Two requirements to Add Relative Insight to Your Client Reporting: Benchmark Yourself Against Your Invested Peers AND Investable Assets

Published by Marshall Smith, CIPM, Managing Director - General Manager, Products
May 23rd, 2017

Benchmarks are a fact of life. In education, there is your class rank. In college football, there is the top 25. In my son’s Karate club, there are colored belts. Benchmarks help you understand where you stand against your peers.

In each of these examples, the benchmark is appropriate because there are others with similar attributes who have achieved a different level of expertise, result, or milestone. It would not be appropriate to compare my six-year-old white belt (with two yellow stripes!) against a black belt. One has been training for a few months, the other for many years. Instead, he trains with other white and yellow belts. His benchmark comparisons are other kids within a few years of him. 

When we present performance results to our clients as wealth managers, we often don’t consider some of the same principles. For example, the most common relative benchmark is a market index like the S&P500. While there are many investment products that mimic the S&P500 return, most do not reflect the actual costs of investing including trading, custodial, or administration and management fees. Most likely, the returns you calculate for your clients include the effects of all of these costs. In addition, are your clients’ peers actually invested in the mix of market benchmarks you are showing them? 

It’s just human nature to compare yourself to others around you. In doing so, you compare yourself to actual outcomes of others like you. In performance reporting, this can be accomplished by using peer groups. Comparing your clients’ performance to their peers offers the following benefits:

  1. You can speak to how their peers’ actual invested strategies are performing. Are any peers really just invested in a single or mix of passive market indices? 
  2. You can compare their asset allocation compared to their peers. While you may achieve a similar result in terms of return to your peers, how did you achieve that? Was it through a more or less diversified portfolio? 
  3. Compare your clients’ returns to actually achieved returns, including all administrative, custody, and trading fees. Why compare your clients’ returns to an index return that cannot be achieved in the first place?

To learn more about how you can leverage peer group benchmarks in your client reporting, register here for our webinar on March 24th 12 PM CT/1 PM ET, or reach out to me at Msmith@FirstRate.com.

About the Author: Marshall Smith CIPM, Managing Director of Service Bureau, has been with First Rate since 2006. In this role he oversees Service Bureau, the business line responsible for clients that outsource their performance processing function, develops and maintains client relationships, and develops strategic planning for all Service Bureau operations. In addition, he leads First Rate’s Marketing team. You can follow Marshall on Twitter @1stRateMarshall, or connect via LinkedIn.

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