Lack of Performance Reporting (Part 7)
Posted by Mark on April 19, 2018 at 07:07 | Last modified: November 30, 2017 14:00Today 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).
> 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.