Financial advisors may not be thrilled by the idea of being ranked against one another on job performance.
But that’s exactly what one financial technology firm intends to do with its ranking of several key advisory areas, like portfolio management, client interaction, and fees.
The firm, StackUp, was founded on the premise that money managers never have a good answer for clients who ask about their performance.
“As a financial advisor myself, I often faced clients who wondered how to assess my performance, and I realized that while I knew I was doing a good job, there was no way to objectively prove that, which was frustrating,” said StackUp Co-Founder Jason Aronson. “While investors trust their advisors with their largest assets, they often have no objective view of performance and must put complete trust into the advisors’ hands.”
StackUp allows an investor to securely link his/her accounts and get a rating on their advisor or roboadvisor’s performance compared to similar investors, Aronson explained. It also provides questions to ask your advisor based on what the system is seeing, which helps the investor manage what can be an intimidating conversation.
The platform also clarifies fees for the investor, which StackUp calls a “notoriously murky issue.” Many investors aren’t aware of the fees they’re paying and don’t have a way to benchmark them.
StackUp rates financial advisors, brokers and robo-advisors and can be used with any investment account, including retirement accounts and 529s. For those managing their own assets, StackUp can provide a performance review to help determine whether working with a professional financial advisor makes sense. StackUp provides continuous monitoring of the financial advisor’s performance and feedback.
The StackUp platform is currently free, though the model will eventually include a charge to investors for ongoing monitoring.
Some advisors aren’t sure the ratings idea works in their industry, where every client’s situation is unique.
“Transparency always has its positives because it brings competition and lowers prices,” said James Schramm, a financial advisor with Schramm Financial Group. “Yet … every client is different. You would have to segment out every portfolio for its overall goal and how is that going to be monitored?”
Consider this scenario from Schramm: If an advisor has a client with a “moderate” portfolio who asks the advisor to sell funds so they can take money out, the client may not take the money out for a month.
“In that case, the cash sitting in the account will negatively affect the returns,” he said. “The theory behind ranking performance is great, but I can think of dozens of one-off situations that would make this nearly impossible to do.”
Additionally, a rating system for advisors may also emphasize performance over what is actually best for the client.
“Maybe taking extra risk isn’t what best for this particular client, but you know that if it works out your firm will move up the rankings,” Schramm said.
If advisory ratings became public information, then clients could start jumping around from advisor to advisor chasing the best returns.
“They would start putting themselves in more aggressive portfolios to get better returns and advisors would be fearful of putting clients in more appropriate portfolios in case the client jumps ship because of some list that doesn’t take into consideration their personal situations,” Schramm added.
Others say that clients have every right to check an advisor’s value via a ratings system, given how much they have at stake.
“Clients should demand comparison rankings,” said Alexander Lowry, a professor of finance at Gordon College. “I can’t imagine following a newsletter and investing hard-earned savings without knowing the analyst’s track record – in both bull and bear markets. A firm should review all of their recommendations and assign a grade to each advisor.”
Advisors who believe in themselves and deliver quality work would benefit from results being published, Lowry added. As always, there are caveats.
Companies like StackUp should focus on choosing relevant periods to measure results, Lowry said.
“For example, making a lot of good recommendations over 12 months during a raging bull market is hardly an accomplishment,” Lowry said. “Anyone could do that. Thus, at the end of each year, you need to carefully choose a relevant period to review. You need to rate analysts on how they perform over market cycles, not just a calendar year.”
The more your advisory service is based on direct money management, the more amenable advisors should to getting rated.
“In theory, ranking financial advisors is a fantastic idea. However, the implementation may be more difficult than anticipated,” said Gabriel Pincus, president of GA Pincus Funds with offices in Dallas and Chicago. “Users sync their brokerage accounts to StackUp and have the ability see all of their accounts in one place. StackUp also enables users to see their performance, risk level, and to compare against portfolios with similar risk tolerances held by other users.”
Advisors who focus on money management will relish the opportunity to be ranked, Pincus said, while advisors who focus on the intangibles of financial planning will abhor the idea.
The StackUp ratings system is driven by client-provided data, which the firm relies on to get the ratings right.
“We feel StackUp can help facilitate the relationship between advisors and their clients by simplifying for investors the complex data involved in analyzing investments,” said co-founder Guy Bauman.
Furthermore, it can help clients feel more comfortable referring their friends and family to their advisor with data-driven ratings as support for the referral, Bauman said.
“Since client referrals are often the most common way advisors grow their business we are looking to help clients who have bad advisors find good ones,” he said.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.
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