Lack of Performance Reporting (Part 4)

Today 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.