Investors who have an advisor or those looking for an advisor are often told how much money the advisor manages. Sometimes there are awards or industry rankings shared that show the advisor is in a top tier measured by Assets Under Management (AUM) and framed plaques in reception areas can be seen touting the size of the firm.
The question for investors is, does this matter? Is being a bigger advisor better for the investor?
While most investors want fast and clear answers to questions like these, the reality is that it depends on a variety of factors. The very first thing to know is do not be overly impressed by a huge advisor and conversely do not be underwhelmed by a very small advisor. It is more nuanced and complicated than that.
Insights into Large Advisors
There are no standards defining “large” or “small” but in the industry advisors that manage $1Billion or more in client assets are regarded as large, and like all markets, there are fewer of them than those below that asset level. Historically, most advisors grow by referral so if an advisor has gotten to this level, it usually means that their earlier clients were satisfied enough to refer their friends and colleagues to that advisor. Existing client referrals are meaningful and a very good sign that the advisor has done well for their clients.
However, there are two very important things to know about a firm that got large by referral. First, the vast majority of investors, even wealthy ones, have not historically understood advisors like they understand other professionals. This means they refer friends and family to their advisor without fully understanding their own advisor. Schwab ran a terrific ad that illustrates this very problem.
The second is that most advisors and advisory firms have not embraced marketing like other industries and professionals have, but those firms that have indeed invested in state-of-the-art websites, videos, events and even dedicated sales staff to leverage referrals do grow faster than firms that do not.
Smaller Advisor Observations
There are unique characteristics about smaller advisors that are important for investors to know. First it is useful to recall that human nature sometimes subliminally makes us believe that “bigger is better”, but that is not the case and especially not in the case of wealth management.
For example, there are many advisors that will limit the number of clients they take on and will purposefully stay small. Some advisors in this category want to focus on personally delivering their service to a smaller number of clients, make a reasonable income doing so, and avoid running a big organization. Other advisors have a very niche market and their client base is naturally limited.
As stated above, most advisors are not as focused on marketing as professionals in other industries are. Some advisors are so focused on their craft as advisors that they are significantly behind modern day marketing norms. Their websites, marketing collateral and even their “bedside manner” are dated. If you’ve ever encountered a medical doctor who is expert in their specialty, but not the worlds greatest communicator, this exact dynamic exists in wealth management. These advisors, while expert, tend to grow slower as investors do not embrace them as others.
When thinking about your current advisor or looking for a new one, consider their size as just one of many aspects to evaluate. While size can be a factor, there is much more to learn about than just how much money they manage or how many clients they have.
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