Comments on Performance and Fee Structure (Part 2)

Today 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.