Why? Their ownership is concentrated in the hands of the founders and there is no mechanism for transferring it to its successors over time. In reality, these firms are glorified sole proprietorships that are unlikely to survive (at least in their current form) the departure of their founders. 

Finally and most important, AUM tells nothing about the quality, expertise, depth and breadth of the firm’s staff. If you look closely at several of the “best wealth managers” listed in these surveys, you will find that more than a few are overwhelmingly dependent on the expertise of a handful of individuals – typically the founders – and that many of the firms’ other “professionals” are often (effectively) administrative staff who just service existing clients. 

To be sure, it is easy to understand why those poor souls who are tasked by various publications to prepare lists of the best wealth managers almost always invariably default to AUM as the key admission criterion: It is the easiest statistic to get because every firm is required to disclose their AUM as part of their Part I Form ADV. 

At the same time, it is likewise understandable why one’s social standing within the industry has historically been based on AUM. When the industry first started, everyone was tiny and trying to find a way to signal to prospective clients that their firms were a safe choice for getting competent advice. By trumpeting one’s AUM (in particular if the firm had one or two big clients) it was easier to sound like a much bigger and badder organization when marketing. And old habits are hard to change.

Please allow me to propose an alternative three-factor model that, while it involves a little more work, is probably a more accurate depiction of the “best” firms and that anyone can use to study the industry. The first factor is sustainability as measured by ownership. If a firm’s equity is concentrated in very few hands (which can also be found on a firm’s ADV), it almost by definition is unsustainable and should be disqualified from any “best” list, regardless of AUM.

The second factor involves the breadth and depth of expertise of a firm’s professionals, which can easily be found on its Web site. Any wealth manager that wants to be considered as one of the “best” should have a deep team (excluding the founders) of professional staff – many, if not most, of whom are also owners – all with numerous years of experience and possessing professional credentials (i.e., CFP, CFA, etc.) and, most important, who are young enough to be around at the firm for at least the next 15 to 20 years.

The third factor – a firm’s likely profitability – may at first seem unimportant in the grand scheme of things. However, any business that does not make money does not last over the long term, and as noted above, clients are signing up for long-term advice. How can a wealth manager be one of the “best” if it does not make much money as a business?

Estimating profitability is a bit more art than science, but still is very doable even with just public information. One should first compare a firm’s number of clients with its AUM and thus, estimate average client size (both sets of data are on its ADV). You can then take average client size and apply it to the firm’s fee schedule (which is disclosed on its Part II Form ADV) and come up with a round-number estimate for its revenue. To be sure, more than a handful of firms regularly discount their stated fees, so at best, you are getting only an estimate of revenues. 

Estimating a firm’s costs is also not that hard, given that most firms list all of their employees (including credentials and experience) on their Web sites and there are numerous industry surveys that one can use to estimate their compensation. Add to that about 20 percent to 25 percent of revenue for overhead costs. Compare the firm’s aggregate costs to revenue and one has a ballpark estimate of a firm’s gross profitability. 

This combination of long-term sustainability, breadth and depth of expertise and ongoing profitability provides a much better picture of which wealth managers are actually competent, sustainable businesses -- and by any measure is far more accurate than a list largely tied to AUM. It also should be a much better guide for those study groups trying to figure out which other firms are, in reality, their peers.