Fiduciary pressure: rule changes by the SEC could add to demands on brokers © Bloomberg
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Early February was a showcase for the benefits of using a financial adviser, when the plunge and partial rebound in global markets rattled many investors.

Marcus Fagersten, an FT 400 adviser with UBS Financial Services in San Francisco, took calls from nervous investors and also sent out studies that put the gyrations in context. The time spent on reassurance was topped by the hours used to modify clients’ tactics, such as helping those who needed cash but who did not want to sell battered investments.

The return of volatility highlights the work of financial advisers beyond managing investments, whether that is talking clients out of rash decisions or managing expectations.

Against this backdrop we present the sixth annual edition of the Financial Times 400 Top Financial Advisers, which provides a snapshot of the best professionals at traditional US broker-dealers.

Most advisers with large practices are like Mr Fagersten, who says “investing” accounts for less than a fifth of his job. Indeed, a quarter of the advisers in this year’s FT 400 outsource investing by using model portfolios from their companies.

Leading advisers earn clients’ loyalty with financial planning and guidance through special situations: buying a house or exercising stock options. “I spend most of my time managing the client relationship,” Mr Fagersten says.

Professionals at large brokerages have rebranded from “brokers” to “advisers” over the past 20 years and are living up to the new label. At the same time, quality of advice is in the spotlight.

Attention ratcheted up last year when the first phase of the US Department of Labor’s “fiduciary rule” — requiring retirement plan advisers to act as fiduciaries by putting clients’ interests before their own — came into effect.

The Securities and Exchange Commission is expected to unveil its own fiduciary rule that would specify when advisers’ recommendations must meet the fiduciary standard or must merely be “suitable” for investors. Such a regulation would extend well beyond the Department of Labor’s rule for retirement advisers.

The fact that 70 per cent of FT 400 advisers say an SEC fiduciary rule would affect their business hints at the impact.

Regardless of the regulatory outcomes, the focus on fiduciary advice has nudged the industry towards lower-cost investments and other practices that can be considered in clients’ best interests. More advisers are making greater use of passive funds, which are cheaper because they simply track indices. Passive investments account for 29 per cent of the assets that the FT 400 advise upon, up from 26 per cent last year.

In this year’s FT 400, the average adviser managed $1.4bn in assets as of June 30: 23 per cent higher than the year before, thanks in part to rising stock markets. Listed advisers come from 22 broker-dealers, with the biggest Wall Street companies best represented: 20 per cent of the advisers are at Merrill Lynch and 19 per cent at Morgan Stanley.

As usual, the larger states with higher concentrations of wealth have more FT 400 advisers. This year’s advisers came from 38 states plus Washington DC.

New York has the highest concentration of advisers (18 per cent) followed by California (14 per cent). The methodology behind the FT 400 is explained below).

As usual, many first-rate advisers missed the list. Competition is tight, so the difference between listed advisers and those who miss the cut can be just a few percentage points in growth rate.

Given the importance of advice and managing relationships, it is no wonder that 41 per cent of the FT 400 advisers say meeting client demands is a top challenge. Experience counts, too, especially when volatility is greater than usual. Some 89 per cent of FT 400 members have been advisers since 2000, so they have at least two bear markets under their belts.

Methodology

The Financial Times 400 is intended to provide a snapshot of the best financial advisers for the investors who use them — such as FT readers. We assess advisers based on what investors care about, and we use a quantifiable, objective methodology.

The Financial Times and Ignites Research, the FT’s sister company, contacted the largest US brokerages in autumn 2017 to obtain practice information and data for their top advisers across the US. This resulted in verified data on assets under management instead of relying on advisers’ self-reported figures.

We asked for information on advisers with more than 10 years’ experience and who had more than $300m in assets under management. Such minimum criteria filtered out most advisers.

The FT then invited qualifying advisers out of this group — a list that totalled about 880 — to complete a questionnaire that gave us more information about their practices. We added that information to our own research on the candidates, including data from regulatory filings.

The formula the FT uses to grade advisers is based on six broad factors and calculates a numeric score for each adviser. The factors are:

1. Assets under management can signal experience managing money and client trust.

2. AUM growth rate (we look at both one-year and two-year growth rates) can be taken as a proxy for performance, asset retention and ability to generate new business.

3. Years of experience indicate experience managing assets in different economic and interest-rate environments.

4. Compliance record provides evidence of past client disputes. A string of complaints could signal problems.

5. Industry certifications (CFA, CFP etc) demonstrate technical and industry knowledge and obtaining these designations shows a professional commitment to investment skills.

6. Online accessibility illustrates commitment to providing investors with easy access and transparent contact information.

Assets under management accounted for an average of 70 per cent of each adviser’s score. AUM growth rate accounted for an average of 17 per cent.

Additionally, the FT places a cap on the number of advisers from any one state that roughly corresponds to the distribution of millionaires across the US.

We present the FT 400 as an elite group, not a competitive ranking. We acknowledge that ranking the industry’s top advisers from one to 400 would be a futile exercise, since each takes different approaches to their practice and has different specialisations.

The research was conducted on behalf of the Financial Times by Ignites Research, a Financial Times sister publication

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