How To Use The PennyPilot Grade When Evaluating Financial Advisors

You’ve decided that it’s time to hire a financial advisor or you want to know if your current financial advisor is right for you, now what? How do you begin? What constitutes a good advisor? How do you find someone you can trust with money you’ve worked so hard to accumulate?

The PennyPilot Grade can help. It is a starting point in your search for a financial advisor or in your evaluation of whether or not your current financial advisor is meeting your needs.

What is the PennyPilot Grade?

PennyPilot obtains publicly available registered investment advisor data, sifts through relevant data points, and runs it through our proprietary algorithm to produce a ranking of more than 5,000 financial advisory firms. Grades range from (for the highest ranked firms) to F (for the lowest ranked firms).

The below summarizes the inputs that factor into the PennyPilot Grade:

Potential Fee Level – The fee an advisory firm charges you is a crucial contributor to whether or not you achieve your financial goals. Hiring a financial advisor that charges excessive fees can cost you hundreds of thousands of dollars, or more. Excessive financial advisor fees can mean the difference between running out of money in retirement or not. 

PennyPilot analyzes typical fees listed in forms advisory firms are required to file with the Securities and Exchange Commission to see how individual firm fees compare to competitors. Our analysis culminates in a score ranging from Low (Best) to High (Worst).

Please note, there is no uniform standard for administering fees. Each advisory firm may package and charge for services differently. Our analysis utilizes PennyPilot developed methodology to standardize fees and facilitate comparisons across advisory firms, though our view is subjective. The below outlines the most pertinent aspects of our methodology, but it is not exhaustive. Ultimately, you should independently compare individual advisory firm offerings and fees charged.

PennyPilot captures fee data from an advisory firm’s Form ADV, which is a form the SEC requires firms to complete and update regularly. PennyPilot includes only firms that are registered with the SEC and offer both portfolio management and financial planning services to their clients. 

The percentage of assets under management (AUM) fee is the fee used for comparison. Firms that do not charge based on a percentage of a client’s AUM are currently excluded from evaluation and do not impact relative firm ranks. 

Some firms include financial planning and other non-continuous services in addition to portfolio management as part of their AUM fee. It is PennyPilot’s belief that this is generally not in a client’s best interest and therefore we do not credit advisors as offering more for their fee. For example, a financial plan is typically created at the onset of an advisor/client relationship and then updated when a significant life event occurs. Charging at annual, quarterly, or monthly intervals for this infrequently executed service does not serve clients well.  

PennyPilot assesses fees using a dollar-weighted-average methodology to capture fees that decline as a client’s AUM rises. This method is used as most advisory firms that offer fee tiers calculate fees using this methodology. However, a small number of firms charge a single percentage rate once a client’s AUM crosses into the next fee tier. For these firms, our methodology overstates fees levied. 

Third-party fees are not taken into consideration. Therefore, if there are third-party services offered that are not included in the AUM fee, then the end fee a client is charged may be higher. Fees are evaluated for assets of $2,500,000 and lower.  

Clients Per Advisor – How much time will the financial advisor you choose to work with be able to devote to serving you? Expansive client lists can limit a financial advisor’s ability to provide adequate service to you and your family. This could be detrimental to you and your loved one’s quest to achieve your financial goals. We categorize firms in groupings ranging from Low (Best) to High (Worst).
Amount of Firm Resources – The resources a firm has at its disposal can impact the breadth and depth of services offered and its viability as a going concern. Greater resources may also position firms to rectify any wrongs in cases of advisor disputes. Firms earn a resource assessment rank ranging from Modest (least amount of firm resources) to Substantial (greatest amount of firm resources).
Disclosures Score – This input assesses the extent to which an advisory firm’s record includes past criminal, regulatory, or disciplinary disclosures. The result of the assessment places firms in one of three categories: Poor, Mediocre, or Exemplary.
Dual-Registrant Conflict – Dual registration refers to advisor firms or individual advisors that can act in two capacities; as registered investment advisors (held to a fiduciary standard), or as brokers (held to a less-stringent standard of care). This dual-registration creates a conflict of interest between clients and investment professionals providing recommendations. The presence of this conflict can prove harmful to investors seeking guidance compared to working with a financial advisor where this particular conflict is absent. You can learn more about these investment professional distinctions by accessing our Investment Professional Infographic. Firms are categorized into one of two groups, indicating the presence of this conflict or not.

What role should the PennyPilot Grade play in my evaluation effort?

The PennyPilot Grade is a starting point. You should reference it initially to help you sort through financial advisor options, then continuously reference it during your evaluation process as it will help you ask the right questions of a potential or current financial advisor. You should then check the PennyPilot Grade throughout your relationship with your financial advisor to see if a financial advisory firm’s standing has deteriorated.

PennyPilot Grade Limitations

The PennyPilot Grade relies on data submitted by financial advisory firms to the Securities and Exchange Commission, a U.S. government agency that regulates financial advisory firms that meet certain criteria. This data is not independently verified and does not include all U.S. financial advisory firms. The SEC requires firms to fill out Form ADV to report the data. This form offers advisory firms some discretion in response to certain data points, which could obscure uniformity in reporting across firms. All inputs used in the PennyPilot Grade serve as a proxy, which may cause the reality experienced by any individual advisory firm client to differ. In addition, the following PennyPilot Grade Potential Fee Level input-related limitation should be acknowledged.

Potential Fee Level Limitations – The PennyPilot Grade fee comparison does not necessarily include fees charged to clients by financial advisory firm third-party vendors, which could cause fees to be higher in certain instances.  

Access to the PennyPilot Grade Here!