There is only one way to know if you are getting competitive investment performance. You have to select a relevant benchmark and hold your advisor accountable for beating the benchmark’s return. If your advisor consistently outperforms your benchmark you should sleep better at night.
The returns that are produced by your advisor are impacted by the performance of the securities markets. If the markets go down, there is a good chance you will lose money. If the markets go up, there is a good chance you will make money. Continue reading →
Every investor who relies on financial advisors to help them achieve their financial goals should be asking themselves how they can increase their advisor’s accountability for investment performance. Why ask the question? Most advisors go to great lengths to avoid accountability.
Here is an example. You select an advisor who convinces you to invest your assets in five mutual funds. You buy the recommended investments and you experience very poor performance over the next two years. Who is responsible for the bad performance, the funds or the advisor who recommended the funds? The advisor wants you to blame the funds so he can retain his relationship with you. He says it is not his fault the funds failed to deliver competitive performance. I disagree. The funds and the advisor who recommended them are both accountable. You should sell the funds and terminate your relationship with the advisor who sold you the funds. 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.
As we approach the end of the year investors will be faced with the critical task of reviewing their 2011 performance and determining whether they should stay with their current advisors.
The most frequent question we receive from investors is “Did my advisor beat the market?” This performance expectation is created by advisors when their sell financial advice and services to investors.
Financial advisors use “beat the market” sales pitches to justify the amount of fees that will be deducted from investor assets. If investors do not have this expectation, they may not be willing to pay the fees.
A high percentage of investors have this expectation, but, is it a realistic expectation?
No, it is not. For example only about 25% of mutual funds beat market returns over longer time periods and the funds are different every year. It is an extremely rare fund that beats the market every year.
Also, what is the market, the S&P 500? This is an index of large capitalization stocks. What if your portfolio is a combination of stocks and bonds? This index is no longer applicable.
In January Investor Watchdog is rolling out six Benchmarks that vary by rate of return expectation and exposure to risk. In the future investors can ask their advisors if they beat their Watchdog Benchmark before and after the deduction of fees.