Who Ranks Financial Instruments' Performance?

In My Humble Opinion
1

I’ve been surfing the web for the latest rankings of Top 100 financial groups (investment firms, fiduciaries, etc) and a list of how financial products (instruments?) rank based on performance. One would think this should be readily available via Forbes, S&P, Duns and Bradstreet, etc. And yet, I cannot find it. At best, I found Forbes Top 8 financial groups.

Surely, the SD can save me some time and provide some good links and/or good search terms to get at what I seek. (I’ve been hitting on best stocks and banks, but that’s not quite what I am seeking.) Thanks in advance!

One follow-on question: Are 2021 rankings out yet? Or, is 2020 the latest info available at this time?

2

For something like annuities, Barron’s has a list, broken down into the myriad categories of annuities you could choose from. These are really hard things to quantify, since there are so many different options and moving parts, it becomes nearly impossible to compare as the complexity increases.

Individual stocks/bonds/mutual funds/ ETFs are rated against a specific index, so that should be easy to find

3

Best in which way and among which financial instruments? Without knowing the answer to these questions, it’s impossible to answer. Even knowing these criteria, it might be possible that the answer isn’t readily knowable. There are services that provide the rates of return for certain financial products (like Morningstar for mutual funds and ETFs) but they offer no opinion on the best Kenyan bond portfolio/Pokeman card total return swap nor do they monitor whether pork belly futures were a good investment last year. Are cryptocurrencies a financial asset? Chances are, someone bought a lottery ticket for $2 that outpaced all of these.

Why are you asking? What are you really trying to learn?

4

Agree with @Tired_and_Cranky . What are you trying to learn? If you’re just seeking which types of financial instruments had the best return, then over what period? One year, 5 years, 10 years,??? And what about relative risks, volatility? The answers are more complex and require more specific questions in order to get answers which you can act upon.

5

What kind of instruments are you talking about, specifically? Something like a publicly available corporate bond is very different from a bespoke insurance swap, for instance.

6

Right- I think at best, the OP is going to get a series of lists, depending on what they prioritize.

7

If they’re lucky. Likely, they’ll get lists of lists, within lists.

8

It would be interesting for the OP to return and explain what he’s really trying to ask. Maybe there is an answerable question there. Or perhaps we can clear up some confusion in his head about this stuff.

The hard problems for anyone to solve are the ones where you/they know just enough vocabulary to ask the seemingly obvious but thoroughly wrong, questions. It turns the whole quest for knowledge into a multi-layered XY problem.

9

It kind of sounds to me like someone potentially wants to invest some money, but doesn’t know how, and googling “best financial instruments” wasn’t terribly helpful in the way it is when you google “best toasters”.

But that’s the thing- with the way the stock market works, the very act of publishing a list like that would skew the value of the stocks (Schroedinger’s stock certificate?) and probably change what should be on the list.

Beyond that, there are a lot of questions about how the list is compiled, what the metrics are, etc…

10

I don’t even think there are 100 different firms that offer brokerage services in the United States. At least not country-wide. I see everyone’s tax statement from their broker, and it’s extremely rare now 5 years into this job that I see a broker I haven’t seen before. You might get a top ten list, but I would personally have a hard time naming more than around 20.

If you expand that to financial services in general, the problem there is that there are lots of different firms that do different things. There is a pretty major split in between banks and insurance companies in terms of the products they offer such that it’s not really meaningful to compare Chase to Prudential or Capital One to Met Life. It definitely is far more likely that I’ll see an issuer of a 1099-R, whether for an IRA, annuity, or pension, that I’ve never seen before, and I’ve sure the number of such firms is well over 100, but most of those are probably one-issue entities. While plenty of businesses have their pensions paid through Prudential or State Street, a lot of unions have their own pension fund, so that number can get pretty high, but it’s not like you are going to be choosing which pension fund to participate in - you get whoever your employer uses.

So I don’t think the firm question is particularly meaningful. In terms of instruments, the best rating service I can think of is Morningstar for various funds. But here, all funds are only compared to other funds with the same broad objective, not to funds that have different objectives. Certainly there’s going to be some fund out there that’s done the best out of all of them over the period you’re looking at, but that fund might not fit your investment strategy, and if you look over other time periods it might be a whole lot worse because it’s highly volatile. I’ve looked at the funds that have the highest return over the last ten years, and every single one of them is a leveraged fund and there’s a warning that they are not suitable for most investors. It just so happens that the last ten years have been quite a bull run, with a temporary dip in the grand scheme of things last March, such that leveraged funds have beaten out everyone else. But once we get a real recession, those funds will take a huge beating.

If you look for funds that have done the best over the time period they’ve been around, you need to filter out ones that have been around at least some number of years, as the leading fund for return since inception is currently a small cap fund founded March 2020. If you were smart enough to start a small cap fund then, you would also have had very similar returns. Restricting it to ones that have been around at least ten years reveals only one with over 25% return per year, but if you look at their holdings, they have 40% of their assets in Tesla and basically all of their huge return compared to the market came in the last year. Tesla stock did much better than the rest of the market recently, but if you want to bet on Tesla stock that much, just buy it yourself. They also have 85% of their assets in their top 10 holding. That is to say, they are hardly diversified at all. There’s always going to be some actively-managed barely-diversified fund that’s done the best over whatever period you’re looking at, but that doesn’t mean that the particular fund will do better in the future.

