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Does the Preoccupation with AUM Harm Client Service?

By Thomas Coyle November 28, 2017

Assets under management – AUM – is a popular metric in the wealth management industry. But some advisors — especially independents who say they emphasize financial planning over asset gathering — question its validity as a meaningful measure of achievement or even competence.

“My business is built on my clients’ trust in me, not AUM,” says Thomas Balcom, who runs 1650 Wealth Management in Lauderdale-by-the-Sea, Fla., an RIA with $70 million under management. “I have clients who could work with Goldman Sachs but they choose me because we like and trust each other, which is what it really comes down to.”

Goldman’s Private Wealth Management group requires a minimum account balance of $10 million.

It’s generally assumed an advisor’s AUM tells consumers something about his or her relative standing, many industry folk agree. A big number implies success and longevity. A small number suggests the FA is new to the game or not quite as focused as he or she might be.

As an industry measure, AUM comes into play across the board. Many advice firms have minimum book sizes for hires. At one firm the cutoff may be a book of $100 million under management. At another, three times that wouldn’t be enough.

AUM can even color a wealth manager’s credibility. Some Wall Street practitioners won’t even listen to FAs with AUMs they deem too puny.

AUM-centricity can also impair business relationships.

“I have firsthand experience with larger firms declining to partner with us because we have less than $100 million under management,” says Balcom. “We have also had a case with a major bank that refused to do business with us for a period of time because we were under the $100 million threshold.”

But “a firm with $350 million and five advisors — per advisor the same AUM as me — is just fine” according to industry standards, adds Balcom. “For many in the industry, firms under $100 million just aren’t on the radar screen.”

Lisa Kirchenbauer of Omega Wealth Management in Arlington, Va., says the industry’s obsession with AUM infects media coverage of the wealth industry and its participants.

“I get annoyed at how in various publications, including the Wall Street Journal, they will reference AUM,” says Kirchenbauer, who manages nearly $100 million. “Do these same publications do that about any other profession?”

(As you can see in the previous sentence, FA-IQ also cites AUM as a matter of editorial policy — except for FAs who charge by the hour or on a project basis, or who levy a retainer.)

For Kirchenbauer, it’s simply not clear that because “you have a lot of AUM you are making that much revenue — and in many cases the average fees per client may be lower than for a lower AUM advisor.”

Philip Petrowski of Blackhorn Partners in Verona, Wisc., takes a harder line. “The AUM total has become a proxy for success, especially as a substitute for knowledge or trust,” he tells FA-IQ. “Pushing volume instead of personal relationships just means you could be doing the same thing wrong in repetitive fashion.”

Though advisor Eric Roberge views AUM as “rather meaningless when you start to look at the value that we add as advisors,” he understands why the wealth industry emphasizes it.

“The industry grew up in a world where the value of a financial advisor was solely to manage your assets,” says Roberge, who runs Boston-based Beyond Your Hammock, a firm that offers an array of fee options, including hourly and monthly charges. “From an industry perspective, large firms only want advisors with large AUMs because it brings immediate revenue to the company.”

Alex David

And Roberge agrees with Balcom that higher AUM gives independent firms “buying power which can lower expenses from an economy-of-scale perspective.”

Bottom line, says Roberge, “clients care that you are a good person, a coach, someone who can help educate them and guide them toward achieving their goals.” In this context, he adds, “AUM has nothing to do with true financial planning.”

FA-IQ asked the four biggest U.S. retail brokerages — Merrill Lynch, Morgan Stanley, UBS Financial and Wells Fargo Advisors — what they tell their FAs, and the rest of the world, about AUM. Only Wells Fargo responded.

“During the recruiting and hiring process of experienced advisors, AUM is but one of many metrics we consider, such as experience, production, mix of business assets and their Central Depository Registry records,” Alex David, head of branch development for Wells Fargo Advisors, tells FA-IQ in an email. Meanwhile, the firm’s recruiting efforts aimed at inexperienced and usually young FAs “do not factor in an AUM.”

David Bize, a First Allied advisor in Oklahoma City, says he doesn’t “interact enough with high-AUM firms to know what they think of my low AUM.”

But he believes “everyone in the financial planning business knows that a good financial planner can only reasonably provide comprehensive service to 50 to 100 clients.”

On this precept, he adds, “If my average family has $500,000 to $1 million of investable assets, my practice is going to have AUM in the $50 million to $100 million range.” But “if I changed my philosophy to managing investments only, raised my investment minimum or partnered with or hired additional financial planners, I could double or triple my current $70 million AUM relatively easily.”

But that, Bize feels, would work against the “purpose” of his business life, which is “to establish a comprehensive financial planning practice in which I personally know and am integrally involved with serving my clients.”