Would Knowing The Investment Return of Your Financial Adviser Actually Provide Any Value?

There was an article this weekend in the WSJ titled, “Financial Advisers: Show us Your Numbers” by Jason Zweig.  I am usually a fan of Mr. Zweig’s articles and tweets, however, this article didn’t make much sense.  The crux of the article is that Mr. Zweig believes that financial advisers should be required (or at least want) to share their overall investment returns.  I think the request would make most people say, “Yes, I would love that number” or “How isn’t that mandatory yet?”  However, like most things in life I don’t think it is that simple.

Two Clients One Adviser

While Mr. Zweig correctly states,

Of course, much of the value of a financial adviser can’t be captured by measuring the track record of his investment picks alone. By reducing your taxes, planning your estate and retirement, cutting your debt and adjusting your insurance coverage, an adviser can make you much richer and more secure.

Those benefits often can’t be quantified. But that still shouldn’t exempt advisers from reporting results that can be quantified, like investment returns

he completely downplays the different clients that an adviser may have.

Lets say we have a hypothetical adviser who has two clients.  For simplicity purposes we’ll call them Client A and Client B:

  • Client A is a 72 year old retiree
  • Client B is a 22 year old recent college graduate

Obviously Hopefully, Client A is going to be invested conservatively providing a rate of return of X%, while Client B may be in 100% small and micro caps providing a rate of return of Y%…I don’t see how providing the general public with a blended rate of return of Z% would be beneficial.  My simple example is the easy one.  What about some of the harder questions which naturally arise:

  • If you have a large client who is poorly market timing despite a planner’s best efforts to make him stop – how is that handled in the return?  Is it weighted?
  • How would the rate published handle annuity and other insurance products sold?  Do you use the teaser rates on a variable annuity? What about the return of capital on a SPIA?
  • How do you handle the qualified retirement dollars which may be directed by a planner but not under his or her management?
  • Is the average age and net worth of the planner’s clients provided with the return? How else would it have any meaning?

Even if we are going to ignore the logistical issues above there is a question as to whether this type of publication is actually a good idea?

What May Occur if Financial and Investment Advisers Start Sharing their Returns?

Regardless of the rules it won’t take long until the system causes a planner or adviser to act in a way not in their clients’ best interest in order to ratchet that shiny number up!  Maybe that means taking on additional risk beyond what the client should be taking…maybe that means buying an annuity with a high fees and correspondingly high guaranteed shadow accounts…maybe it is opening and shutting accounts to game the weighted amount in the number regardless of brokerage fees or mutual fund sales costs…etc.

The logistics of how the system is set up won’t matter, a system like this would cause a large number of investment advisers to act differently and likely in direct conflict with their clients’ goals and objectives.  It isn’t like an adviser wants his or her clients to have lower returns.

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