Lack of Performance Reporting (Part 7)

Today I want to talk about the lack of accurate performance reporting among IAs (or whatever you want to call them).

This information comes from a January 7, 2016, article in azcentral written by Eric Tyson (author of Investing for Dummies).

     > Mutual-fund companies must have their performance records
     > audited and reviewed by the… [SEC]. Most also provide an
     > independent auditor’s report. Private money managers face no
     > such SEC requirement. Few provide independent audits. Of

This is the “expensive accountant.”

     > course, you really want to know the performance facts about
     > the money manager who you’re considering for ongoing
     > management of your funds. What [annual] rate of return has he
     > earned… How has he done in up and down markets? How much risk
     > has he taken, and how have his funds performed versus comparable
     > benchmarks? These are important questions. Getting objective
     > and meaningful answers from most investment advisers who
     > manage money on an ongoing basis is difficult…

Emphasis mine.

     > If all the money managers are telling the truth… 99% of them
     > have beaten the market averages, avoided major market
     > plunges over the years, and just happened to be in the best-
     > performing funds last year. Money managers pump up their
     > supposed past performance to seduce you into turning your
     > money over to them through common marketing ploys:
     >
     > Select accounts: If you can get the money manager to give

Emphasis mine.

     > you performance numbers and charts, too often an asterisk
     > refers… [to] something like select or sample accounts. What this
     > term means, and what the money manager should’ve said instead,
     > is: “we picked the accounts where we did best, used the
     > performance numbers from those, and ignored the rest…”

From the client point of view, this is all good reason to stick with GIPS compliant and verified firms.

     > Advisory firms also may select the time periods when they look
     > best. Finally, and most flagrantly, some firms simply make
     > up the numbers (such as Bernie Madoff did).

Outright fraud…

     > Free services: Some money managers will produce performance
     > numbers that imply that they’re giving… services away… money
     > managers charge a… percentage of assets… [and] are required
     > to show… returns… [net of] fees… to clearly show the amount
     > that, as an investor using their services, would’ve made…

Some will occasionally show “after tax” performance, too. At the very least, I think some adjustment should be made when short-term strategies are being compared to a longer-term benchmark (the latter may have a lower tax burden).

     > Bogus benchmarks: …some also try to make themselves look good
     > in relation to the overall market by comparing… performance numbers
     > to inappropriate benchmarks. For example, money managers who invest…
     > in international stocks) may compare their investment performance
     > only to the lowest-returning U.S.-based indexes.

Sneaky, sneaky…

     > Switching into (yesterday’s) stars: Money managers don’t want to send…
     > updates that show… they’re sitting on yesterday’s losers and missed
     > out on yesterday’s winners… they may sell the losers and buy into
     > yesterday’s winners, creating the illusion that they’re more on top of the
     > market than they are… known as window dressing, [this] is potentially
     > dangerous because they may be making a bad situation worse by selling
     > funds that have already declined and buying into others after they’ve
     > soared (not to mention possibly increasing transaction and tax costs).

I included “optionScam.com” as a category for today’s post. “Unsavory” would also apply.