Show me the Money! What is your adviser's track record?
Checking the performance of your stock or the fund you bought can be very simple. Several websites like Bloomberg, Yahoo Finance or Google Finance can help you out. These websites also let you change how you would like the data to be presented so that you can check the returns for the month, year and even the past 5/10/20 years (provided the stock or fund was in existence then).
Checking the track record of your banker, broker or adviser who claims that they are able to give you great returns is a much more difficult task.
Granted, the person advising you on your investments and finances could be helping you out in ways that cannot be quantitatively measured. For instance, they could be advising you on your wealth distribution after you die, making sure that you and your family are shielded from most catastrophic events; helping you restructure your assets to reduce tax, and so on.
But when it comes to measuring whether you are closer to reaching your financial targets in growing your money, it is a more elusive matter.
Typical financial statements from your banks and brokers are usually a confusing array of numbers and line items over many pages of sometimes incomprehensible data. The majority of investors who receive such information have no clue what is going on and just file it away – hoping that they can look at it sometime in the future when they have the time to study it more closely (which they never do!).
To further compound such confusion, investment costs, commissions and other deductions are usually "hidden" or not disclosed clearly upfront, making it harder to understand the actual return over time.
Financial consultants often argue that every investor is different, with differing starting times and dates. But the fact of the matter is that it is mathematically possible to calculate the actual net returns from the first day you invested till the current date, even after taking into account withdrawals, additions, regular savings plan contributions, dividend payouts, and so on. No complicated programs are needed; all this can be done with just the humble Excel spreadsheet.
So, why doesn't every financial institution tell you what the actual return on your investment is on a per annum basis? Good question!
If that information was available to every customer, would they still remain customers? Or would it generate a whole slew of difficult-to-answer questions about the wisdom of the institution's investment ideas and stock picks?
It seems that institutions are content to have statements which merely fulfil the basic regulatory requirements, and not give anything more.
Our view is that investors need to know the actual return on their investment, not only to make meaningful comparisons with the index, but also to check whether their plans are on target toward their financial goals.
The two questions investors should thus be asking their relationship manager, banker or adviser are:
How are my investments doing relative to the market or index? If they are doing a lot worse, the investor should begin seriously evaluating the current investment strategy with the relationship manager, banker or adviser and understand why it is not working.
How are my investments doing relative to my financial goal? After all, this is the reason why they are investing in the first place.
We urge investors not to be complacent or to accept pat answers on why they cannot see or measure how their investments are doing. Many investors feel that they have no knowledge of the markets nor are they experts in choosing what to buy. As such, they leave it all to their relationship manager.
"Why would I ask how it will turn out?" is a common refrain; "they obviously know more then me, and so I trust them to make the right call."
However, asking how existing investors or clients have fared is an important question every investor needs to ask when interviewing their adviser and assessing whether they can work together. Knowing how the adviser reacted during past market turmoil is also crucial.
Answers should not be vague, and shouldn't just be the results of a single client, or a cherry-picked handful of lucky market calls or fantastic stock picks. The adviser should also be upfront about what didn't work in the past. Performance data should be a composite of a large number of clients' portfolios over multiple time periods.
At the end of the day, the more enlightened investors become, the more transparent and open the financial industry will be; which will ultimately be for everybody's good.
