Stephen Campisi, CFA, deserves the most credit for championing the concept of “goal based reporting.” It’s been a common theme in many of his presentations over the past several years, and has garnered much interest.

A component of this topic is how returns are calculated, and Steve; Stefan Illmer, PhD; and I have been united in our effort to bring more attention to employing the internal rate of return, in order to show what the investor’s return is. Fortunately, this is gaining ground.

Goal based reporting white paper

First Rate, an Arlington, Texas based software vendor, has published a white paper on this topic. It’s free, and can be found by going here. I was aware that First Rate was behind the effort to increase visibility in this area, and offer goal based reporting. I suspect other vendors, too, will realize the value that such reporting can have for their clients.

Why goal based reporting?

Goal based reporting aligns the information that is shared with the client’s objectives. These client objectives should be known by the manager, so that he/she can construct a portfolio in such a way that it has the best chance to deliver the results the client wants. The results should be shown in a way that demonstrates the manager’s success relative to the client’s goals. If the client’s goals are to be met, awareness of them, coupled with the right kind of reporting to measure the degree of success are needed. And this reporting falls under the concept of goal based reporting. And goal based reporting is not just about getting the returns right (think “IRR”) but also having the right benchmark, where the benchmark reflects the client’s goals.

Who does goal based reporting apply to?

Everyone has financial goals, otherwise, why invest? This includes everyone from retail investors to large pension funds, endowments, and foundations. It’s important for investment managers to understand their client’s goals, so that they can best structure their portfolio to meet them. It’s important that they report time-weighted returns, in order for the client to be able to assess how they did vis-a-vis the market. And the IRR tells the client how well they did, with sensitivity to any external cash flows that occurred during the period.

If you haven’t given this topic much thought,  you should.  In addition to First Rate’s white paper, there’s a Dietz Award winning article that Steve wrote with my colleague, Patrick Fowler, which you should find of value.