By: Howard AschwaldcloseAuthor: Howard Aschwald Name: Howard Aschwald
Member: Member Paladin
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Email: haschwald@quantumcap.com
Site: http://paladinregistry.com/external/beaninformedinvestor/advisor_profile.php?advisor_id=2297
About: Howard began his investment career at Morgan Stanley. He then joined the investment management firm of Stein Roe & Farnham as a technology analyst and portfolio manager. At Quantum Capital Management, Howard is the Director of Research and Chief Investment Officer. He graduated from the U.S. Naval Academy at Annapolis and recently retired as a Captain in the Naval Reserve. Howard has an MBA in Finance and a Masters Degree in Financial Planning from San Francisco's Golden Gate University. He is a CFA charterholder, a member of the CFA Institute and the Security Analysts Society of San Francisco as well as a Past President of the Marin County Estate Planning Council.See Authors Posts (1) | May 13, 2009

One of the best ways to get people to buy an investment or buy into the advisor is to show a stellar record of past performance. You’ll see a presentation that shows what such and such did or how this combination of mutual funds or exchange traded funds did over 1, 3 and 5 year periods. Hypothetical performance is misleading. It always looks impressive (otherwise, why show it) but there’s a catch — It’s not the advisor’s actual record.  It’s his or her current pick list. Who knows how these investments will perform in the future or how the advisor’s changes and future picks will do going forward?

Every recommendation, every change, is part of an advisor’s decision making process, whether they use individual stocks and bonds, mutual funds or separate account managers. You are looking for actual past results.  Even a mediocre record of actual results is vastly superior to something hypothetical.

Every investment track record tells a story.  An advisor that won’t show an actual track record is either not willing to take responsibility for his past decisions or wants to hide a poor record until such time that a good one can be shown.  A hypothetical record is just a way to fool you into thinking that is what the advisor has and will deliver to you in the future.  It’s better for an advisor to show no performance record, rather than a misleading one.

Five things to watch out for when looking at an advisor’s track record:

• Management Fees not included.
• A “representative” account as opposed to all accounts meeting specified criteria.
• Using an easy to beat and misleading benchmark for comparison.
• Results from simulated model portfolios based upon past buy and sell recommendations.
• Back tested performance of hypothetical strategies and current recommendations.

Read the fine print at the bottom of a track record performance report and some of the above five items might be disclosed.  If so, at least you’ve been warned. If not disclosed and you spot any of the above, caveat emptor.