Comments on Performance and Fee Structure (Part 2)
Posted by Mark on April 10, 2018 at 06:01 | Last modified: November 29, 2017 06:14Today I continue with discussion of some insightful comments to Dr. Mark Perry’s July 2014 blog post.
With regard to Tim’s Medley’s “baffling” comment, another reader writes:
> That statement is an outright lie or he’s extremely obtuse. I
> suspect the former. If anyone has worked in the financial
> advisory business, the possible reasons should be fairly obvious.
>
> The most obvious reason is that clients accounts are often highly
> customized to meet financial goals and specific needs. This means
I addressed the issue of SMAs here and here.
> each client will have different levels of risk assets, defensive
> assets, alternative investment exposures, socially responsible
> investments, single stock holdings and etc. You should not create
> a performance track record from a group of portfolios that all
> unique. The numbers wouldn’t be a fair representation of the
> performance of the financial advisor.
GIPS compliance is the way to track performance of SMAs. I think there must be some standardization but there’s plenty of wiggle room available and GIPS will track performance of all composites.
> That being said, financial advisors are mostly salespeople,
> who are better at schmoozing than investment analysis.
I’m clearly not the only one who has picked up on this.*
> I would suspect that most performance would be terrible.
> If you add up all the fees, which include advisory,
> custodial, mutual fund, trading, and others fees, it
> can be in the 2-3% range…
This makes me more confident that my fee would not be excessive if I can outperform. While I believe in the fairness of performance fees (see footnote and its referent here), as a pure management fee I would begin consideration with 2%.
> Unless an advisor is a phenom (if [so then]… he/she
> wouldn’t be an advisor), a client probably will probably
> underperform the benchmark.
As mentioned in the Part 7 footnote, professionals capable of generating solid performance seem to be investment/portfolio managers rather than financial advisers. Legally speaking, though, they both fall under the IA(R) definition.
Another reader comments:
> “The numbers wouldn’t be a fair representation of the
> performance of the financial advisor”
>
> I agree. That would be like shopping for doctors by how
> many patients did not die. I don’t know how much I would
I believe that while the composition of patients may differ, mortality is a meaningful statistic given a large sample size.
> trust performance measurements that were not verified
> by a third party such as Morningstar anyhow.
Reputable verification services are not cheap but should be regarded as well worth the cost for credibility.
I will continue next time.
>
* Also see here, here, here, and here.