by Jack Waymire
Your financial advisor claims he cannot provide track records because all of his clients are different. The advice he gives to a 35 year-old investor is very different from the advice he gives a 70 year-old investor.
There is some validity to this claim, but there is also a reality. Financial advisors could lump clients with similar characteristics (performance, risk tolerance) into categories and publish a track record for each category. For example, the 35 year-old is in the Capital Appreciation category and the 70 year-old investor is in the Capital Preservation category.
Model Portfolios (Categories)
All you have to do is determine your category and view the track record of the advisor’s current clients in that category. This information would help you compare advisors to each other and establish your performance expectations.
These categories already exist. They have different names, but investors with similar characteristics end up owning the same ETFs, mutual funds and securities. This makes sense. There are only so many variations for stock market exposure: 100%, 75%, 50%, 25%, and 0%. Each of these represent a different exposure to risk and upside potential.
What if a financial advisor knew he is not producing competitive rates of return? What if he believed you would not hire him if you had this information? The solution is to withhold the information and hope you don’t ask for it. Or, he relies on sales and relationship skills to gain control of your assets without providing a record of past results.
This strategy works if 98% of financial advisors adopt it. The strategy does not work if 50% of advisors publish track records and 50% do not. You may prefer to use advisors who publish track records.
Legitimate Track Records
There is a second reason why a financial advisor does not have a track record. Legitimate records are expensive to produce. The advisor would have to use a calculation that is GIPS (Global Investment Performance Standard) compliant. This means the advisor has to include all of the clients in particular categories (model portfolios).
Then the track record has to be audited by an independent, well-known firm that has this type of specialized expertise. This ends up being a relatively expensive process that can cost tens of thousands of dollars to do it right. Track records that are not done right are worthless.
The pressure to start providing track records may come from the Robo-Advisors that are also called Online Financial Advisors. They already lump investors into model portfolios that are supposed to reflect their tolerances for risk. All they have to do is calculate the track record of the model, versus every investor in the model. Traditional advisors could use a similar process if they do the same thing for various categories of investors.
Have you asked your financial advisor about his track record? What was his response?
Other posts from Jack Waymire
When it comes to finding the best financial advisor, I always recommend choosing a fiduciary financial advisor. But...
There is no doubt selecting the right financial advisor is one of the most important decisions you will...
When we face critical decisions, many of us turn to professionals (financial advisors, CPAs, attorneys) who have specialized...