Performance reporting is advice industry’s biggest challenge

By Dan Hallett on November 19, 2013

The financial advisory industry has long been challenged to report accurate, personalized performance to its clients.  Investment management clients have always wanted good reporting but most retail clients didn’t require it because returns seemed healthy.  But having survived two bear markets, investors have grown disappointed with their portfolios’ growth even without knowing percentage returns.  Securities regulators have mandated the reporting of personalized rates of return starting in a couple of years.  I believe that this will prove more challenging for the advice industry than any other regulatory initiative – including the much-discussed best interest standard.

Lack of performance reporting an industry choice

I have been studying Canadian mutual fund investor returns for more than 15 years.  While fund and index performance has long been easy to find online (even in 1998), reliable personalized performance reporting (or high level investor returns) was and still is elusive.  Investors are left to guess or calculate their own investment performance.  Most dealer firms have performance algorithms embedded in their back office systems but for various reasons have not made it part of regular client reporting.

Today performance reporting is, ironically, available at some discount brokers and at many investment counseling firms catering to wealthy investors – leaving everyone else in the dark on this issue.

A history of meagre returns

While pre-2000 investor performance was pretty good, investor performance rarely measured up to published fund returns.  But after two painful bear markets, the late 1990s’ strong investor returns have turned sour.  When I spoke at the Investment Funds Institute of Canada (IFIC) annual conference in 2008 on challenges facing the industry, I informed the audience that fund investors – in aggregate – had failed to capture any equity risk premium for the nearly 15 years through mid-2008.  (See this related blog post from 2010 for more on these figures.)

Not surprisingly, my preliminary updated calculations show that the damage from the last bear market remains painfully evident.  By mid-2008, investors had generally seen returns in the range of 5% to 6% annually in mutual funds.  As of mid-2012, the range of investor returns was generally in the 3% to 4% per annum range over the trailing 15 years.  While that’s preliminary, I don’t expect the numbers to change much.  This is consistent with some of the one-off investor return calculations I’ve performed over the past couple of years.

Performance reporting will create great divide

While many advisors fear the disclosure of commissions or being held to a fiduciary standard, I think performance disclosure is the national regulatory initiative that will have the greatest impact on the advice industry.  Once long-term performance is shown in percentage terms, I expect both clients and their advisors to be surprised at the low numbers.

There are good advisors that add value through investment advice, solid financial planning and/or clear reporting.  There is a seemingly large contingent of mediocre or less diligent financial advisors that haven’t delivered good value.  This latter group should feel threatened.

During the past two bear markets, I’d heard from the more diligent advisors providing good value to clients that they’d won lots of new clients – despite the pain otherwise imposed by bear markets.  Not surprisingly, during those same markets I also heard from mediocre advisors who were losing clients which worsened the bear market sting.

Clear and transparent performance reporting is a long overdue requirement.  But much like my bear market observations, I expect new performance reporting rules to widen the gap between these two extreme groups of advisors.  In time, clients will benefit by being better informed and likely having fewer mediocre advisors from which to choose the next time they search for a new steward of their family wealth.

This document [PDF] details all of the pending changes.  Pages 7 and 38-40 detail the performance reporting elements.

About Dan Hallett

Dan Hallett is Vice President and Principal at HighView. With over 20 years of industry experience, he is widely recognized as an investment expert. His professional opinion is regularly sought by print, TV, radio, and online media publications. He has also contributed to several best-selling personal finance and investment books.
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