Lack of Performance Reporting (Part 6)

In July 2014, Dr. Mark Perry wrote about the Jason Zweig blog entry I have been discussing. Dr. Perry is scholar at the American Enterprise Institute in Washington, D.C. Today I will discuss some reader comments in response to Perry’s post.

     > If routinely tracking and disclosing… [performance info]
     > was good for financial advisors it would already be happening.
     >
     > I agree with everything in this post except the idea that
     > this failure to disclose is baffling. Nothing baffling about
     > people acting in their own self-interest

That caught my eye, too.

Another reader claims to have experience with hedge funds:

     > …as a hedge fund you are not allowed to share your numbers
     > until you have a relationship with someone and believe them
     > to be… accredited… or… qualified… for me to post my
     > [performance] numbers on a public website or to send out a
     > mailer is illegal.
     >
     > of course, once i do have a relationship… we ALWAYS show
     > them our numbers. hell, we’re dying to.
     >
     > anyone who does not should be regarded with great suspicion.

I have written about how vendors/advisers exaggerate returns when marketing and advertising trading systems and strategies. Critical thinking is great for debunking such frauds.

On the other hand, though, if you genuinely had solid performance then why wouldn’t you advertise it?

     > this gets a lot more difficult for an RIA… as his or her
     > results are anything but uniform.
     >
     > such advisors tend to create bespoke products and portfolios
     > for their clients based on different goals.
     >
     > if you seek low risk capital protection or dividend income,
     > comparing you to someone who seeks… growth is… irrelevant.
     >
     > even among 2 investors with the same stated goals, the way
     > they go about it may be very different. one might want emerging
     > market and currency exposure, one might not.
     >
     > clients have idiosyncratic issues like big holdings in an employer…
     >
     > this creates a real problem in terms of demonstrating returns.
     > just which account is supposed to be the benchmark?

This is why I erroneously believed separately managed accounts could be exempt from performance reporting.

     > the flip side of that, of course, is cherry picking, something
     > that RIA’s and brokers are justifiably notorious for. they have

In a subsequent comment, another reader mentions GIPS compliance as a way to avoid this fallacy.

     > 200 accounts, they pick the best 3 and market based on them.
     > the results are not typical and may have even been driven by
     > something the RIA did not do.
     >
     > so, there is a real issue here around reporting even with the
     > best of intentions, and intentions in the advisory space are
     > often far from pure.

When he puts it that way, it sounds more like chicanery than a simple “fallacy.”

I will continue next time.