business or practice. As we at Pershing and TD Ameritrade get deeper into providing business metrics, we’re all going to have to train ourselves to use more sophisticated measuring sticks.”

Dan Inveen, who is a co-author of the annual FA Insight research and who is developing one of the big data systems, is willing to provide the first suggestions. For a numbers guy, his recommended questions are very non-metric but right on point for any practice conversation: What kind of clients do you work with? What kind of services do you provide?

We’re all going to have to train ourselves to use more sophisticated measuring sticks,” says Mark Tibergien of Pershing Advisor Solutions.

If you want to dive quickly into the numbers with a stranger you’re meeting for the first time, Inveen favors your year-on-year rate of revenue growth and average annual profitability level.

Oligino suggests a question that both gives you insight into the other advisor and also, at the same time, invites information that could be relevant to your business: Where is your growth coming from these days? “If you’re growing at a healthy rate, that assumes you must be doing a really great job,” she says. “Chances are you have interesting things to say about your value proposition, packaging, servicing and the overall offering.”

Angie Herbers of FourPointe Consulting initially doused my quest with a bucket of water. “I teach my client firms never to compare themselves to others,” she says. “The service models are all so different, we don’t really have good grounds for comparison.”

But then she concedes that she will mentally evaluate advisory firms after one or two questions at an industry conference. She frequently hears an interesting — and equally dysfunctional —alternative to boasting about a high AUM. “You’d be surprised how many firms have a lot of staff and are proud of that, as if it were a real business metric,” she says.

Her favorite follow-up question, which provides context for that raw head count, is: What is your total AUM divided by total staff? This is something advisors can usually calculate in their heads if they aren’t getting it straight from Veo or NetX360. “I’m looking for $35 million or above per staff,” Herbers says. “I’m looking for firms that are able to provide great service with fewer people, which is another way of saying they’re more efficient.”

Tibergien adds a different dimension to the start of a conversation. He recommends that you inquire about the other advisory firm’s diversity of employees, the characteristics of its optimal client and the three things that best define its culture. “The answers to those three questions tell me a lot about who I’m talking to and what they’re adding to the profession,” he says.

Metrics? “I would not rely on absolute numbers,” Tibergien continues. “Rather, I think in terms of the relationships between one number and another. Several stand out: assets per client (what kind of clients do you work with), revenue per staff, clients per staff and clients per advisory staff.”

Let’s switch gears. Instead of The Question, what is The Metric? How could we you rank or sort the “top” advisory firms, using some criterion other than a crude sorting on their AUM numbers?

Tibergien suggests an index that would blend some of his recommended ratios together, along with profitability and growth rate. “It’s an interesting question,” he says. “I’d be interested in talking more about it, to see if we could come up with something that might be called the Financial Advisor Business Index, that becomes a standard.”

Should we include client satisfaction rates? Tibergien is skeptical about the subjectivity of whatever number is provided. “I’d worry that firms would not use the same survey methodology or the same survey firm, and they would come up with outcomes that don’t mean the same thing,” he says.

Oligino is similarly skeptical of trying to blend in client retention rates, even though she concedes it is an important metric. “Most firms retain almost all of their clients, so it’s really not a differentiator,” she says. “Is it really significant that this firm is at 99% and that one is at 94%?”

Inveen actually does rank survey participant firms every couple of years in the FA Insight reports, and his preferred metrics are, once again, growth rate and profitability. “Ranking firms purely by AUM doesn’t tell you anything about how healthy the firm is, and ranking based on last year’s profitability doesn’t tell you whether a firm’s current growth rate is sustainable,” he argues. “If the firm is maintaining growth and profitability consistently over some period of time, it tells you a lot more about its health, and even indirectly, maybe, the quality of its service.”

Oligino thinks that we may be asking the question a year or two prematurely, since the big data systems will soon be providing very detailed metrics. She echoes Tibergien: we don’t know yet what the definitive combination of metrics will or should be, if such a thing emerges at all. “Right now, firms are so different, I’m not sure ranking even makes sense,” she says. “A small firm might be providing great advice and service, and a large one might not.”

The numbers, at this stage, aren’t telling us the difference.

So what have we learned? If nothing else, this exercise might help us move on from a relatively crude way of deciding if a professional stranger is worth talking to, to questions that lead to deeper, richer conversations. Let’s agree that bigger is not necessarily better, and it certainly doesn’t, by itself, make you more interesting or relevant.

Bob Veres

Bob Veres

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisers. Follow him on Twitter at @BobVeres.