Don't get me wrong; I think it's a good thing that we have all these studies, reports and surveys that focus on the practice management challenges of financial planning firms–far better than the olden days when everybody was creating their business and revenue model in isolation, and nobody knew what was a fair salary for an advisor or key ops person. Today, we have a lot more data on how firms grow, how fast they're growing, what they're paying for their talent and key metrics that they can track to better manage their operations. The fact that these surveys don't always agree actually gives me more confidence in their authenticity and relevance.
But… It seems to me that these practice management surveys are causing us to get a bit sloppy in our thinking and conversations. We read about the exceptional firms, the standouts, the “best” advisory firms, and define them as the companies whose assets and profitability are growing the fastest. We see rankings which put the firm with the most AUM at the top of the list and proceed down from there; the number one advisory firm in the nation, the number two, on down to the mediocre number 200 or 300, the laggards who have a mere $450 million of client assets.
Well-managed companies deserve to be saluted, and it's interesting to know which firms have attracted the most AUM. But reading these reports gives you the impression that other qualities–like quality of service, client satisfaction, depth of client engagement, great client outcomes–are unimportant or irrelevant when, in fact, they should be the only standards by which we measure a “great” planning firm. The reports, surveys and articles tell us nothing about the most important characteristics; instead, they highlight and pile accolades according to standards which, to me, are not terribly unlike the sales contest postings you find on the walls of brokerage firm branch offices. Who generated the highest sales volume this month? Who's ahead in gathering assets year-to-date? Ladies and gentlemen, I give you the “best” broker in the office!
Meanwhile, advisors are in the habit of defining their status, when they talk to each other at conferences, by their AUM number. That might be appropriate for sales agents, but in a profession, status should only come from quality of service and client outcomes. We don't measure the quality of doctors by their income, do we?
So what, exactly, am I proposing here? I think we should all agree that AUM is great indicator of the size of your firm and, perhaps, the complexity of your management challenges. But it isn't even a clue as to where anyone stands in the hierarchy of professionals. I would like the surveys to be more careful in how they characterize the fastest-growing, largest or most profitable advisory firms, perhaps adopting just those terms: “fastest-growing,” rather than “extraordinary,” “standout” or “best.” And it would be nice if articles defined a firm's size by gross revenues rather than AUM, which would have put firms that charge retainers on an equal footing with those whose revenue model is based on assets.
And then perhaps the profession should start doing something that I think will be really hard: assessing, measuring and discussing the quality of service and advice that clients receive from various planning firms. Right now, it's hard to know, from the outside, who is excellent and who is merely ordinary or, perhaps, truly awful. I'm imagining that in hallway conversations, we'll compare notes not on AUM but on service levels and technical complexities. I envision magazines doing occasional mystery shopper surveys of advisory firms to see what's being recommended and how clients are treated.
The goal is to put the emphasis on where it belongs in any profession; that is, on quality rather than quantity. Perhaps the greatest indicator that this has become a problem is the fact that we don't yet know exactly what we mean by “quality advice” or how to compare it, or what we mean by “best” advice and “best” client service. In other words, we are, today, about where we were 15 years ago with practice management issues: all earnestly trying to figure it out in isolation.
If we can shift the focus, if we can change the terminology and how we confer status in the profession, then perhaps we'll be able to start comparing notes on this more important issue. At the very least, we'll have our priorities more in line with who is, and who should be considered, our “best” advisors and firms.