Pretty much all investment advisers send out periodic statements with clients’ individual performance. But many advisers still don’t report overall performance as a firm. Wall Street Journal columnist Jason Zweig wrote a good piece this weekend on the question of whether advisers should publicly report performance numbers. Despite the rather blunt headline (“Financial Advisors: Show Us Your Numbers“) Zweig does a good job of explaining the complexity of the performance question.
On the one hand performance reporting is becoming more common and gives transparency and accountability to a business that too often lacks those things. But then again, there is the fundamental axiom that past performance is no guarantee of future returns. Over-emphasis on performance often distracts people from their ultimate financial goals. As Zweig puts it, “Of course, much of the value of a financial adviser can’t be captured by measuring the track record of his investment picks alone. By reducing your taxes, planning your estate and retirement, cutting your debt and adjusting your insurance coverage, an adviser can make you much richer and more secure.”
Zweig quotes advisers who make good points on both sides of the issue. Many old-school advisers say the business of managing money is about relationships and trust and the regulatory hassles and risks of performance reporting outweigh the benefits. But then again, others ask how can you judge an adviser if you haven’t seen any performance numbers? And how can the manager himself operate if he doesn’t even have a good accounting of how his portfolios are performing?
We sympathize with both sides of this debate and sort of come down in the middle. We track our performance, dividing our portfolios into groups based on five general investment strategies or “objectives.” We then compute average returns for these groups or “composites” over various periods. But we don’t publish these on our website or brochures. We use them internally, and they are available upon request from prospective or existing clients.
Why not report more extensive firm-wide performance numbers on the website? An article entitled “On Performance” that we wrote several year ago explains how we think about performance reporting. In short, performance is much more than just a number:
Prospective clients of O’Brien Greene & Co. should be interested in performance but not too interested in it. Let us explain.
Trying to beat the market month in and month out can have some very unpleasant consequences. In the 1990’s, for instance, when the technology component of the S&P 500 stock index was ballooning to an unprecedented size, the only way to outperform the S&P 500 was to own a handful of extremely over-priced high tech stocks. Some stocks had no earnings, and even no products, yet their stock prices were soaring. If you were going to beat the market, these were the stocks you had to own.
In other words, one had to suspend the rules of prudent investing in order to beat the stock market. This situation went on for a period of years until the bubble burst from 2000-2002, when the high tech sector exploded.
Why not bend the rules of prudent investment for a little while when potential returns are enormous, a client might ask. Suffice it to say that countless investors lost as much as 75% of their IRAs and other long-term savings when the 90’s tech bubble burst. Indeed some these unfortunate investors became our clients in the aftermath of devastating losses.
Perhaps a better way to think about performance is to expand the definition of the term to include notions of preservation of principal, certainty of income stream, liquidity and transparency. These qualities are difficult to quantify, but they are just as important as mathematical comparisons.
Performance, therefore, is far more complicated than a set of numbers on a page. Clients should be prepared to look beyond the stated numbers to determine whether performance is appropriate for their circumstances. Performance that is remarkably good is often a red flag which marks a coming catastrophe.
At O’Brien Greene we have broken performance into five major categories or investment “objectives” for easy comparison. We have collected the investment returns of each respective group and presented the returns in a format approved by federal regulations. Beginning with the peak of the market in the year 2000 and then continuing through the subsequent bear market and recovery. Thus the results trace performance through recent good times and bad times in the market.
The numbers bear out our long term investment approach. The full gamut of performance numbers are available upon request. Keep in mind, however, the performance averages are designed for making easy comparisons with mutual funds and other kinds of investments and are not the most accurate measure of absolute returns.