How good is your financial advisor’s investment performance? Is your investment performance net of all expenses that were deducted from your accounts? Is your financial advisor’s performance consistent with your tolerance for risk? Will your performance enable you to achieve your financial goals?
You should have a lot of questions for your financial advisors about your performance. These numbers impact when you retire, your standard of living during your retirement years, and your financial security late in life when you need it the most.
Conflicts of Interest
If you are like most investors, you have a major problem. The professional who is responsible for producing the performance also provides the information that documents your performance. Financial advisors can spin numbers so they look better than they really are. And, they know how to deflect blame for bad numbers. They use these sales tactics so you do not terminate your relationship with them. Terminations stop their income.
No Performance Data
What if your financial advisor does not provide performance measurement reports? Any performance data comes from the investment manager (mutual fund, hedge fund). It means your financial advisor is really a sales representative who does not provide ongoing services. Real advisors charge ongoing fees and their primary services that justifies the ongoing fee is performance reporting.
Beat the Market
The most important measurement in performance reporting is relative results. Absolute returns don’t tell you much. For example, your performance is a positive 10% for the past twelve months. Not bad – a double digit return. However, your friends were up 20%. On a relative basis your 10% absolute return does not look so good.
A high percentage of investors task their advisors with beating the market that is represented by the S&P 500. This is relative performance, but it may be apples and oranges. The S&P 500 is an index of large capitalization stocks. It is a valid comparison if 100% of your assets were invested in large cap stocks. It is an invalid comparison if you owned other asset classes: Foreign stocks, real estate, bonds, etc. Chances are you own multiple asset classes because diversification is a popular way to minimize the risk of large financial losses.
Paladin Performance Benchmarks
Paladin Advisor Research has developed five performance benchmarks that vary by exposure to risk. Each benchmark represents the performance of five to nine asset classes. Asset allocation is based on the risk characteristics of the benchmark. The results have been back-tested to 2008 to make sure the benchmarks were performing as expected during the prevailing market conditions.
Investors select a benchmark that is based on their tolerance for risk. Comparisons are as easy as comparing the advisor’s performance to the benchmark’s performance. Advisor’s who consistently under perform the investors’ benchmark should be replaced with advisors who can produce better results. You only have so much time to accumulate assets for your future use.