AUM Isn’t Everything

Posted by Mark Piquette on September 18, 2014

A recent column in Financial Advisor touched on a misconception that is pervasive in the financial advisory industry: the tendency “to equate assets under management with the quality of a firm.”

Most firms highlight AUM as a point of pride, and as the author points out, industry rankings of the top firms are little more than rankings of the largest firms by assets under management.

In truth, the quality of an RIA—or a custodian, for that matter—is much more than AUM. Clients value service above all else. While AUM is perhaps an indication of success to date, how much money a firm manages—particularly a relatively new firm—is not necessarily a good barometer of the breadth of its expertise or the quality of service it delivers to clients. Clients don’t care about the money a firm manages for other people; they care about the money that is being managed for them. They want to know that when they call the phone number listed on a firm’s website, they’ll be connected to a real person who can help.

Another argument against AUM as the be-all, end-all is that the talent of firm may be concentrated in just a few people. AUM, too, may be tied up in a handful of clients—meaning if multiple key people or clients leave, the firm’s long-term future may be in jeopardy.

Instead of fixating on AUM, the author recommends a more nuanced approach to determining the quality of a firm. There are three key factors to consider, he argues:

  • The sustainability of ownership (ie, whether “a firm’s equity is concentrated in very few hands”)
  • The depth and age of the team—and whether the team will be there several years down the road
  • Profitability

Ultimately, the quality of a firm is determined by the success and happiness of its clients. AUM should not be confused as a measure of that. 

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