Lack of Performance Reporting (Part 4)
Posted by Mark on March 13, 2018 at 07:28 | Last modified: November 20, 2017 12:42Today I resume discussion of Jason Zweig’s July 2014 blog post:
> “It’s baffling to me,” says Tim Medley, president of Medley
> & Brown, a financial adviser in Jackson, Miss., that manages
> $575 million and publicly updates its performance monthly
> online. “The advisory business has grown dramatically, and
> I would have guessed that by now a lot more advisers would
> be posting their rates of return on their websites.”
“Baffling” echoes my “no-brainer” sentiment.
> Mind you, every client opens and closes accounts at different
> times, in a variety of investments, with various levels of
This is suggestive of my historical perspective of separately managed accounts (SMA), which I “perhaps erroneously” believed to be justified in omitting performance reporting.
> risk. But that doesn’t mean an advisory firm can’t calculate
> the average return it earns for its clients. Every investor
In other words, my inference was indeed erroneous.
> in a given mutual fund also is unique, but all mutual funds
> report their past returns in the same standardized format.
Kenneth Winans, in the article discussed last time, also discussed a standardized format:
> Any advisors who actually have a performance record worth
> boasting about can prove they make money in bull markets
> and keep it in bear markets, too. Doing so simply requires
> getting a Global Investment Performance Standards (GIPS)
> verified performance record. A GIPS record is a full disclosure
> of investment performance results adjusted for risk using
> a standard methodology, allowing for comparison among
> different investment managers and benchmarks. Numerous
> disclosures are also mandated, such as whether performance
> is calculated before or after fees. GIPS standards are set
> by the CFA Institute, which administers the well-respected
> Chartered Financial Analyst program, to give “investors
> the transparency they need to compare and evaluate
> investment managers.”
Winans believes all investment advisors should have their performance GIPS verified.
To find out more, I contacted Sean Gilligan of Longs Peak Advisory Services. He spoke with me about the process and cost.
He also discussed verification:
> Verification is the review of an investment management
> firm’s performance measurement processes and procedures
> by an independent third-party verifier. Specifically,
> verification assesses whether the firm has complied with
> all the composite construction requirements of the GIPS
> standards on a firm-wide basis. It also tests whether
> the firm’s policies and procedures are designed to
> calculate and present performance in compliance with the
> GIPS standards.
>
> Third-party verification brings additional credibility to
> a firm’s claim of compliance and supports the overall
> guiding principles of the GIPS standards: fair representation
> and full disclosure of a firm’s investment performance.
Verification is that “expensive accountant” and thanks to Sean Gilligan, I now know who some of these companies are.
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