Two Reports Take Financial Advisors To Task

By Cyril Tuohy

InsuranceNewsNet

Financial advisors were in for some harsh scrutiny in two recent reports.

The most recent edition of the “Cerulli Edge – Advisor Edition” found that financial advisors have an inflated image of themselves. They tend to think that they are more qualified than they are and that they do more for clients than they do.

A separate report, the “Principal Financial Well-Being Index of Financial Advisors,” found that advisors manage their own businesses poorly.

“Cerulli Edge,” a regular analysis by financial analytics and consulting company Cerulli Associates, found that 55 percent of advisors think of themselves as true financial planners. Yet only 33 percent are worthy of the investment planner category. Investment planners are experts who offer asset management with some retirement planning or education funding.

In the more rarefied stratosphere of wealth management -- which provides comprehensive wealth management, wealth transfer, stock option planning, executive compensation, trust, estate and charitable giving -- 11 percent of advisors perceive themselves as wealth managers. Yet only 3 percent of advisors qualify as true wealth managers, the Cerulli report found.

To be sure, many advisors are valuable but the Cerulli report says that they “have a habit of overstating their value proposition and most are investment planners.”

In only one of the four categories – the money manager category – do financial advisors’ perceptions of themselves follow in lockstep with that of Cerulli Associates findings.

Only 8 percent of advisors believed that their practice belonged to the money manager category. Advisors in money manager practices build portfolios of individual securities for clients and focus on investment management and asset allocation.

Is the oversight by design a marketing ploy to entice clients? Or is it that advisors play a little loose with terms “bandied about freely with little attention paid to what the job entails,” the Cerulli newsletter asks?

Or do the percentages hang on how stringent the definition of what a financial planner or wealth manager entails?

The Cerulli report found that 97 percent of wealth managers operate as members of a team. Operating within a team is a prerequisite for advancement in the industry and allows advisors to specialize in a particular area of financial advice. It also gives advisors and practices extra flexibility.

Even if an asset allocation advisor individually overpromises on his or her ability to serve a client, the odds are that the advisor can count on a team colleague to be able to address the client’s tax and succession planning challenges.

“Clients who receive infrequent contact, do not meet determined minimums, or are more problematic than they are worth, can be contacted to discuss other options,” Cerulli said. For instance, clients with fewer assets are ripe for handoff to a newer colleague. Clients who eschew personal contact are more likely to be receptive to managing a portion of their assets through the Internet.

The distinction between an asset manager and a true wealth manager is the “emphasis on services, and delivery of a larger quantity of them,” the Cerulli report said. “Comparing wealth managers to the entire advisor population, the most significant difference in the services they offer lies in investment management due diligence,” Cerulli said.

To be sure, as long as their portfolios are performing well, clients may frequently not know the difference between an asset and wealth manager.

As many as 59 percent of the 614 respondents in the recent “Principal Well-Being Index” survey said they neither have created a succession plan nor had the value of their business assessed. This suggests that they may not have the expertise that they claim to.

According to authors of the “Principal Financial Well-Being Index,” these advisors simply may not have the time to address succession planning, or they may not be prioritizing this issue.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].