Financial advisers and the reporting of past performance

Today's Wall Street Journal had a very interesting article by Jaime Levy Pessin titled “Advisers’ Little Secret: Their Past Results.” It touches on the subject of financial advisers’ general lack of past performance for prospective clients.

Many advisers primarily provide advice, and don’t have discretion over their clients’ portfolios. Thus, the performance of these portfolios wouldn’t necessarily be representative of the adviser’s skills, as individuals may choose some of what the adviser recommends, but include some of their own decisions, too.

Where the adviser has discretion, there are opportunities for them to showcase their performance. The GIPS® standards (Global Investment Performance Standards) are clearly the best way to present past performance. It requires firms to construct composites, which are collections of accounts that are managed in a similar fashion. A challenge for many advisers when it comes to GIPS is the need to have a “firm,” as only firms can comply with the standards. Unless the adviser has this ability, or unless their entire organization is prepared to comply, the Standards probably won’t apply.

Advisers can still construct composites even though they aren’t able to comply. And, they can have these returns verified by and independent third party, just as GIPS compliant firms do (in addition to performing GIPS verifications, we have done these reviews for several advisers, and provide “non-GIPS” verifications for several firms, too).

Of course, many firms are reluctant to allow their advisers to showcase their performance, because monitoring such presentations can be extremely challenging, especially when a firm has thousands of advisers.

Interestingly, many of the advisers’ clients or prospective clients never ask to see performance results, thus appearing to obviate the need for this effort. Hopefully more retail investors are realizing that adviser past performance, just like anyone’s, is worth investigating.

We consult to several brokerage firms, and most find their advisers asking whether their numbers are “GIPS compliant.” While this recognizes the value of the standards, it also demonstrates a misunderstanding of what the standards are. Ms. Pessin identified efforts that are underway to define rules for this segment of the market, something we've discussed doing with some of our clients.

To summarize: if GIPS doesn’t apply, an adviser can still create composites to showcase those strategies they wish to market. And, they can have these returns verified, to add further credibility to what they provide.