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Written by: John Odell, CFP®, Arroyo Investment Group
“Trust, but verify.” ~ Russian proverb
In life, there are certain things out there that cannot be measured. Investment performance is not one of them.
Look up any mutual fund or exchange-traded fund (ETF) online, and you’ll quickly find data on how those fund managers performed over different periods. Using that information, you can compare their results against benchmark indexes to see if they are performing favorably compared to the general market. You can also compare them against each other.
The Mysterious Case of the Missing Numbers
Ever wonder why you can’t find similar information for wealth managers?
A Wall Street Journal article entitled Financial Advisers: Show Us Your Numbers asks that burning question.[i] Since wealth managers often talk about the returns they can achieve for clients, why don’t they quantify their own investing track records?
It seems to be common sense, but per Charles Rotblut of the American Association of Individual Investors, ”Investors would want to know that, but I don’t know how many are actually asking for it.” i
Why are Individual Investors Getting Less?
Transparency on investment performance is the norm in the institutional and corporate worlds. Pension funds and other large investors demand it, and investment managers in those areas routinely provide it. They have little choice in the matter, as they must do it to stay competitive.
However, this never really caught on for individual investors:
- Most investors don’t know to ask
- Most financial advisors who work with individuals and families don’t voluntarily disclose this information
Transparency is Critical
When someone is helping you invest your life savings or even a sizable sum of money, transparency should not be optional. You should be given information upfront to assess how good they are at managing money.
So you should ask the financial advisor you’re working with or considering for their investing track record.
Be sure to request that answer in writing too. Too many people have been burned after reality doesn’t live up to verbal promises delivered in early meetings.
But bottom line, you want to see their historical investment track record. And not for just a few years, but several. That can help screen out lucky runs that may be more of a result of a bull market than real skill in navigating changing market conditions.
What Numbers Can You Trust?
Unfortunately, there’s one more caveat. As an investor, you’re probably aware that numbers can sometimes be manipulated to look better than they really are.
Misleading investment reporting is no exception. It can often be seen in the investment newsletter world, where cherry-picking and creative data selection can make results look much better than they really are. Then, Bernie Madoff was the ultimate example where numbers were simply manufactured.
So how can you be assured you see the actual results? Fortunately, there is a solution.
Meet GIPS®, a Worldwide Reporting Standard
The CFA Institute is a nonprofit global association of investment professionals. This association created and maintains what is considered the “gold standard” of investment reporting. These standards are called the “Global Investment Performance Standards,” or GIPS®.
GIPS® is a set of specific standards for reporting investment results in an objective, clear way. Those firms who voluntarily choose to comply with these standards agree to go even further:
- They agree to measure their results according to specific methods outlined in the GIPS® standards.
- They agree to have their results verified by an independent third party to ensure compliance. [ii]
What Does GIPS® Mean to Investors?
If you’re one of the millions of investors who choose to work with a wealth manager, GIPS® gives you a better way to make an educated selection.
Because the data will be compiled in a standardized format, you get the data you need to properly evaluate investment managers.
That means you can compare apples to apples.
Where to Find GIPS® Compliant Financial Advisors
Since GIPS® compliance is voluntary, not all firms choose to participate. As you might imagine, firms that do are likely quite confident in their abilities to generate consistently strong returns.
Overall, GIPS® compliant firms are rare; only about 1,700 firms across the world claim GIPS® compliance. ii
Of those, only a small percentage cater to individuals. But they do exist. You can find all compliant firms here with this directory. https://compliancetracking.cfainstitute.org/gips-firm-list
Most firms that cater to individuals usually offer a complimentary second opinion on your portfolio holdings, so there’s no cost or risk to you to shop around.
The Proof is in the Pudding
Bottom line? If a firm doesn’t provide independently verified performance numbers (GIPS® standards), they may not be providing you enough data to evaluate their performance.
They may very well still be competent, of course, but may not be as committed to transparency as you may prefer.
So until there’s a better way, GIPS® is the best method out there to help determine the skill of a wealth manager based on facts…not on promises.