I Don’t Trust the “Top” Rankings and Neither Should You

In the BD surveys, firms are measured by their revenues, so LPL Financial is inevitably the "top" firm, and the fact that it has more affiliated “producing” reps than the other independent broker-dealer firms cements its primacy on that list. Raymond James and Cetera are usually sitting near the top of the BD list, again based exclusively on revenues and headcount.

But does size, all by itself, have any relationship to what matters to the reader and the consumer? Is there any effort, on the part of the editors, to determine the quality of the various investment platforms? Or the accuracy of each firm’s trading/clearing operations? Is there an assessment of their technology, the number and depth of the software integrations they support or the inflexible rigidity of the compliance rules they impose on their reps? How much marketing, practice management, HR or succession-planning support do they offer?

If BDs were ranked by those criteria, the list would be largely inverted, because the smaller firms tend to offer a more personalized service package. That, of course, raises other questions. Best ('top') for whom? Some advisor/rep offices might be better served by an industry giant, while others are more compatible working with a company where everybody (as the saying goes) knows your name.

The other part of these broker-dealer surveys that should make the reader nauseous are the quotes you’ll see from broker-dealer executives, telling the credulous writer that they are no longer sales organizations; they are now “national planning firms.”

What you will not see is any shred of analysis into whether those proclamations are remotely true. And, in fact, the survey data itself will contradict the announcements. In the more comprehensive packages, you will see the percentage or dollar revenues collected by the BDs on annuity, life insurance and other product sales, versus fees (defined as asset management fees, shared between the reps and the broker-dealer). In almost all cases, sales are 40% or more of the total revenue and are more often over 60%. Sales are important, but the BD executives won’t be talking about that.

In some cases, you will also see the ”payout range,” which basically says how much of the rep or rep office’s compensation (commissions and AUM fees) they get to keep, which gives you a back-door way to estimate how much of their revenues are taken by the BD. These payout ranges are typically far more generous than the wirehouse grids, because the reps are paying their own office expenses. But they are still based on production, which means the more sales and AUM a rep does, the greater the percentage they get to keep.

The grid numbers are different, but this is exactly like the wirehouse model; the BD collects the revenues and then gives back whatever it determines is the allotted percentage to the reps, and that percentage depends on (that word again) “production.”

I actually do believe that some of the independent broker-dealers aspire to become national planning/RIA firms. But most of them are just telling us the story that consumers like to hear. These days, when consumers are increasingly drawn to fiduciary advisors who sit on the same side of the table as they do, nobody wants to be known as a national sales firm.

Critical as I am of the BD rankings, the rankings of "top" advisory firms are worse. Once again, the “top-ness” is entirely predicated on the total revenues of the various companies; the biggest are at the top of the list and the smallest are toward the bottom. There is no consideration of quality--and that is by far the most important thing to understand about advisory firms. I know of very large firms with multiple offices that I wouldn’t send my dog to, and very small solo practices whose clients enjoy extraordinary service and advice. The rankings don’t consider that some of the firms only provide asset management services while others, at the other end of the spectrum, provide comprehensive financial planning, life planning and coaching – often for roughly the same price.

Nor do the rankings offer any clue about the depth of expertise. If a firm is a marketing machine with cursory planning and an overpriced AUM model, it is far more likely to rank higher than a firm that takes great care of a smaller number of niche clients.

But that’s not even the worst of it.

The advisory profession is undergoing a long, slow shift toward more flexible fee structures. Some firms are doing away with AUM entirely; others are charging some of their clients according to the assets they manage while charging others (who, perhaps, have not accumulated enough assets to manage) on a quarterly flat-fee basis. There are some excellent hourly-based planning firms which, if we were ranking "top" firms by quality of service, would land somewhere at the top. But they don’t appear anywhere on the list – a serious omission.

Despite all these issues, the trade publications continue to rank advisory firms by their AUM business, by the amount of client assets that they directly manage. But… is managing assets even the core service of a financial planning firm anymore? I would argue that it is becoming an accommodation, even though most of the revenues still come from that accommodation.

