Understanding your "Performance Report" from a financial advisor

You receive it every month with a predictability unlike most things in your life. It arrives, whether through an email ping or a packet in your mail, the same time and same place each month without fail. What is it that holds this place in your life? A predictability you can set a watch to – your investment statement/performance report from your financial advisor, banker, broker and the like. No matter the outcome of the markets, your investments accounts impact from the markets, or the decisions made by the person investing for you, the results of all three of these are layered throughout the report delivered to you with such assurance.

The challenge – with such mastery in the delivery of the information, where did the mastery go wrong in helping you understand what is within the statement?

A client report is the single most important piece of information you’ll receive about your investment assets but for some reason it is singularly the most difficult pieces of paper you are forced to decipher like a sphinx riddle every month. But, you rely on the statement because of its natural tendency to be something you trust:

  • It can not tell you lies
  • It will only share what has actually happened – what has been bought and sold
  • Your performance numbers are there somewhere and yell the truth out

So, if the client “performance report” does all these things, why the confusion?

There are two factors we found create issues around receiving the client report. It is almost always the same two issues and unfortunately clients do not understand what the client report could do for them set-up correctly.

  1. The advisors did not set-up the reporting system to deliver the information you’d wish to see. In most reporting systems there are standard formatted reports. These are typically what advisors use. It would take the advisor going into the system and changing some settings for you to receive a more comprehensive report. We almost included “more detailed” but this is not the case. If the reporting is set-up correctly the advisor is not delivering more information just better, usable data to you, the client.
  2. From the advisors standpoint it is often better not to share detailed data with the client. An advisor has more control when sharing limited data on the account as the more data allows for a more thorough examination by the client of past performance and decisions. This is not to say the advisor is intentionally hiding the information – the statement will have the data. It is the way the data is laid out for the client. Without doing a complete analysis of buy/sells and breaking down benchmarks, the client will not be able to do comparisons of the advisors work on their behalf.

What does this mean? How do we approach performance reports at Moenio?

We are simple in our approach. There are a few changes we want in any report and, if the advisor cannot change the report to deliver the required information through their reporting system, we ask them to manual make the changes. We want to see the following:

  • Performance broken out by one-month, six-month, one-year, three-year, five-year
    • We want to understand how the advisor has performed over time. It is not fair to hold the advisor accountable for performance over a one-month or six-month period. Too many events are out of their control and it is not a full market cycle.
  • Performance against an asset allocation benchmark
    • This is about allowing you to see how they are performing with the investments against a some standard you can judge. Ok. We do not want to judge them over a one-month or six-month period but how do we then evaluate their decisions? We look at the investments they are making and compare those to like-kind investments. If they buy a US growth mutual fund, we need to compare that mutual fund against others of its kind. Whatever the reason the advisor entered, we use this as our evaluation.
  • Money-weighted and Time-weighted returns
    • There are occasions where an advisor will provide performance numbers but will have to make a decision about the format they will use. Be mindful that they can use one of these two options and they will often deliver different results. Simply, the money-weighted takes into account withdrawals and contributions to the account but this can have an impact on account performance when the account is smaller in size whereas the time-weighted is concerned with a geometric return – time weighted is the industry standard but be mindful
  • Fees
    • Most firms offer the ability to break out fees for the client in the performance report. It can be listed on the report and is something you should request. Fees are not included for some products such as Private Equity, Structured Notes, and others. There are occasions where an advisor will tell you they cannot break out the fees. Simply ask that they provide that answer in writing.

This is enough from our standpoint to help guide you in the path of performance reports. You should be able to use the report in the way it helps you not the way it is delivered – unless you can understand and use it in the way it is delivered. What we provided is a simple approach to helping you go down the right path.

If you have any questions, please contact us at Moenio and we’ll be more than happy to discuss what steps you should take.