Have You Seen Your Financial Advisor’s Performance Results?

Merriam Webster defines the word “verify” to mean “to establish the truth, accuracy, and reality of” a claim or situation. When it comes to choosing someone to make decisions with your money, nothing serves as better verification of ability than the truth about a financial advisor’s past performance. Then why don’t more investors ask to see a track record? If you’re in the market for a financial advisor, ask these 3 questions to make sure that he or she truly does possess the level of skill needed to manage your portfolio successfully.

1. Can you provide me with your 10 year track record in writing?

Many advisors will say they’ve created good results, but when it comes to the “show me the numbers” moment, they can’t produce any concrete evidence in writing.

How long does the track record need to be?

Because of the cyclical nature of the economy and the market, you should only consider advisors with track records of 10 years or longer. Usually over the span of a decade there is a downturn of some sort which can show how the manager performs in such an environment. A track record shorter than 10 years is just not revealing enough – luck may have been the driving factor rather than skill.

Advisors build financial plans and invest your portfolio accordingly. In cases where portfolios are customized for each client, advisors will say that there is no track record because each portfolio is different. For example, the investments for a 35 year old are likely to be more aggressive than those for an 80 year-old couple. The portfolios are going to be invested differently — but nonetheless, there should be a track record for each type.

The bottom line is that any time an advisor claims to be making an investment decision –whether it is choosing ETFs, mutual funds, or stocks–the numbers matter. An investor should know how well the advisor’s decisions, whatever they may be, have performed in the past.

Fees for an advisor with a track record may potentially be higher than for an advisor without one. In these cases the higher fee is likely to be warranted, depending on performance. If you needed heart surgery, would you find the cheapest surgeon? Or would you pay a higher price for the one that gave you the most peace of mind?

A lack of track record works against the interests of investors. How do you trust an advisor who can not document his or her results? The only way to know the truth and to keep the advisor accountable is to see the track record in writing.

2. Is your track record GIPS verified?

Performance guidelines can get pretty technical. If you’re not a financial professional, how do you know that the standards by which the track record is judged are truly fair and objective?

Behold the Global Investment Performance Standards (GIPS). GIPS are produced by the CFA Institute, a non-profit investment management association that is not affiliated with any money management firm.  The GIPS are written in plain language that is understandable to a non-financial professional.

You can see a list of all firms claiming compliance with GIPS here. Check this website for confirmation when speaking with any financial advisor who says that he or she follows these standards. All the top advisors and money managers are on this list.

A GIPS compliant firm won’t be able to engage in performance-inflating practices such as:

  • Cherry picking (only including certain well-performing accounts in the calculation). Under GIPS, every single account that the firm has managed must be included.
  • Excluding composites that do not perform well.
  • Including non-discretionary assets (those over which they did not have decision making authority)
  • Grouping together portfolios into composites where they don’t fit in terms of style, strategy, asset class, or risk/return (just for the sake of boosting performance)
  • Failing to accurately define composites or include full disclosures
  • Switching portfolios from one composite to the next without sound justification (not just for performance enhancement)
  • Failing to explain in writing how portfolios are selected for composites
  • Comparing the composite to an unsuitable benchmark to reflect better performance
  • Including performance for personal accounts that were managed before the advisor was a professional money manager without disclosing that this was the case

So if GIPS is such a great thing, why wouldn’t every advisor comply with them?

Aside from cost, an advisor may find that performance doesn’t look as hot as it once did when held to stringent guidelines.

Any firm can claim GIPS “compliance”, but this must be “verified” by a third party if you want to trust the results. The top performing GIPS verification firms are ACA Compliance and the Spaulding Group. The “Big Four” accounting firms (Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG) render these services as well. Unless a reputable firm such as these have placed their stamp of approval on a firm’s track record, there is no way to know if the advisor is truly GIPS compliant.


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3. Is this track record audited?

Once GIPS compliance is established, investors should ask who prepares the track record according to these standards.

An independent third party should prepare and audit the track record. The auditing firm should be a reputable, established firm that is not associated with the advisor in any way (remember Madoff said his brother was his Chief Compliance Officer).

Here are some red flags when it comes to auditing:

  • Track record is not audited
  • Audit was performed by an affiliated entity or by the firm itself
  • Auditing firm is a small, no-name accounting firm

Auditing is important because it ensures a clear and consistent treatment of all the variables that can influence the return. Does the performance take into account all relevant trade costs, mutual fund or ETF management fees, and overall advisor fees? Compounded over time, these can make a big impact.

Firms that offer unaudited track records may do so because they have been unable to comply with fair standards. This may be a sign that they are hiding poor performance, or the track record may even be fake.

Summing It Up: Track Records Matter

Whether an advisor is in the business of picking ETFs, mutual funds, or stocks, it’s important to know what their results have been.  Track records should be obtained in writing. It is best to look for a financial advisor who has at least a 10 year track record and has managed money over at least one full market cycle. Advisors who do not have a track record or fail to produce documented evidence of one are suspect. Moreover, a track record should be audited and follow GIPS guidelines, a claim that should be verified by a third party firm. There is no excuse why an advisor shouldn’t have one.

Investors should be aware that no matter what any client reference says or what any track record shows, past performance isn’t the only thing that matters. Other factors should be taken into account, for example, the credibility of the manager’s overall investment strategy. Although past performance should be examined very closely when evaluating an advisor, it is not a guarantee of future performance. But no track record at all should be a non-starter no matter what else the advisor says or shows.

If you have any questions about how to evaluate an advisor’s track record, visit Dash Investments or email me at  dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.

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