Lack of Performance Reporting (Part 9)

Working through Robyn Post’s 2014 article in Money magazine, I left off with the argument that pre-existing client-specific securities or portfolios render performance reporting of representative accounts meaningless.

Sean Gilligan writes [e-mail correspondence] that GIPS offers two options to handle such cases. The portfolio can be labeled “non-discretionary” and left out of the composite records altogether if client-specific securities amount to a significant percentage. Alternatively, these securities may be labeled “unsupervised” and removed from the performance calculation.

Part of establishing and maintaining compliance involves definition of discretion in the “GIPS policy and procedures.” This specifies how much customization is allowed before the portfolio gets excluded from the composite. Gilligan agrees that SMAs will generally have more customization than investors within a pooled fund, which relates to my initial mention here.

With options available to handle client customization, I wonder if the “performance reporting just doesn’t make sense” claim is less serious belief and more an excuse to avoid the GIPS compliance expense. It could also be GIPS ignorance.

Continuing on with the article:

     > Other factors that can also sway performance returns include
     > the wide range of investment goals and risk tolerances among…
     > advisers’ clients, said [financial adviser] Dave O’Brien.

I disagree with this. Although I do not currently have experience trading for a wide range of clients, I think suitability and risk tolerance levels can be broken down into granular GIPS composite categories.

GIPS composite categories are not the same as representative accounts because the latter leaves the door open to cherry picking better results. Time-weighted return (TWR) is performance without the impact of deposits or withdrawals. Comparing managers based on representative accounts from their strategies can be meaningful provided that TWRs are used along with consistently-implemented strategies. GIPS require compositing rather than representative accounts to aggregate TWRs across all portfolios with the same objectives and constraints. Composites cover the firm’s cumulative performance.

     > …O’Brien [says] advertising historical track records is more
     > suited to hawking a product, such as a mutual fund, instead of
     > comprehensive advice… “We’re providing a service… that’s
     > unique to each client… To the layman they may seem the
     > same, but they’re not.”

If not by comparing performance then I wonder how O’Brien suggests we evaluate investment advice. I am hoping to get a return phone call to explain this.