I’ve said it before: the financial services industry has a big problem with transparency. Industry jargon, dense fine print and inconsistent explanations of products confuse even the most sophisticated investors.
Recently, complaints were aimed at CNBC in the wake of its second annual list of the top 100 fee-only wealth management firms. The complaint centers on CNBC’s use of the term “fee-only.” Since the SEC’s standards only apply to a few terms (e.g. “Registered Investment Advisor”) and there is no single standard for “fee only”, it’s hard to criticize CNBC for using the term consistently with accepted industry standards (which they did). Debating the nuances within the industry about which standards should be used does not help the consumer and only causes more confusion.
The big issue here is that consumers often rely on lists and rankings that come from prestigious and credible media sources and research firms. Perhaps we could look outside our industry to see what we can learn from other trustworthy list makers like Consumer Reports. They have a long tradition of objective and deeply thorough analysis, so what can we learn from them and how can we make these lists better for the consumer?
Here are 5 suggestions to get this conversation started:
1. Verify actual revenues along with AUM numbers.
Revenue, rather than assets under management (AUM), should be included as a key metric for rankings by size. Fee structures vary too much from firm to firm for AUM to provide the only metrics for comparison. Most consumers do not understand that there is a big difference between a single $200-million endowment paying a $150,000 flat consulting fee and ten $20-million HNW households or 100 $2-million retirement accounts, and most list makes do not provide clear segmentation of the different types of AUM. AUM is important, but without revenue it only tells part of the story.
Once verifiable revenue is a disclosed metric, the consumer might find it valuable to understand the sources of revenue, particularly if there are other sources of revenue than pure fee-for-service wealth management or fee-for-service asset management.
We might look to another credible list maker, Inc. Magazine. When Inc. publishes its highly respected list of fastest growing private companies (HighTower has been on that list three years in a row), I sign a formal legal document attesting to the revenues of my company. Financial industry rankings should require the same level of detail and accountability and require that the CEO or accountant for the firm attest to the revenue and revenue attribution.
2. Clearly articulate each firm’s business model.
I know this will cause lots of arguments and discussion, but let’s try to look at it from the consumer’s perspective. For example, the consumer might view our industry as having three basic categories: Wealth Managers (advisors who build portfolios with financial investment products and other securities, and provide financial planning, tax, and other financial wellness advice), Asset or Portfolio Managers (advisors who buy and sell individual stocks or bonds for a fee) and Combination (advisors and firms who do both).
Clearly, this set of categories needs refining, as it’s an imperfect oversimplification—but this should start the conversation. I urge that we have this conversation from the point of view of the consumer and consider how they view what we do in our business.
Those firms that do both (and this is likely the largest category) should undergo a transparent assessment of how much of their business flows from their various activities. There is no embedded judgment in this suggestion. Different types of services are necessary and valuable to the consumer, but it’s important to communicate these differentiations so the consumer can understand an “apples-to-apples” comparison.
3. Distinguish fiduciary and non-fiduciary sources of revenue.
Again, using the revenues of the firm as a baseline, each firm should disclose what percentage of their revenues flows from a fiduciary relationship and what percentage does not. This shows consumers how the firm makes money.
4. Cut the jargon around credentials.
AIF, CFPA, CAIA, CBC… WTH?
Check the full list of Alphabet Soup.
Let’s use plain English. Are you a “service person” or a “salesperson?” Is your job to put my interest first (fiduciary), or sell me something (broker)?
At HighTower, it’s important to us that our clients understand the difference, and we made this video to help educate them accordingly. Are the letters after your name credentials that are meaningful to a consumer, or just the appearance of a credential? List makers should seek to educate the consumers about what the credentials mean and identify some standards on which the consumer should rely. Again, let’s look at this through the eyes of the consumer.
5. Assess the firm itself.
Numbers alone do not tell the whole story. Publications and rankings owe a duty to their readers to dig deeper. For example, does a firm that posts strong financials but is under investigation for a breach of professional ethics belong on a list of the industry’s finest?
As professionals, we all aspire to be recognized as the best in our fields. Let’s work together to ensure those accolades actually mean something to the audience that matters most: our clients.