So, in addition to ignoring entirely all the things that would make an advisory firm valuable to a client, the rankings also exclude firms that have given up the AUM revenue model and penalize firms that are moving away from it.

Beyond that, there are situations when publications offer a ranking or list that absolutely should include quality of advice as the primary criterion – and they once again fail to deliver. Exhibit A is the list of "top" young-professional advisors in the March issue of Financial Planning magazine. All are wirehouse brokers.

Come again?

Lest you think I’m exaggerating, I’ve listed below the brokerage affiliation of every single person on the list, identified by their rankings, rather than by name:

Merrill Lynch: (#s 2, 3, 4, 6, 7, 8, 14, 15, 20, 21, 22, 23, 25, 28, 31, 32, 35, 37)

UBS: (#s 5, 9, 19, 26, 27, 29, 30, 38)

Morgan Stanley: (#s 1, 10, 12, 17, 18)

J.P. Morgan: (#s 11, 16, 24,

William Blair: (#s 13, 40)

RBC: (# 33)

Ameriprise: (# 34)

Oppenheimer & Co.: (# 39)

Janney Montgomery Scott (# 36)

All independent RIA firms: (none, zilch, nada)

We can leave aside the preposterous precision of listing one young advisor first (the top) and others as number two through number 100. But more broadly, is it possible that none of the young talent in the financial services profession resides in any of the thousands of independent planning firms?

You know the answer. The "top" young advisors on this dubious list, who get to put this dubious but impressive-sounding honor on their resumes, are obviously selected by the brokerage firms themselves by way of recommendations to Financial Planning’s editors. I am going to surmise that the quality of the honorees has more to do with production than with the quality of their advice or client service.

Before the reader jumps to conclusions, I want to emphasize that size is one justifiable criterion when evaluating firms in the marketplace. My issue, in the form of a question, is this: Is size the most important factor? Is it the only factor to consider?

Similarly, the recommendation of the employing firm can be a good starting place for selecting a "top" young advisor for inclusion on a list. But shouldn’t that be followed by a thorough evaluation of the characteristics of the young advisors who have been nominated? If that follow up is conspicuously absent, what is the value of the list? And should anybody believe that we can sort 100 young advisors in rank order from 1-100?

The pushback I expect from this rant is that it would be hard to evaluate the quality of each and every young advisor, advisory firm and broker-dealer. Without question, this is hard. There are so many moving parts to consider, and the quality of each factor can be highly subjective.

But does that mean you sigh in exasperation and give up? Does that mean that you imply (with the word “top” in the heading of the rankings) that there is some qualitative measure that the reader isn’t privy to?

As a counterexample, T3’s Joel Bruckenstein and I conduct an annual software survey that does include market share for each of hundreds of tech solutions, and, yes, we rank them by that market share figure, most popular to less so. But we also collect, and emphasize, the average user ratings (a quality assessment) of each solution, and we note the changes in the user ratings from one year to the next. Beyond that, there is plenty of commentary on the (sometimes wildly) different feature sets of the various solutions in every category.

I can tell you from painful personal experience that including these qualitative elements is unquestionably hard. But isn’t that the work that readers deserve from their publications? Isn’t that an element that readers would value?

If nothing else, I would like the trade press to retire, forever, the term ”top” from its ranking vocabulary. Top implies quality as well as quantity, and if the rankings are purely focused on the former and totally ignore the latter, if indeed there is no effort to evaluate quality of advice, quality of tech, quality of service, quality of a lot of things that are important to readers in this profession, then "top" is an absurdly inappropriate heading.

Call it the ”biggest” BDs and RIAs, and acknowledge that quality of service, quality of advice, any kind of quality, is totally absent from the way these lists are created. There might be a dozen Bernie Madoffs in the rankings, but as long as they’re collecting a lot of AUM, reps or sales, they’re going to be up there on the list.

And that’s at least as nonsensical as trying to tell us when the next recession is going to happen or what the Fed is up to in its future meetings.

That’s what I think, and I hope I didn’t hold back too much.

How about you? What do you think about all this? Let me know in the comments.

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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