Lack of Performance Reporting (Part 5)

Today 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!