The Case for Withholding Performance Reports (Part 1)

I am surprised to see myself defending opacity in the financial industry.

One of the things the industry routinely avoids is accurate performance reporting. I did an extensive review on the subject earlier this year. The upshot is that most potential clients fail to demand accountability by demanding such reports, that the opacity is likely self-serving for the industry, and that transparency might lead to compliance issues.

Unlike my shock and awe when doing the research, I found myself at least neutral if not favoring opacity when writing this recent post. More is to be said about performance than just the numbers alone. No matter how my results look, for example, the additional context would be downright scary. Consequently, I would feel more comfortable sharing with those I trust than with complete strangers.*

This concept is indirectly affirmed by S12 E15 of CNBC’s “American Greed.” As part of his fraudulent pitch, Ephren Taylor promised one plaintiff an annual return of 66% on a “riskless investment.” Taylor fits under the “worst-case scenario” umbrella along with Madoff and others profiled on the show. But even on much smaller orders of magnitude, I question whether performance claims are ever trustworthy when compliance is not onboard to ensure accuracy.

Performance is one of the most powerful tools con-artists use to defraud people. Promises of unrealistic returns hit the uneducated in arguably their most vulnerable spot. Fraud runs rampant in this industry where people are literally handing over money [with the hopes of investing but all too often with the result of getting robbed].

Because I never know who I’m dealing with when making new connections, I prefer to keep performance out of the discussion. It might be relevant if presented correctly, but the numbers are misleading often enough to necessitate scrutiny as a means to establish validity. I therefore don’t feel comfortable believing performance claims I hear from others and I don’t think they should either. It’s a cautious and maybe even pessimistic approach but I honestly credit an ability to avoid the lofty sales pitch as one of the keys to surviving 10+ years as a full-time trader.

In contrast to baseless claims, I would believe performance numbers generated from GIPS compliance and verification. This is precisely the sort of expense retail investors do not undertake.

* I will resolve a related contradiction next time.