If we were hiring a financial advisor, one of the first questions we’d have for them is “what’s your track record?” Prove to us you know what you’re doing and your strategies work. If your advisor (or potential advisor) shows you historical performance, it’s important to understand what you’re actually viewing.
In our experience, a lot of advisors don’t report performance, or if they do, they don’t compare it to an appropriate benchmark. So if they can’t quantify their track record, how badly should you want to work with them? We’ll look at two common methods of showing performance.
In order to show prospective clients the performance we’ve delivered for clients over the years, P&A groups like-minded accounts into what are known as composites. For example, accounts 100% invested in individual stocks are grouped together into what we call our Custom Equity composite. Accounts that have an asset allocation of 75% stocks and 25% bonds are generally grouped together, as are 50/50 accounts, etc.
By grouping our client accounts into composites, we are able to measure performance that we have actually delivered to our clients over various time periods (1, 3, 5, & 10 years, for example) net of our fees and all expenses paid by the client. Then this performance is compared to an appropriate benchmark. We are very proud of the performance we’ve delivered over the years. It has facilitated a lot of living, charitable giving, and fun on the part of our clients.
Rearview mirror investing
Several of us at P&A sit on the finance or investment committees of foundations and non-profits. Part of our role on these boards is listening to the presentations of financial advisors pitching for the organization’s investment business. Too often we see what we’ll refer to as “rearview mirror investing.” This occurs when an advisor says, “here’s what we recommend, and as you can tell, it’s done very well over the last X number of years.” What they fail to tell you is that they didn’t actually have their own clients in these investments over that full-time period. Unsurprisingly, it’s pretty easy to come up with a list of funds and investments that have outperformed a benchmark in the past.
Why does this distinction matter?
Since this goes on in formal presentations for non-profit business, we’re highly confident that it also goes on when an advisor is meeting with individuals or couples. The lesson here is to be sure you know what you’re looking at when someone is showing you performance. It makes a big difference if it’s actual composite performance or hypothetical, “if you would have owned this” performance. One is real results delivered to clients, while the other is nothing more than cherry-picking.
In a nutshell, our composite performance describes the decisions we have made in the heat of the battle. Emotions can run high and drive decisions during volatile times. This is proof of our steadfast approach. And remember, the old adage “past performance doesn’t guarantee future results” applies no matter what you’re being shown.