How Did We Do?

Published by Terry Gaines, CPA, Managing Director - Manager, Business Development
May 26th, 2015

Senior couple meeting with agentHow did we do last year? This is a question posed millions of times in our wealth management world. Unfortunately, the answer can be a real head-scratcher. Well, we outperformed similar fund managers, but we lost money, however we are still on path to meet your goals. It’s little wonder that the general population sometimes questions our profession’s transparency and straightforwardness.

In spite of our good intentions, we have created a confusing, multi-faceted recounting of our efforts and results. Today, time weighted returns are the foundational reporting standard for communicating investment results to clients. Indeed, time weighted returns are the best method we have to show a client how well we performed compared to other managers and to various benchmarks. On the other hand, we sometimes show the client a money weighted return, or an internal rate of return which is generally in better alignment with what the client really wants to know. Thirdly, we may also show the client how well we performed against a goal or series of goals. This presentation is what most folks are truly interested in knowing. How likely will I be able to do this, or do that, and what do we need to do to stay the course or to change courses to get there?

So, what’s the best, most informative message to use? Surprisingly, they should all be used. Each of these three messages (time weighted returns, internal rates of return, and goals analyses) serve a very valuable role in our industry. They all help to inform and educate the investor.

Okay, now what? Perhaps it’s time to take a hard, critical look at how you are messaging to your client. Putting yourself in their shoes may open your eyes as to how to improve your reporting to them. You might decide to start with what is most important to them. This is likely to show how well you are tracking to their goals. Why you are on or off course and what potential adjustments may need to be made. From there, they likely want to know how well they did from an internal rate of return perspective. How well did the portfolio grow during the period from an absolute perspective? Lastly, the typical investor is probably interested in the time weighted return. How did we stack up against other managers and various benchmarks? Most of us investors have a little, or a lot, of competitive spirit. The investor wants to know they are doing as well or better than the “competition”. While this is obviously an important number to most people, the principle message should focus around the goals and the client’s actual results in the form of the internal rate of return.

In summary, relationship managers want to provide their investor clients with superior service. In doing so the client becomes inseparable with the relationship manager. They become that manager’s biggest fan. One way to improve service is to provide the investor with meaningful, understandable, and usable reports. If you provide your client with data you want to show them, maybe you should consider showing them data they want to see. They will appreciate you for it.

About the Author: Terry Gaines joined First Rate in 2000. He works closely with customers and other experts in the industry to anticipate the needs of the performance measurement industry. In addition to his role at First Rate, Gaines serves his community through leadership positions with the Arlington and National YMCA, The Levitt Pavilion for the Performing Arts. The Arlington Chamber of Commerce, Junior League of Arlington and Leadership Arlington.

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