Reporting client returns is not complicated or difficult. Even the new Advertising Rule the SEC (Securities and Exchange Commission) made it clear how to report client returns accurately and honestly. It is not an esoteric or outlawed practice. When I worked for the big brokerage houses, they pushed hard the philosophy “sell the relationship, not the performance”. They knew that most financial advisors were not outperforming the market.
During these times when your account is down, don’t you want to know what the longer-term track record is for your advisor? Most client accounts are down this year, and the clients of AFC are no exception. But our clients can look at the past and see our longer-term track-record and recoveries of the past. Of course, past performance is no guarantee of future success. But what would you rather have: some idea of what an advisor had done for their clients in the past or an assurance of “just trust me”.
There was a cartoon in the Wall Street Journal around the time of the 1987 crash. It showed a couple meeting with their financial advisor. He says to them: “Well you lost $50,000 in your account and I made $50,000 in commissions, so I guess we are even.” Really? Without a track-record of real performance, this joke doesn’t feel so funny. AFC client accounts may have seen a steeper decline than the market, but our clients have a historical track-record to see how we have handled past recoveries.
So, is it that hard to report client returns? No.
The Advertising Rule discusses composites of client accounts. These are actual client accounts with no carve outs. As soon as a new account has been with the advisor for one full quarter, it is included in the composite. Accounts remain in the composite until the account is terminated. Returns must be reported net of all fees and expenses. It is not complicated.
AFC is currently in compliance, and in fact has been reporting the composite since our formation in 2005, long before the new advertising rule. I do not use a model. These are actual client accounts with no carve outs. As soon as a new account has been with AFC for one full quarter, it is included in the composite. Accounts remain in the composite until the contract is terminated. The number of accounts in the 2022 Q4 composite was 143 compared to 112 in 2020 Q4. Of those 112 in 2020, 111 accounts had a return in excess of the S&P 500 TR. That included accounts that I had managed for over 16 years and also those new accounts that had one full quarter, but less than two quarters. It included what would be considered conservative accounts as well as moderate and aggressive accounts.
Even those financial advisors who use a model can report how their clients are doing. In 1987, early in my career, a techie guy approached me to do trading for his model. He was not licensed so was willing to use me to do trades. His model showed that he beat the market by a pretty big margin. I was excited because he made a lot of trades and I would get paid for each trade made.
The techie got a client and off we went. At the end of the first quarter, the model showed it had indeed beaten the market. But the client’s account showed he lost money. The first assumption was the commissions and other costs had offset gains. However, had there been no commissions or expenses the account would still have lost money. The same thing resulted in the second quarter. At that point, the techie went away to refine the model and the client closed his account. I never heard from either the techie or the client again.
Models and hypothetical back tested trading systems should be verified by actual client returns. That is my opinion. It is not that difficult to measure the client account against the model return. We measure each and every client account against the S&P 500 TR. That can be done with a model as well. The model has a value each day. For new accounts simply use the value on the day the new account starts.
If your advisor is only reporting model results, check your account against the model. Hopefully it is not going to be like the client of the techie I mentioned above.
There is a reason that financial advisors do not report real client returns. Is your advisor one of them? I often use the example of Peter Lynch. He averaged 29% annually for 13 years – not every year, but as the average. Some years were up much more than others, and at times he was down as much as 40%. For those clients of the Magellan Fund managed by Lynch, they could look at his track record and feel some sense of comfort that market drops had been followed by recovery and higher highs. I wonder how many investors would have stuck with Lynch had there been no track record to show that his clients had recovered in the past.
If your advisor is not reporting a composite of how well clients have performed in the past, you should click on this link and talk to Al Souza of Adams Financial Concepts.