Lack of Performance Reporting (Part 11)

Today I continue discussion of Jaime Levy Pessin’s 2011 WSJ article “Advisers’ Little Secret: Their Past Results.”

     > Andrew Tignanelli [of MD based Financial Consulate] says… complying
     > with GIPS is “quite intense for the average small… advisory firm…”

This is another reference to GIPS expense as a barrier to entry.

     > As of now, his firm has chosen not to provide performance information
     > publicly, although he does make it available to prospective clients
     > who ask for it, which he says happens infrequently… [emphasis mine]

To me, this details much of what is wrong with the industry. If you’re a client looking for an asset manager then performance should be near the top of the selection criteria. I continue to be amazed to discover this may not be the case.

     > Mercer Bullard, a law professor… points out that the SEC requires
     > disclaimers… explaining that past performance doesn’t guarantee
     > future returns. But, he says, some firms worry that any form of
     > performance reporting could be viewed as a promise. That concern,
     > he says, “necessarily suppresses the use” of such numbers.

Jonathan Pond seemed to be worried for similar reasons. In addition to not stating it as a promise they are including a disclaimer that explicitly says it’s not a promise. So why worry? A securities attorney might be able to speak to the frequency with which advisers get sued for this and whether they lose any such cases.

     > Some advisers may not publish performance numbers… says Susan John…
     > chairman of the National Association of Personal Financial Advisors…
     > A financial adviser who manages money but also helps with retirement
     > and estate planning… may be less likely to provide performance…
     > “because each client will have a specially tailored portfolio…
     >
     > …[at] Merrill Lynch… advisers construct portfolios for clients “based
     > on their individual attributes,” says a spokeswoman for the firm.
     > “In this context, we do not believe aggregating the performance of a
     > group of clients would yield a meaningful result.”

See my previous comments about how GIPS can account for this, about how granular categories do seem viable, and about how this might just be an excuse to avoid the expense especially when most clients [surprisingly] may not ask for it anyway.

     > Medley & Brown LLC… addresses the disparity in client types by
     > posting two broad, 10-year rolling performance charts on its website:
     > a “growth” composite, which includes portfolios with less than 18% of
     > the account in cash and bonds, and a “balanced” composite, which
     > includes portfolios with 18% or more in cash and bonds.

This is one way to define granular categories.

     > Because of the cost and labor involved in adhering to GIPS, Medley &
     > Brown is not GIPS-compliant, says Tim Medley, a principal…

This baffles me because as of mid-2017 (note: Pessin’s article is from 2011) online databases do not suggest Medley to be a small firm (see Tignanelli’s comment above).

I will conclude next time.