I am, and always have been, a huge fan of Barron’s. It is a great resource for investors and those having interests in the financial services industry. However, the “America’s Top 100 Financial Advisors” supplement in the February 20, 2012, issue has to go down as possibly one of the most disappointing pieces of financial journalism I have ever seen, and definitely below the standard many of us expect from Barron’s.
I do not know any of the 1000 financial advisors mentioned in the article. They may be the best financial advisors ever to grace this planet. Many of the advisors will no doubt use their rankings for marketing purposes, and investors, with no knowledge of the evaluation criteria, may blindly rely on the ranking itself, without knowing the criteria that was actually used in making the rankings
What concerns me is that the standards used by Barron’s in making the evaluations focus more on the benefits that the advisors provided to their firms than on the benefits they provided to their clients. The article states that evaluations were based on the amount of an advisor’s assets under management (“AUM”), the amount of revenue that the advisor produced for their firm, and an undefined standard as to the quality of their practices.
As an investor, I would be somewhat concerned to learn that Barron’s evaluations were based partly on the amount of revenue that an advisor generated for their firm instead of how, and if, the recommendations actually benefitted me. Given the current debate over a financial advisor’s duty to put a client’s interests first, one would hope that such a standard would have been included in Barron’s evaluation criteria. Perhaps it was part of the undefined “quality of practice” standard. Barron’s failure to provide the criteria for this mystery standard is a perfect example of why many are calling for greater transparency in the financial services industry.
However, the most alarming statement in the article is the statement that
Investment performance isn’t explicitly a criterion , because the advisors’ clients differ widely in their goals, but most of the advisors have been attracting lots of new business through referrals, a clear sign of customer satisfaction.
How soon we forget! If I remember correctly, most of Bernie Madoff’s clients were supposedly satisfied and, thus, provided Madoff with clients through referrals. This in no way suggests or is intended to suggest that any of the advisors named in Barron’s article were involved with Madoff or that they are or have been engaged in any unethical or criminal activity. Again, I do not know any of the advisors named on Barron’s.
I have two concerns with the Barron’s rankings, the first being that simply to rank advisors without taking into account some level of performance vis-a-vis the client is potentially misleading and dangerous, as some people will simply look at Barron’s list without realizing that Barron’s criteria apparently did not stress the benefit the advisors provided to their clients as much as they did the financial benefits the advisor provided to their firms. While Barron’s properly disclosed this shortcoming, the fear is that some people will simply go directly to the rankings without reading the article.
Secondly, the use of assumed customer satisfaction and resulting client referrals is likewise potentially misleading and dangerous. As a securities attorney and former compliance officer, many “satisfied customers” quickly become unsatisfied customers when they learn that their advisors did not put the customer’s best interests first, regardless of the applicable legal standard, and that the advisor sold the customer investment products based upon the financial best interests of the advisor. In too many cases, seemingly satisfied customers simply lack the information or experience to be unsatisfied customers…yet. (See Madoff)
Barron’s attempt to provide useful information for investors, while done with good intentions, simply falls short of their high standards. Unless and until Barron’s provides full disclosure as to the evaluation criteria used in evaluating the advisors, specifically the “quality of practice” standards, and includes some sort of criteria that evaluates an advisor’s performance and their actual benefit to their clients, as opposed to the advisor’s financial benefit to their firms, investors should perform their own investigation and evaluation instead of blindly relying on Barron’s rankings.