Financial advisors know you want to see a track record that documents past investment performance. This is the easiest way for you to measure the competence of a new advisor. It is also a very risky way. Most financial advisors do not have track records because their services vary by client. Some advisors, one or two percent, have legitimate track records. Then there are advisors who market fake track records. Continue reading
Advisors know you want high performance. Some investors even want high performance for low risk (does not exist). If you are a more experienced investor you want competitive returns for reasonable amounts of risk and expense. How do you know if your returns are competitive? You have to compare your return to the returns of other investors with your same characteristics or to the returns of a relevant benchmark (See Performance Benchmarks).
The question is, how do you determine the performance you can expect from an advisor before you select him? This paper provides some important tips about performance and track records. Continue reading
Advisors know you want the highest possible investment returns that are consistent with your tolerance for risk. If you are in your 30’s this could be an all equity portfolio of aggressive growth stocks. If you are retired your portfolio could consist of securities that produce the greatest amounts of income. Most advisors believe performance is the key to winning new clients.
On the other hand, financial advisors do not have track records. Only money managers have track records because they provide the same services to multiple clients. Advisor services vary by client so they do not have track records or at least they don’t have legitimate track records. So how do they market their services to investors who put a major emphasis on performance? Continue reading
Financial advisors provide track records that are supposed to document the past performance of their current clients. They know investors are prone to selecting advisors with the best track records, but what if the track records aren’t real? Bernie Madoff marketed a fake record. Investors are in big trouble if they select advisors who manufacture track records to gain control of their assets. Continue reading
There are three performance numbers that should matter to you.
First, is your performance goal. Let’s assume you have to average a 10% rate of return to achieve your financial goals.
Second, is your absolute performance. What return did your investments deliver? If your performance was 10% then you achieved your financial goal for that year. You should also differentiate between gross and net returns (after expenses are deducted). You may find your 10% return became 8% in which case you lagged your goal.
Third, is your relative performance. This is the number that really matters. How did your investments perform compared to a benchmark. For example, your absolute return was 10%, but your benchmark was up 20%. On a relative basis you lagged your benchmark by 50% – not so good.
Relative return benchmarks also tell you how you performed during negative years. For example, your benchmark is down 10%, but your portfolio’s performance is only down 5%. On a relative basis you win because you lost less.
Investor Watchdog is launching a new website in the next few weeks that contains five sophisticated performance benchmarks. Some of the benchmarks have up to 12 asset classes and they use varying asset allocations to reflect different tolerances for risk. You select the benchmark and we monitor your results for you.
Money managers have track records. That is because they provide the same service to multiple investors. Examples of money managers are mutual funds, separate account managers, and hedge funds. These managers are firms of professionals who select investments (securities) for your assets.
Financial advisors do not have track records. They say it is because they provide different services to their clients. For example, the services they provide their younger clients are very different compared to the services they provide their retired clients. Financial advisors recommend money managers, but do not make securities selection decisions themselves.
I can accept their argument, but I also take it with a grain of salt. It is possible to divide their clients into categories and develop track records for each category. Their advice does not vary much within a category. However, this would be an expensive, time consuming process to do it right.
Just because advisors do not have track records does not mean they are not accountable for your performance. Their advice helps you allocate assets between investment classes and they recommend the money managers who actually invest your assets in securities.