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How do I find out how the clients of advisor do with their investments after paying all the fees?

Jul 26, 2012 by Jasper from Monroe, LA in  |  Flag
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You have asked a very important question, which you would think deserves a simple answer. Unfortunately, however, the reporting of investment performance is a very complicated subject that is rife with abuse, misrepresentation, and neglect. We recommend that you find an investment advisor who is committed to consistent and periodic reporting of investment performance results that comply with the Global Investment Performance Standards (GIPS) of the CFA Institute. These standards insure that results are presented fairly, accurately, and on a comparable basis.

Comment   |  Flag   |  Jul 26, 2012 from Morristown, NJ

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Jasper -- you should be most interested in the performance of your own account. The advisor likely manages many accounts and differently according to the agreements with each individual client. For example, some clients may be more heavily weighted toward bonds which generally provide lower returns than stocks. Likewise, clients may put boundaries on how much is invested overseas.

To judge the performance of your portfolio you can request the advisor compare it to indexes representative of the funds you own. Out of the gate, your investments incur fund management expenses as well as the expense of your advisor when compared to indexes.

Hope this helps. Paul

Comment   |  Flag   |  Jul 26, 2012 from Ridgefield, CT

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Jasper,

Typically, IF a firm provides performance reporting, the performance is reported NET of fees.

IF a firm or an advisor does not provide performance reporting then it can be a bit more difficult. If there has not been trading within an account, then perhaps Morningstar's Hypothetical module in Principia will give you an idea; you can add fees in the module and it will correctly report performance - but again - only if there has not been trading in the account.

Otherwise, the calculations are extremely complex. The equations are here:

http://en.wikipedia.org/wiki/Internal_rate_of_return

You cannot use the simpler Geometric Rate of Return (otherwise known as Total Time Weighted Rate of Return - TTWR) because of the cash flows out of the account.

Sorry to make things so difficult, but those are the facts. Hopefully the advisor provides performance reporting (I can tell you from writing the checks that it is quite expensive - well into the 5 digits per year for a small firm like ours; much more for a big firm). If they do - then the performance numbers should be "Net of Fees" or "AFTER Fees."

Jon Castle http://www.Wealthguards.com

Comment   |  Flag   |  Jul 26, 2012 from Jacksonville, FL

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Jasper, this is a central question that should be dealt with more often (and more completely) than it is. Good for you for bringing it up.

In addition to what has already been said, it is important to know that many advisors are managing money for clients in such a way that all of their clients have different portfolios - and thus different performance numbers. In this case, you may get an advisor to share some representative returns of their real clients' portfolios (with the names scubbed off, of course), as way to "sample" how their clients have done.

However, you should also ask how much risk those actual clients took to get the returns they did. You cannot adequately judge investment performance in terms of someone's rate of return without also knowing how much risk they took to get there. One common measure of risk is standard deviation. I believe you should ask for both rate of return and standard deviation over some meaningful period of time.

Thanks again for asking your question.

Comment   |  Flag   |  Aug 02, 2012 from St Louis Park, MN

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