New “Barron’s Advisor” List-Potential Compliance and Fiduciary Issues

Barron’s recently released a new list, the “Barron’s Advisor” list. While advisors obviously enjoy being placed on such “top” or “best” lists, Barron’s list raises various issues that can serve as a lesson in addressing potential compliance and fiduciary issues due to the questionable criteria used in the evaluation process and the requirement that advisers pay to be placed on the list.

As a securities attorney, an RIA consultant and a former RIA compliance director, I always view such “best” lists with skepticism. The people on Barron’s new list may be the best financial advisors in the country. However, the criteria that Barron’s claims is not client-centric and therefore is highly questionable in evaluating the skills or performance of the advisors on the list.

Barron’s justifies its list “based on hard numbers: an advisor’s assets under management and annual revenue generated, as well as the length of time in the business, client retention,  and philanthropic work.  None of these criteria translate into truly reliable indicators of a financial advisors skill as a financial advisor.

  • Assets under management and annual revenues may indicate marketing skill, but simply does not necessarily reflect the skills or abilities of a financial advisor. Furthermore, has Barron;’s actually verified an advisor’s representations regarding assets under management and annual revenue.  Recent FINRA notices have addressed the problem of misrepresentation of assets under management;
  • Length of time in the business addresses longevity, but longevity does not necessarily reflect the skills or abilities of a financial advisor, as evidenced by the recent conviction of industry leader Matthew Hutcheson for securities violations;
  • Client retention could be based on client satisfaction, or based on my legal experience, it could also be based on a client not really understanding or being aware of a financial advisor’s actual activity. I use a proprietary metric, the Active Management Value Ratio, to assess the cost effectiveness of an investment and a financial advisor’ recommendations.  Approximately 75 percent of my analyses indicate investments and/or advice that is not cost effective for the investor. In many cases I find situations where the relative cost of the investment or recommendation greatly exceeds the relative benefit by as much as 300-400 percent;
  • Philanthropic work simply makes no sense as a criteria for the skills and abilities of a financial advisor.

The new Barron’s list does include a new disclosure – that advisors must pay a fee to be included on the list. Barron’s assures the public “that the fee has no effect on [an advisor’s] in ranking or continued placement on the list.” Right. Hopefully Barron’s will understand those who view such statement with skepticism, as it sounds like something we have heard repeatedly coming out of Washington.

I have been reading Barron’s for almost forty years and consider it a valuable resource. At the same, as an attorney and RIA compliance consultant, these lists are extremely troubling, as they are arguably based more on marketing skills rather than client-centric criteria, as well a new “pay-for-play” requirement that, despite Barron’s claim to the contrary, raises valid questions as to the legitimacy and value of the list.

Advisors on Barron’s new list and advisors in general should review a no-action letter that the SEC issued in connection with third-party ratings lists. The no-action letter lists various criteria that an advisor should consider before using such rating lists in marketing their practice.  The letter can be found at iaa120205.htm.

Despute Barron’s claim that the required payment by an advisor doesnot influene the evaluation process, I have advised my RIA consulting clients that any rating program tht requires such payments to be included on a list raise compliance and fiduciary concerns. The no-action letter lists various issues that must be addressed and conditions that must be satisfied. Any use of such ratings in marketing or otherwise would always need to include a full disclosure of such “pay-to-play”requirement be disclosed, as such payments would arguably constitute material information that a client should be aware of.

Given the fact that the criteria used by Barron’s is more marketing oriented than client oriented, the no-action letter would suggest that this information would also need to be disclosed in connection with an advisor’s use of such rating in order to avoid possible claims of misleading a client.

Financial advisors, investment advisers, and other investment professionals should always consult with their compliance departments and/or legal counsel to ensure compliance with all applicable laws and regulations.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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