Lack of Performance Reporting (Part 5)
Posted by Mark on March 29, 2018 at 07:01 | Last modified: November 27, 2017 11:06Today I continue discussion of a July 2014 blog post by Jason Zweig.
Zweig addresses how financial planning activities like tax reduction, estate and retirement, [life and long-term-care] insurance, debt management, and asset protection provide value. I alluded to this here and I wonder if a failure to separate these fees enables advisers to “go cheap” with the investment expense (as mentioned in a previous footnote).
Zweig continues:
> [While financial planning] benefits often can’t be quantified… that
> shouldn’t exempt advisers from reporting results that can be… like
> investment returns.
>
> Even so, most financial advisers remain reluctant to calculate their
> results. Jonathan Pond, president of Jonathan D. Pond LLC, a financial-
> advisory firm… that manages approximately $230 million, says he
> worries that the SEC would second-guess any such numbers, raising the
> potential for regulatory reprimand [emphasis mine].
>
> “As a result, we absolutely do nothing as far as putting out performance
> data,” he says. “It will be a cold day in Hades before we put that sort
> of thing in a brochure.”
I find this shocking and very similar to a 2016 financial adviser discussion about not including inferential statistics in articles.
> If a prospective client is curious about track record… Pond [says]
> he will find two existing clients whose situations are comparable.
> Then his staff prints out portfolio holdings for each, removes
> the personal identifying information and sends the documents to the
> prospective client—who is then free… to look up the past
> performance of each holding separately online.
This sounds like a cheaper alternative to GIPS compliance.
> Most investors probably won’t even go that far, says David Spaulding,
> head of a firm… that measures investment performance. “In a relationship
> business, many clients just say, ‘Why would I ask about numbers? This
> guy clearly knows what he’s doing.’ So nobody brings it up.”
Salesmanship trumps performance. Put another way, rapport acts as a smokescreen.
With regard to SMAs, which I have mentioned in Parts 1 and 4, Zweig quotes David Fried of Fried Asset Management:
> “If an adviser says that every client is different, then how can he
> realistically be an expert on investing in all those different ways?”
> Mr. Fried asks. “And if they aren’t all different, then the adviser
> must have a few core strategies, and then the return for each of those
> can be reported.”
This sounds like a powerful argument to me.
Zweig recommends anyone in the market for a financial adviser ask for a written performance record:
> That shouldn’t be just the results of a single client, a cherry-picked
> handful of lucky stock picks or market calls, or a short-term snapshot
> that starts… at the beginning of an epic bull market.
>
> It should instead present a composite of how large numbers of clients’
> portfolios fared over multiple time periods—say, the past one, three,
> five and 10 years, after all fees…
>
> If enough clients start asking, advisers will have to apply the same
> scrutiny to their own performance that they claim to apply to funds
> and other investments.
Powerful argument indeed!
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