This is the seventh post in the 8-part “Taking Stock Of Your Financial Advisor” series, focused on the dynamic relationship between high-net-worth investors and their advisors. “Taking Stock Of Your Financial Advisor” is sponsored by OppenheimerFunds. See more posts in the series ».
At a time when stocks have been hitting new all-time highs, investors might feel like they need to approach their advisors about their portfolio’s performance compared to the S&P.
Measuring the results is important, but it is important for clients to do so with their own financial goals in mind.
Clients should ask their advisors to explain their returns to them in the context of their principal and the investment term. They should also ask their advisors for appropriate benchmarks.
Some like Steve Blumenthal, CEO & founder of Pennsylvania-based CMG Capital Management Group, argue in favour of different buckets with different investments.
In a Wall Street Journal column, Blumenthal elaborated on three such buckets.
“The first bucket is the equity bucket, and this could be compared with the S&P. However you need a second benchmark for the bonds in a client’s portfolio, which could be better compared with the Barclays bond index. The third bucket I reserve for alternative strategies or things like REITS or commodities. There are many different kinds of strategies that could fall into this bucket and each has a different benchmark, so you may end up using many different benchmarks for this bucket.”
But not everyone is in favour of benchmarks.
Hedge fund manager Paul Singer, CEO of Elliott Management Corporation, would like to do away with benchmarking altogether. “As much as we sympathize with investors who want a basis for understanding when their managers are doing well or not, benchmarking is not helpful to us,” Singer wrote in a letter to investors back in July.
“We are proud of our very long-term consistent results obtained with an extremely low variability of return. That result is what really counts — not what the other person is doing.”
At the end of the day the most important thing investors should remember about benchmarking is that they should be a fitting way of measuring their returns, taking into account their risk tolerance and financial goals.
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