You pay your investment manager or financial advisor to manage your money. Don’t you deserve to know how good they are at it?
- What’s their track record?
- Are they good at safeguarding and growing wealth?
- Have they successfully navigated volatile markets and tough economic times?
Sounds elementary, but according to the Wall Street Journal article “Financial Advisors, Show Us Your Numbers,” most advisors don’t disclose their performance records. Or they talk about their results, but offer no written and independently verified performance records. So sadly, most people end up trusting this critical role to someone they really have no way to evaluate.
Investment Reporting is the Norm in the Corporate World
Investment reporting is commonplace and expected in the corporate and institutional investment world. If you’re the person responsible for investing the assets of a large organization, you’ve got to do your homework. So advisors to these groups generally provide performance numbers—their institutional clients demand it.
So why is it that most advisors to individuals don’t do something similar? According to Charles Rotblut of the American Association of Individual Investors in Chicago, a nonprofit with 170,000 members nationwide, it may be something investors are simply not requesting.
“I have to think investors would want to know that, but I don’t know how many are actually asking for it,” he said.
When your life savings is at stake, you have to get past the awkwardness and ask. And get it in writing, too. Things said in a sales meeting may sound good at the time, but countless investors have been burned when the actual services delivered didn’t match the glowing sales pitch.
And you don’t want just any numbers, because as you are probably aware, there are ways to “fudge” all kinds of measurements. We see that all the time with statistics.
So how can we trust the numbers?
Fortunately, there’s a solution.
Ask Your Advisor for Their GIPS®-Verified Investment Track Record
GIPS® stands for Global Investment Performance Standards. GIPS® is a worldwide standard of reporting investment results created and maintained by the CFA Institute.
Those firms who comply agree to:
- Measure their own results in a very specific way
- Have their results verified by an independent third party to ensure compliance
What does this mean to you?
With GIPS® standards, you get the transparency you need to compare and evaluate investment managers.
In other words, this allows you to compare apples to apples.
Bottom line? If a firm doesn’t provide independently verified performance numbers (GIPS® standard), there is not enough information for an investor to adequately assess their performance. They may still be competent, of course, but may not be as committed to transparency as you may prefer.
Learn more about the GIPS® standards here.
Why Not Be Transparent?
It would seem highly counterproductive for a firm serious about serving individuals to not provide these numbers. Regardless, the vast majority of firms that serve individuals do not. In fact, as of the date of this article, the CFA Institute reported that only 1,467 firms worldwide comply with GIPS® reporting standards (source: https://www.gipsstandards.org/compliance/pages/firms_claiming_compliance.aspx).
Of these, only a small percentage serve families and individuals. And even fewer also have CERTIFIED FINANCIAL PLANNER® professionals on their staff to help you with all your financial needs beyond investing.
Does Using a GIPS-Compliant Advisor Guarantee Great Returns?
Does working with a firm that provides GIPS-verified results guarantee you’ll make loads of money? Not at all. But at least you know you’re working with a firm that is serious about being transparent.
Regardless, you still need to look at the numbers. How do they compare with the general market averages?
Don’t look at just one or two years. You have to look over long periods of time. You want a firm that is experienced and able to navigate changing investment climates.
That is especially important right now, as we enter the ninth year of a record long bull market. Investing is easy for novices and advisors alike during a bull market, when things naturally rise.
What Should You Look For in a Financial Advisor or Investment Manager?
If you’re serious about building real wealth—wealth that lasts—you don’t want your advisor swinging for the fences with your money. Where there’s big outperformance possible, there’s more risk being taken.
What you want is a good risk manager that helps you benefit from rising markets, while shielding you from large losses in falling markets.
Because true wealth isn’t built in one year, or two years, it’s how you do over decades that matter. The fact is that most people—and even many advisors–fall prey to emotions and unconscious biases and end up making far less than market returns.
We saw that in 2008 and after the dot com crash….investors may have had eye-watering returns for a few years, but ended up giving most or all of it back.
Instead, you want a firm that has proven the ability to apply discipline and best practices to consistently produce better results than you would get on your own.
What the best advisors do is systematically manage your investments so the big ups and downs of the market are smoothed out. While you may give up a bit of the upside, you’ll have a better chance of achieving your financial goals and avoiding significant losses.
For more education tips on what to look for in an advisor, download our free eBook.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families. Visit us at www.arroyoinvestmentgroup.com.
