Measuring Returns vs. Other Advisors

A client called me this week and told me that his last financial advisor asked to see my portfolio and returns from last year.  My client asked me what I thought about this sales tactic. I had never put much thought at all about another advisor calling my clients. I think more about markets and portfolio management. I assume that this advisor was probably hoping that I held too many bonds in 2017 or that I missed the bull market for this client.

Unfortunately for this advisor my investment returns supported my positive outlook on the markets. I don’t document investment returns for marketing literature purposes because it would be a full-time job. I can quickly calculate an investment return for a client, but I don’t share the results with the public. I’ve seen too many advisors lose everything and entire firms go bankrupt if their return calculations were incorrect. This is not a business risk that I want to take. But, for this one time, I wish that I could show the return.

This advisors’ sales tactic of trying to recoup lost business is meaningless to me. He can keep calling all the clients that he lost to me every year and ask to see my returns. I’m sure my clients will keep telling him no. If another client who fired him had decided to show him my portfolio, I’m sure he had another sales trick up his sleeve to scare my client into moving the portfolio back to him.

I believe that investment returns alone tell you nothing about how well your portfolio did. What matters most is how much investment risk did you take to achieve your return? If your portfolio returned 18% but held 25% in low risk investments, how does that compare to a 18% return which held 100% in risky investments? At the very core, this is the difference between our investment philosophies. How does this advisor even define a risky investment? He might show you the volatility or standard deviation of past returns and I would present to you a balance sheet or cash flow statement. Since his firm manages money using model portfolios selected by the home office, he will have all the fancy sales literature full of worthless statistics in his presentation.

These statistics do not capture risk. A good question to ask an advisor like this, is what was the volatility of the stock market at the height of the market crash in 2009? The S&P 500 was at its lowest point of 672, but the value was the cheapest in a decade. This advisors’ home office was showing volatility statistics at the highest level on record. Annuities sales became very popular at this type of brokerage firm when markets crashed. An annuity purchased in 2009 at the market low missed the ensuing +300% return over the next decade.  Now, at the top of the market, annuity sales have dropped significantly when volatility is at its lowest point ever and stock valuations are at the peak in over a decade.

The secret of the investment business is that you don’t know how good a financial advisor is until after you give them money. You probably won’t know how good they are until after a full economic cycle. If it so happens that another advisor gets your ear and tells you a story about how wonderful their returns have been, you should immediately be on guard and ask them about portfolio risk. Risk is the engine for return and the goal of any investor is to take the least amount of risk to achieve the highest level of return. I look forward to this time next year when this advisor calls my client back and asks them how they did in 2018. All of my clients can be confident that I will strive to be that advisor who can invest well after I receive the money and not settle on past returns.

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