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In our firm, we interview potential clients. Maybe they want to hire us, but do we want to work with them? Sometimes the answer is no.
We can often tell before we even talk to them. Before talking to a potential client, we ask that they fill out our online Pre-Meeting Questions (PMQ). Their attitude and biases often show in the questions they ask.
In one recently submitted PMQ, a woman explained that she had just sold a business, had several million to invest, was in her late 40s, and wanted to retire. That all sounds fine. Then she said, "I would need to know your company's track record and performance with returns that are verifiable in order to consider your firm to help with achieving returns on my principal so I can live on the interest."
One of my experienced and well-credentialed co-workers replied to her. She responded by saying she would only talk with a senior partner or owner of the firm. Responding this way is one sure way to get on my bad side. The people I have hired are exceptional, and I am only one person. I cannot speak to everyone.
I thought carefully about my reply. Although I already knew she was probably not a good fit for our services , I was still concerned about the kind of adviser she might choose, and so in my reply I said,
"Track records are completely irrelevant to building a portfolio that can deliver income for life. I have watched lots of people lose plenty of money because someone showed them a good track record. Every prospectus states "past performance is not an indication of future results" because it is true.
“If you are planning on hiring someone based on their track record, you will most certainly find someone who is willing to show you one that probably looks darn good, and will have nothing to do with your future outcome. Bernie Madoff had a phenomenal track record.
“No one can predict the future. Generating income for an unknown lifetime, with unknown inflation and unknown economic circumstances is not about track record. It is about risk management and taking steps to make sure that even in a worst-case economic scenario you have an acceptable outcome. It is about education and managing uncertainty."
Amazingly enough, she replied, once again asking for our historical track record.
Folks, if this is how you shop for investment advice, don't come crying to me when you get ripped off.
Get some common sense. Just stop and think for a minute. There are what, about 9 billion people in the world? A lot of them super smart and well educated (Harvard, Yale, Stanford, Cambridge, Oxford, etc.). They have access to super computers that can process data at lightning speeds. And yet you think the investment adviser or financial planner sitting across the conference room table has "the edge?"
Let me tell you a secret. There isn't an investment adviser, MarketWatch reporter (no disrespect — I like MarketWatch), or Goldman Sachs employee that can guarantee you a successful future track record. They don't really know if gold is going to spike or if Apple is about to make a comeback. They are simply glorified educated guessers.
And the investment adviser showing you their great performance? I could use any one of numerous software platforms to create a fabulous looking hypothetical report that would show a great track record. I won't because I think it is false and misleading, but in that respect, I'm the anomaly in my industry, not the standard.
You know why Bernie Madoff was able to pull off his scam to such a massive magnitude? Because he had a great track record.
Think about it, not only was Bernie Madoff's track record great — it was too great. Long before the regulators would listen, investment professionals recognized that it simply wasn't possible to deliver the returns he said he was delivering. (This story is told exceptionally well in the book No One Would Listen .)
If investment professionals, statisticians, and economists know that great track records are meaningless, why don't you?