Wall Street Results

You need asset performance that helps you achieve your financial goals. In fact, you may need double digit returns during your working years. And, if you are near retirement or currently retired, you may need high single digit returns to protect your income, principal, and purchasing power. 

The more you know about performance the better prepared you are to protect your financial interests. For example, you should be able to answer the following questions:

• Are you receiving competitive returns?
• Will you achieve your financial goals?
• Are you exposed to excessive risk or expense?

Conflicts of Interest

Wall Street also needs your assets to produce revenues for companies, bonuses for executives, and incomes for advisors. This creates a major conflict of interest:

• It derives revenue from your assets
• It produces your results
• It produce reports that document your results
• It provides advisors who interpret reports  

Do you see a potential problem with these overlapping interests and responsibilities? When Wall Street controls information it also controls your decisions. And, it is a marketing machine that uses sophisticated sales tactics to retain control of your assets.  

Gross Returns

One tactic is to report gross returns and hope you do not ask for net returns. Your actual return is your performance after all expenses are deducted. 

Expenses

A related tactic is to withhold expense information. You need this data to calculate net returns. You should require a quarterly report that documents every penny of expense that is deducted from your accounts. Divide the expense by average assets to determine expenses as a percent of assets. Then deduct the expense percentage from your gross performance to determine your net performance.

Risk & Reward

Wall Street does not like to talk about expenses (reduced returns) and risk that is synonymous with loss. You take risk to achieve higher rates of return. You need higher performance to justify risk. The problem is you are exposed to high risk, but you are not rewarded with improved results.

Relative Performance

You should use relative performance to determine the quality of Wall Street results. For example, you earn a 10% return on your all stock portfolio that is net of all expenses. Not bad, you earned a net double digit return. Then you find out the stock market was up 20% and you took more risk than the market to achieve the 10% return. Your relative results lagged the market by 50% and you were not rewarded for your exposure to higher risk. 

Meaningful Benchmarks

You need a benchmark to evaluate your relative performance. In this case, the challenge is selecting a meaningful benchmark. You should not let your advisor select the benchmark (potential conflict of interest). Advisors prefer benchmarks that are easy to beat or the benchmark produces meaningless, confusing comparisons. For example, an advisor or firm compares your stock and bond portfolio performance to an all stock index like the S&P 500. This is apples and oranges. You need a benchmark that invests in the same asset classes as your portfolio.

Paladin says.....

We know consistent, top quartile performance is difficult to achieve. We also know Wall Street cannot thrive without investor assets. Wall uses sophisticated sales tactics to minimize the impact of bad results. It is up to you to recognize sales tactics and avoid them.