Two requirements to Add Relative Insight to Your Client Reporting: Benchmark Yourself Against Your Invested Peers AND Investable Assets
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:
- You can speak to how their peers’ actual investment strategies are performing. Are any peers really just invested in a single or mix of passive market indices?
- 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?
- 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, contact [email protected].
Marshall Smith CIPM, EVP of Services, has been with First Rate since 2006. You can follow Marshall on Twitter @MarshallCSmith, or connect via LinkedIn.