Despite software that makes it possible to report portfolio performance going far beyond net gains and losses, many financial advisers remain reluctant to provide in-depth answers to their clients' most basic question: “How am I doing?”
Whatever the reasons for that reluctance — uncertainty about the best ways to explain time- and risk-weighted returns, and other complexities, for example, or fears that revealing nuanced performance numbers could harm relationships — new online tools soon may force more openness.
Wikinvest, a Wikipedia-like investment site that offers free account aggregation and phone applications, plans to launch a service to help investors better understand their portfolios' performance and fees paid, according to a company spokeswoman.
The free service, from a startup called SigFig Wealth Management LLC, promises investors “complete visibility” into fees and performance, and how those compare with “industry standards in fees and performance,” according to the company's website.
SigFig makes its money through media partnerships and from discount brokers to whom it refers customers.
Jack Waymire, a former financial consultant who runs Paladin Registry, an online directory of financial advisers, soon will offer free quarterly performance tracking on his other site, Investor Watchdog, which tells investors “what Wall Street does not want you to know about advisers.”
The service will provide gross and net returns, absolute performance and performance relative to customized benchmarks. Like Wikinvest, Investor Watchdog will make money by offering adviser referrals, which is the business model of Paladin. Investor Watchdog also invites advisers to provide their performance numbers so investors who request them can track the adviser's record.
Whether investors will make the effort to seek out nuanced performance data is another matter.
Lowell Herr, a retired physics teacher who developed a performance-tracking spreadsheet that he shares with other do-it-yourself investors, thinks that the “majority of investors wouldn't understand” some performance measures he uses — leading him to commiserate with advisers who hold back on complex performance information.
MORE THAN THE PORTFOLIO
Providing a true measure of portfolio performance “is more difficult than most people realize,” said Milo Benningfield, a founder of Benningfield Financial Advisors, who uses PortfolioCenter from Schwab Performance Technologies, a subsidiary of The
Charles Schwab Corp.
“The answer to, "How am I doing?' involves a lot more than your portfolio,” he said.
Perhaps for that reason, Mr. Benningfield said that his clients don't go ballistic if their investments haven't outperformed the market.
“We haven't had anyone get angry about portfolio results, compared to benchmarks,” he said, noting that his firm's goal is to match the markets, not beat them.
Looking at performance may distract attention from a client's more important goals, said Mike Leonetti, chief executive and founder of Leonetti & Associates Inc., an advisory firm that manages $480 million in assets.
“There's a risk that you end up focusing clients too much on the rate of return, instead of getting them focused on their goals over time,” he said. “We do a rate-of-return calculation and a broad index of different markets, but it is more to get a feel for what's going on out there in the world.”
Adviser John Valentine remembers that at a client town meeting a decade ago, “clients said, "I have been with you for 15 years, and I don't know if we have done great, good or average.'”
Other advisers warned him away from providing performance monitoring, he said.
“Eight out of 10 didn't want to provide it,” said Mr. Valentine, founder and chief investment strategist of Valentine Capital Asset Management Inc., which manages more than $500 million in assets.
“They believed that grading their investment performance against common benchmarks could put their business at risk,” he said. Mr. Valentine has long provided quarterly performance reports, often bringing laptops to town hall meetings to demonstrate how to interpret them. He talks to retired clients frequently about the sources of their monthly income and the level of risk they are taking to achieve their returns.
Today, while less common among brokerage and hybrid advisers,
portfolio management software is used by most registered investment advisers to prepare performance reports. But even if advisers have the ability to deliver complex reports, many still worry that clients will react badly if their investment results don't measure up.
It also is time-consuming to explain complex concepts such as internal rates of return, time-weighted returns, risk-adjusted returns and other sophisticated portfolio measurements.
“If you work for fees, your No. 1 goal is to retain the client,” Mr. Waymire said.
Advisers who focus on performance as a differentiator may not want their clients knowing too much about actual performance, he said.
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