By Ken Hawkin
Measuring Performance Is Important For the Small Investor
Investors need good information to make the right investment decisions. The better the quality and timeliness of the information, the better the decisions. Investors need external information about the factors influencing stock prices and mutual funds as well as personal information concerning their own portfolio, such as the risks the portfolio is exposed too, the asset mix, and the historical performance.
If an investor can't keep score of their actual return, they can’t know if they're on track to achieving their goals. Feedback about performance is critical, not only to achieve goals but also to identify what types of adjustments need to be made to the portfolio and the investment strategy. This information is relatively straightforward to produce, but the vast majority of companies in the multi- billion dollar financial industry hold this information back from their clients!
Measuring performance is a critical part of the investment process
The professional money mangers, who manage hundreds of billions of dollars of pension plans, and the money of wealthy families, would not dare to meet with one of their wealthy clients and not be prepared to give performance information. In the institutional world everyone knows the importance of measuring performance. It is one of the most basic but critical parts of the investment management process. Performance measurement information helps to determine what adjustments are needed as managers continue to try to outperform their benchmarks. Performance is their measure of success. Those who perform well get rewarded with more money to manage and/or increased compensation.
Performance numbers are also critical for individual investors. The numbers tell you if you are on target to meet your financial goals. The numbers also tell how well your money is been managed. Are you getting good value for the fees you pay? Should you fire your current investment manager?
Performance measurement is important to the small investor for the same reasons it is important to larger institutions. In fact, the less you have the more important it is that your money is well managed.
All professional money managers and their clients agree on the importance of performance measurement. Question: If this is so important, why does the small investor not have the same access to this critical information? Why do most companies in the financial service industry refuse to give investors their actual performance numbers?
Reasons for lack of performance information
Industry participants have given us two reasons why we shouldn’t have, or can’t have performance information.
Investors Can’t Handle the Truth
Believe it or not, some industries participants say that if investors saw their performance numbers they might do something rash, e.g., make bad decisions based on short term volatility of the market. In other words, investors are not intelligent enough to make informed decisions. Supposedly, keeping investors in the dark about performance will make clients better off in the long run. Paraphrasing the words of Jack Nicholson, in the movie A Few Good Men, the industry believes that “Investors can’t handle the truth”
That reason is so laughable that it hardly deserves comment. If investors can’t understand performance numbers why do these institutions spend so much money talking about the performance of their funds (at least those funds that have done well)? If investors are expected to use past performance numbers to intelligently choose which fund to buy – why not use performance numbers to help decide if the portfolio as a whole is on track?
Companies Can Not Afford It
Industry participants believe requiring performance reporting would be costly for the firms. In other words they’re saying they can’t do it, because they can‘t afford it. However, according to the IDA Investor Dealers Association news release date June 15, 2006, this has been a very good year.
“Q1 2006 Securities Industry Performance: Off on a Record Start!
The Canadian securities industry reported a record operating profit of $1.6 billion for the first quarter of 2006, marking a 30 per cent increase quarter-over-quarter and 42 per cent increase year-over-year.”
If they can’t do it in a year of record profits, when will they be able to do it? Why can’t an industry that made $1.6 billion in the first quarter of 2006 afford to let individual clients know how they’re doing – even though they are able to determine their own performance, a “42% increase year over year”. Measuring the performance of a $100,000 portfolio is a lot easier that measuring the performance of an entire industry. Small independent investment counselors provide this information to their clients. Interestingly, the same institutions that can’t afford to provide performance information to the average client is quite able to provide this same information to wealthy clients in the expensive fee based and wrap programs.
The Real Reason
The real reason the performance information is not given is because the law does not require it. There is no question that if the industry participants believed providing performance information would improve profitability, it would be done in a heart beat. The only logical explanation for the failure to deliver this information is that the industry believes the bottom line will be better if clients do not have performance numbers. Apparently the industry also wants to avoid full disclosure and transparency of fees and commissions. The irony is that the industry participant that first starts to treat investors with respect is going to get enough good publicity to gain significant market share.
Why is the industry afraid of performance information? Is it possible they have a concern that investors who know the numbers might start to hold investment firms accountable for the quality of the advice they give?
Performance measurement for the small investor.
What can a small investor do if they want to keep track of the performance of their investment portfolio?
- Ask your advisor/salesman or financial planner/mutual fund salesman to calculate it for you. (the silence and excuses would be deafening)
- Go to www.showmethereturn.com, and use that calculator to show you your return. While there you can sign the petition.
- Wrap programs and fee based accounts generally will have performance measurement as part of the program. Investigate this possibility.
- Simplify your portfolio so that performance measurement can be simple and straight forward. Buy some low cost mutual funds or ETFs (exchange traded funds) and track the performance yourself.
- Consider using a professional money manager who will manage your portfolio for a fee. Go to www.investmentcounsel.org/index.asp for more information and list of managers.
Conclusion
The historical performance of an investor’s portfolio performance is critical information for those who want to manage their money wisely. Most small investors do not receive this information because the majority of companies in the financial service industry don’t provide it. Investors who want to manage their money have a few choices: they can invest their money with a firm that will provide this information, they can calculate it themselves, or try to effect change by signing the petition at www.showmethereturn.com.
Ken Hawkins
Vice President Research and Development
Second Opinion Investor Services Inc
www.secondopinions.ca
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