OpinionFeb 11 2013

The problem with performance data

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It’s now common practice for advisers to flaunt their investment prowess by wheeling out shiny performance data for their model portfolios.

But has anyone noticed that in almost all cases, the firm’s portfolio outperforms the relevant benchmark? Is this plausible?

In reality, what matters to clients is how their own portfolio performs in relation to their plan; not how the model portfolio performs against the benchmark.

Here is how some firms (surely not yours?) manage to ‘beat the markets’ – at least on paper. Their fund selection is based on star manager ratings and quartile rankings – basically past performance.

So just after they have made those ‘tactical’ changes, they produce the performance results for the past quarter, past year and may be past three years – and it happens to be a winner in comparison to the benchmark.

There is only one problem – their clients haven’t been in these shiny new model portfolios in the past quarter or past year. And in many cases, the benchmark used is simply not appropriate.

In reality, what matters to clients is how their own portfolio performs in relation to their plan; not how the model portfolio performs against the benchmark.

So, why are we flexing our ‘investments expertise’ muscle using performance data?

This is one area where the clear, fair and not misleading test applies. If advisers must show performance data, should they have it audited and verified by a third-party?

Abraham Okusanya is the Principal at FinalytiQ