At First Rate we have a unique vantage point while scanning the investment landscape. First Rate develops and supports tools that help investment professionals communicate results to their end clients. First Rate doesn’t manage money; instead, we show the results of how managers did as stewards of the wealth entrusted to them.

In recent years, we at First Rate have seen a shift in what investors want to see on reports that advisors are using to communicate performance. For several decades, performance results have been tied to industry “benchmarks.” These benchmarks are typically market indices that can be reasonably compared to a collection of assets. We have since seen a shift to attempting to compare portfolio performance with the “goal” of the investors. This new approach is known as “Goals-Based Investing.” We frequently hear industry experts debating which approach to reporting makes more sense to the investor: goals-based or benchmark based? Perhaps we’re asking the wrong question when arguing whether one approach is better than the other.  In reality, both approaches answer valid questions to the investor.

When discussing how the portfolio is performing, two basic questions need to be addressed from the client’s point of view.  First, “how am I doing?” Second, “how are YOU doing with my money?”

Question one is relevant in relation to a goal that the client is trying to accomplish with his or her investments.  If I, as an investor, want to accumulate $5 million in assets with an expectation of spending $2.5 million in retirement while leaving the other $2.5 million as an inheritance to my family, then it would be a simple task to construct an investment plan around these goals. Over time as I meet with my advisor, I should be able to see whether or not I’m on track to meet that goal. In this regard, my own financial goals are not tied to industry benchmarks or the market as a whole.

Question two, however, relies on accurate, relevant benchmarks. Question two shifts the attention from the investor to a manager as the steward of assets and this question evaluate how he or she did.  If the manager is doing a poor job compared with relevant benchmarks then it may make sense to find another manager regardless of whether or not he or she is tracking toward the investor’s goals.  On the other hand, the investor could be far behind schedule for meeting the stated goal, while the manager performed incredibly well and kept the investor from being even further behind.

All in all, consider building report packages that address both of these questions. By doing so managers can answer both fundamental questions and demonstrate the value they are adding as a steward of wealth. 

Rob Bethmann( General Manager, Service Bureau )

Rob Bethmann joined First Rate as the firm’s 10th employee in 1998. He has served in multiple business units in the company and currently serves as a Director and General Manager in First Rate’s Service Bureau. In this role Bethmann manages a staff of analysts and focuses on the delivery of our outsourced offering as well as growing the business in the future.