Lack of Performance Reporting (Part 2)

Last time I discussed failure to report reliable performance records as a phenomenon in the financial industry.

I will pick up today commenting on an excerpt from Kenneth Winans’ 2017 Forbes article. Instead of minding performance, Winans says clients are more interested in customer service attributes and how well connected the adviser is.

To me it’s a no-brainer that clients hiring advisers to invest their savings should care about performance above all else. Since they are aiming to grow their money (otherwise why seek an adviser in the first place?) rather than lose it (otherwise why invest as opposed to gamble on games of chance like the lottery or casino games?), how can they fail to hold the adviser accountable for this? I can understand congeniality or rapport as a close second but it boggles my mind to see performance considerations downplayed (or completely omitted) as a criterion for adviser satisfaction.

This helps to explain my recent deliberation about potential brainwashing by the financial industry as a by-product of persuasion (salesmanship). Perhaps deception specialist or magician like Apollo Robbins would be a better analogy.

And perhaps a better explanation for how this occurs is poor financial literacy and an inability to grasp the implications of out/underperformance. Much of this is mathematics (e.g. annual return of 7% versus 6% on $100,000 over 20 years will result in $386,000 versus $320,000: ~20% improvement).

Winans continues:

     > A case in point was Barron’s September article “The Changing
     > Indie Landscape.” The story failed to mention the most important
     > metric that investors want to know — how much money
     > they made their clients over the last three, five, or 10 years

I think educated investors want to know these metrics but the dictionary definition of “investor” presumes no such education. Based on the paragraphs above, I am not at all sure the average investor even thinks to inquire about performance.

     > on average. Instead, money managers boast about assets under
     > management (AUM), as if what our money needs is the company
     > of other money. The media’s obsession over AUM comes because

The smokescreen is displacing the focus from investment performance to AUM. The illusion/fallacy is that because high-AUM advisers are so popular, they must be good at making money grow.

     > many heavily promoted registered investment advisors don’t
     > actually manage any investments at all. While a traditional

They outsource to TPAMs.

     > investment manager keeps your funds in a discretionary account
     > and can buy and sell a mix of stocks, bonds, ETFs or mutual
     > funds, many “money managers” are just middlemen who funnel
     > client money (for a fee) to a real investment management firm.

Hopefully the fee is for other necessary financial planning services rather than simply making the connection with a real investment management firm.

I will continue next time.