Dys­func­tional Ap­proach to AUM

There has to be a bet­ter mea­sure to use in rank­ing the per­for­mance of a plan­ning firm rel­a­tive to its peers, Bob Veres says.

Financial Planning - - CONTENT - By Bob Veres

There has to be a bet­ter mea­sure to use in rank­ing the per­for­mance of a plan­ning firm rel­a­tive to its peers.

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

“WHAT’S YOUR AUM?”

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

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

There are a va­ri­ety of rea­sons I think this is dys­func­tional. I don’t be­lieve size tells you much about the qual­ity of a firm or the na­ture of its ser­vice or ad­vice. What’s more, it’s a bit ar­chaic be­cause a grow­ing num­ber of ad­vi­sory firms don’t charge based on as­sets un­der man­age­ment any more.

But 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 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 bet­ter mea­sure the rel­e­vance of lists of ad­vi­sory firms.

The first thing I got back was sym­pa­thy. “The AUM ques­tion re­ally doesn’t tell you very much,” agrees 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.”

‘A CRUDE MEA­SURE’

“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, a co-au­thor of the an­nual FA In­sight re­search and who’s de­vel­op­ing a big data sys­tem, is will­ing to pro­vide the first sug­ges­tions. For a num­bers guy, his rec­om­mended ques­tions are very non-met­ric: What kind of clients do you work with? What kind of ser­vices do you pro­vide?

If you want to dive quickly into the num­bers with a stranger, In­veen fa­vors your yearon-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 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 Part­ners in San Diego 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.” She fre­quently hears an in­ter­est­ing — and equally dys­func­tional — al­ter­na­tive to 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, to pro­vide con­text for a raw head count, is: What is your to­tal AUM di­vided by to­tal staff? This is some­thing ad­vi­sors can usu­ally cal­cu­late in their heads. “I’m look­ing for $35 mil­lion or above per staff,” she 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.”

THE MET­RIC

Let’s switch gears. In­stead of The Ques­tion, what is The Met­ric? How could we rank or sort the “top” firms, us­ing 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? 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 about client re­ten­tion rates; even though she con­cedes it is an im­por­tant met­ric. “Most firms re­tain al­most all of their clients,” 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.”

WHAT’S AHEAD?

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. “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 AUM, a rel­a­tively crude mea­sure, 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 in­ter­est­ing or rel­e­vant.

”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,” says Angie Her­bers of Four­pointe Con­sult­ing Part­ners.

Bob Veres, a Fi­nan­cial Plan­ning colum­nist in San Diego, is pub­lisher of Inside In­for­ma­tion, an in­for­ma­tion ser­vice for fi­nan­cial ad­vis­ers. Visit fi­nan­cial-plan­ning.com to post com­ments on his col­umns or email them to bob@bob­veres.com. Fol­low him on Twit­ter at @Bob­veres.

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