In February, 2012 I wrote a post regarding the value of Barron’s “Top 1000 Advisers List,” citing the questionable criteria used and lack of transparency on the calculation process used in preparing the list. Barron’s has just published a new list of designated “Barron’s Advisors.”
In the preface to the list, Barron’s states that the publication ranks financial advisors “with the goal of shining a spotlight on the best people in the business.” The preface goes on to claim that the advisors ranked by their publication represents the top 1 percent of their profession.
As a securities attorney, an RIA consultant and a former RIA compliance director, I always view such “best” lists with skepticism. The people on Barron’s new list may be the best financial advisors in the country. However, the criteria that Barron’s claims is not client-centric and therefore is highly questionable in evaluating the skills or performance of the advisors on the list.
Barron’s justifies its list “based on hard numbers: an advisor’s assets under management and annual revenue generated, as well as the length of time in the business, client retention, and philanthropic work. None of these criteria translate into truly reliable indicators of a financial advisors skill as a financial advisor.
- Assets under management and annual revenues may indicate marketing skill, but simply does not necessarily reflect the skills or abilities of a financial advisor. Furthermore, has Barron;’s actually verified an advisor’s representations regarding assets under management and annual revenue. Recent FINRA notices have addressed the problem of misrepresentation of assets under management;
- Length of time in the business addresses longevity, but longevity does not necessarily reflect the skills or abilities of a financial advisor, as evidenced by the recent conviction of industry leader Matthew Hutcheson for securities violations;
- Client retention could be based on client satisfaction, or based on my legal experience, it could also be based on a client not really understanding or being aware of a financial advisor’s actual activity. I use a proprietary metric, the Active Management Value Ratio, to assess the cost effectiveness of an investment and a financial advisor’ recommendations. Approximately 75 percent of my analyses indicate investments and/or advice that is not cost effective for the investor. In many cases I find situations where the relative cost of the investment or recommendation greatly exceeds the relative benefit by as much as 300-400 percent;
- Philanthropic work simply makes no sense as a criteria for the skills and abilities of a financial advisor.
The new Barron’s list does include a new disclosure – that advisors must pay a fee to be included on the list. Barron’s assures the public “that the fee has no effect on [an advisor's] in ranking or continued placement on the list.” Right. Hopefully Barron’s will understand those who view such statement with skepticism, as it sounds like something we have heard repeatedly coming out of Washington.
I have been reading Barron’s for almost forty years and consider it a valuable resource. At the same, as an attorney and RIA compliance consultant, these lists are extremely troubling, as they are arguably based more on marketing skills rather than client-centric criteria, as well a new “pay-for-play” requirement that, despite Barron’s claim to the contrary, raises valid questions as to the legitimacy and value of the list.
While Barron’s criticizes other stories as providing “little benefit” to the public, legitimate questions regarding the evaluation criteria and the “pay-for-play” requirement raises the question is actually unintentionally doing the public a disservice by creating both false representations and a false sense of security, either of which could potentially result in unnecessary financial losses due to advisors who prove undeserving of their designation as a “Barron’s Advisor.”