Market turmoil adds to US financial advisers’ difficulties

There appears to be no shortage of worries for American investors in 2016. Anxiety about the direction of interest rates and concern about slowing economic growth in China have already left their mark on US stock prices. Companies in the S&P 500 lost 10 per cent of their value during January and February only to recover most of its losses by mid-March. Timing is clearly important.

Many investors looking to position their portfolio to withstand financial shocks will be planning to seek financial advice, but even the elite advisers at traditional broker-dealer firms listed in the 2016 edition of the Financial Times 400 Top Financial Advisers will be struggling to make the right choices for their clients.

For example, if they had recommended decreasing exposure to bonds in the early part of the year they would have been caught out. Market turmoil led to a forecast-busting rally in the bonds of many advanced economies.

An indication of the challenges facing financial advisers can be gained by comparing the FT 400 list this year with last year’s. While the FT 400 typically sees one quarter of its names turn over from year to year, this time just half of 2015’s list of advisers returned.

The FT400 research team at the Financial Times’s sister publication, Ignites Distribution Research, believes that the high turnover indicates many advisers made poor investment choices last year. The researchers decided to raise the minimum qualifying amount of assets under management (AUM) from $200m to $300m on the grounds that this is an important criterion of success. But as that change would have affected only five per cent of advisers on the 2015 list, many other advisers lost money and or clients.

As in the three previous FT 400 lists, the research team used a combination of brokerage data, survey responses from advisers and its own research to score the candidates on attributes such as AUM, AUM growth rate, and depth of experience.

The methodology is explained in a separate article published with the list of 400.

In addition to sound knowledge of markets, financial advisers face increasing demands for exposure to alternative strategies, such as hedge funds and socially responsible investments.

Meanwhile, advisers at the biggest brokerages are seeing early signs of competition from so-called robo-advisers that offer automated advice at low cost. And the US Department of Labor’s proposal of more stringent regulations on retirement plan advice and conflicts of interest could have an impact on revenues at some firms.

The researchers used AUM figures which they verified with the brokerages’ head offices. Advisers’ commitment to their professional development was recognised with the award of bonus points for having earned any of the top industry certifications such as the Chartered Financial Analyst or Certified Financial Planner (CFP). In the end the team found that 60 per cent of the FT 400 advisers have at least one of these credentials.

With so many investors now relying on the internet and social media, advisers were awarded points for making their information easily accessible online. Indeed, 86 per cent of FT 400 advisers are on LinkedIn, up from 70 per cent in 2015’s listing. And 95 per cent of FT 400 advisers have websites, up from 84 per cent last year.

The list is presented as a grouping of 400. There is no attempt to rank the advisers within the list because researchers felt the criteria could not be precise enough to separate, for example, the 200th-best adviser from the 201st. Many missed the listing by only a very slim margin.

The Financial Times 400 is listed state by state and, not surprisingly, the larger and/or wealthier states account for more advisers on the list. This fourth annual edition of the FT 400 lists advisers from 38 states plus Washington DC. California and New York are tied with the greatest number of FT 400 members, each accounting for 13 per cent of the total. Massachusetts, Texas, Florida and Illinois, in descending order, are the next most represented states.

The team found the median FT 400 adviser manages more than $1bn in assets, compared with $850m in 2015’s list. Despite challenging markets, FT 400 advisers in this year’s list, which is based on data for the year ending September 30 2015, saw their assets under management grow by 11 per cent over the previous year, and by 32 per cent compared to two years earlier.

FT 400 advisers have been in the business for an average of 26 years. Some 69 per cent of FT 400 have been advisers for at least 22 years, which means they were managing investments in 1994, the worst single year for the US bond market in the past four decades. As uncertainty in the bond market continues, such first-hand experience could prove extremely valuable.

In keeping with the trend towards specialisation in wealth management, 89 per cent of the FT 400 advisers work in teams — that was up from 84 per cent of the advisers in the 2015 survey. Looking at the list highlights just how many advisers focus on the wealthiest investors as clients, a shift encouraged by their brokerage firms. Some 84 per cent of the FT 400 serve wealthy investors — those with $1m to $10m in investable assets. However a greater proportion — 94 per cent — serve very wealthy investors with more than $10m to invest.

While FT 400 advisers share many common traits, there is plenty of variety in the group. The majority of the advisers come from the largest broker-dealer firms, but in all they represent 19 different brokerage firms from across the country.

The advisers also reflect different specialisations — from the 8 per cent who make a point of targeting scientists to the 28 per cent with expertise in trusts and estates. Individual advisers might, therefore, disagree about the implications of oil price movements or the future of China, but as a group they embody enough diversity to satisfy most investors’ ambitions and aspirations.