11

I think there are around 3,500 broker-dealers in the U.S. right now. Most of them are registered in all 50 states. That number has been dropping for years though, and I might be off by some number of hundreds.

It’s really tricky to use the data you have to discern the number of broker-dealers. First, 1099s come not just from brokers but all types of custodians, which include banks and insurance companies. Furthermore, there are several types of broker-dealers in the U.S. that leave different paper trails. The big dividing line, for your purposes, is between “introducing brokers” and “clearing brokers.” Clearing brokers clear and settle their transactions and their clients’ transactions. Some clearing brokers (like Pershing and Apex) do this not only for their own customers but for customers who are introduced to the clearing broker by other broker-dealers (called, naturally, introducing brokers). The introducing brokers find customers, maintain the customer relationships, recommend transactions, and do lots of other things that are customer facing but, in general, they don’t handle customer funds and securities. (In the business, they are sometimes referred to as “$5,000 brokers,” because they need to maintain only $5,000 in net capital, unlike clearing brokers, who may have billions in net capital). The clearing brokers do all the unglamorous work of executing transactions, receiving and disbursing cash, arranging and extending margin, clearing and settling transactions, and sending out confirmations and statements.

The brokers you see 1099s from are clearing brokers, of which there are perhaps a few hundred. You most likely see lots of 1099s from clearing brokers who either handle lots of retail accounts (like National Financial Services, who is the clearing affiliate for Fidelity) or the five to ten firms like Apex and Pershing, which clear transactions for hundreds of introducing brokers.

There are also 14,150 SEC-registered investment advisers plus tens of thousands more who are registered only with the states. In general, they are going to be effecting transactions through some broker-dealer. The ones that deal with retail customers (and not just mutual funds, ETFs, hedge funds, or big corporations) will execute their transactions through a broker-dealer, usually through a platform offered by Fidelity, Vanguard, or Charles Schwab. Thus, if any of those investment advisers’ clients are also your clients, you will just see more 1099s from National Financial Services, Vanguard Brokerage Services, or Charles Schwab Clearing Services, respectively.

Long story short - there are thousands of firms being used by millions of retail investors but despite this diversity, most of them are going to generate 1099s from only a handful of firms.

12

Yep. As an example …

I use a small 10-person local RIA firm for my advice and planning. You’ve never heard of them, nor will you unless you live in my/their zip code.

They in turn contract with small-but-national TradePMR as their introducing broker.

who in turn uses First Clearing, the securities division of Wells Fargo, to actually settle my trades, hold my money market, etc.

My 1099s come from First Clearing. But I have zero direct contact with them. I always deal with the RIA.

OTOH, when I log onto a website to manage my account the url points to some part of First Clearing, but all the branding on the pages is TradePMR. My RIA is almost nowhere to be seen, except if I dig into the profile pages with my personal details.

Such is the modern 3-layered industry. At least as seen from the outside.

13

The OP asks a question that is impossible to answer. There is no ‘best’ financial instrument, just as there is no best food or article of clothing. There’s no magic portfolio of zero risk and high reward.

14

Certainly. You definitely reminded me of the wide range of companies that use NFS, Apex, and Pershing, and I failed to consider that those companies who contract out to clearing companies that are just as much brokers as the major ones who do their own clearing, and would be the ones on a list of the top brokers, whereas NFS, Apex, and Pershing are not entities that one would consider going to as retail investor.

With Pershing in particular, it seems like there are plenty of entities I don’t recall, though I may have seen before (if only with the same client last year), but I was under the impression that it was just the investment advisors, very few of which have national reach. With Apex, I know for sure there’s a broker I used that I haven’t seen anyone else else (or maybe there was one), while there were others that used them that I never heard of, and the same for NFS, and with my broker with Apex, it was online-only, and thus automatically had some sort of national reach, so I probably wasn’t just thinking big enough, assuming that my own experiences were everything there was since they didn’t change very often.

15

There is if you define “best” as meaning “best performing over the last X years”, and restrict your scope to those available through public markets. The problem is, as I noted, that just because they were the best over X years in the past doesn’t mean that they will be for the next X years, simply because they most likely lucked into the best results. Maybe you could look at the best performing funds over the last 50 years, but there probably aren’t that many of them, and those that exist from places like American Funds tend to be a bit more conservative.

Anything publicly offered other than a heavy stock mutual fund is going to not be able to beat the best such fund. There are still going to be plenty of other investments that are not publicly offered that probably did better though. They’re probably going to be hard to track down though, because no one’s publishing their data. Our firm handles the taxes for an investment group that current has 30ish partnerships that each own one or two pieces of real estate, and I’m sure that at least one of those partnerships has just done gangbusters, but there’s no way you would ever know because they don’t publish their results anywhere. If you weren’t part of their investment group, you’d have no idea.