Performance Perspectives Blog

Why it only makes sense to show rates of return (unless they’re pretty awful)

by | Jul 16, 2014

Zweig picture for July 2014 article

Jason Zweig wrote an article this past weekend in The Wall Street Journal, which also appears on his blog. It’s getting a lot of attention. The CFA Institute’s Facebook page links to it, First Rate has a page that recaps it, and several of us have posted a link on Facebook and/or LinkedIn. Jason’s articles are always intriguing, but this one seems to be getting an exceptional amount of attention.

He challenges financial planners and advisors who fail to provide their prospective clients with rates of return. It does seem odd, does it  not, that in this day and age anyone who is managing money for others isn’t telling folks how they’re doing?

I first encountered this phenomenon more than ten years ago when I met with an advisor in the San Francisco area who catered to newly minted high net worth individuals, who had gained their sudden wealth by working in Silicon Valley. The advisor’s president told me that no one ever asked to see his returns. Therefore, why bother to comply with the Global Investment Performance Standards (GIPS(R))?

As I pointed out to Jason when he interviewed me for this piece, for many, selecting a manager is about relationships. I like my manager, so I recommend them to friends: my recommendation may be sufficient for them to look favorably upon them.

But just because the prospects don’t ask doesn’t mean the manager shouldn’t be showing them his/her past performance. In many cases, these folks are unsophisticated investors who need guidance. And as for compliance with GIPS, to us it only makes sense for these firms to comply, even if their market isn’t calling for it:

  1. They’re ethical principles: who doesn’t want to do things ethically?
  2. They’re best practice: who is lining up to do things second or third best?
  3. They provide firms with a marketing advantage over their competition who fail to see the benefits: who isn’t looking for a marketing advantage?
  4. They help firms enhance their controls: who doesn’t want better controls?
  5. They help prospects feel more confident in what’s being shared: who doesn’t want more confident prospects and clients?

Hopefully, this article will help educate more consumers about the need to ask for past performance when selecting managers. The proof is in the pudding, and when it comes to investing, the pudding is performance.

Thinking of complying or wondering what information you should be showing to your prospects? Please contact Chris Spaulding to discover how we can help you make sense out of performance and risk reporting.

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