There are many different aspects of shared and individual accountability in any successful advisory relationship.  Certainly, a client holds their advisor accountable for their recommendations. An advisor should be held accountable for the quality of their planning and investment advice.  Also, an advisor holds a client accountable for providing accurate information, and for following through on recommendations—both investment and planning recommendations.   In some accounts in a relationship, the advisor may be a fiduciary, and have a higher amount of accountability, and in others, a client might be acting on their own, with the advisor serving only as a broker, helping them execute transactions.  The advisor might be overseeing a financial plan, which is presumably based upon some assumptions about the kinds of asset growth to be expected.   They would be responsible for this plan being grounded in reality. A plan based upon wishful thinking is no kind of plan at all.

So, how do the two communicate about how these accountabilities are being met? The first component of the answer must be accurate information.  Let’s look at some ways that a proper performance measurement system helps in this cause.  These are just some of the ways that proper data helps to evaluate whether the accountabilities are being met:

1. The realistic execution of investment plans, and appropriate returns

Individual investment decisions and overall investment plans should be set out in such a way as to make it possible to look back at them over reasonable time periods, in order to evaluate whether they have fulfilled expectations.  Sometimes they don’t.  With the myriad uncertainties and the complex interactions in financial markets, sometimes things develop more slowly than anticipated, or faster.  Unexpected developments throw plans askew.  A well-thought-out investment plan, supported by up-to-date information can be reviewed in order to see which scenario has occurred.  Either expectations have been met, or they haven’t.  Sometimes the results are better than expected, sometimes they are worse.  Each scenario is worth reviewing.  If an advisor has made recommendations to a client, there should be a reasonable understanding of what the return and volatility expectations are, and clients need to be able to look at the recommendations to see if the expectations are being met.  Has a presumably low volatility holding taken a big hit?  That is worth a chat.  If a client has a significant holding in a common stock, and it is not performing up to expectations, an advisor might want to bring it up.  Having reliable data makes this much easier.  If the problem is the advisor’s recommendations not living up to the expectations that have been set, it is easy to discuss this, if the data is at hand.  Sometimes nothing needs to be done, and patience is all that is needed, but at other times interventions might be called for.  There is no reason for anybody to be caught by surprise.  If investments are within the realm of the advisor’s expectations, and a client is still concerned about them, a wise advisor will consider whether they properly understand the risk tolerance of the client.  This can be tricky territory.  Sometimes a client wants all the upside they can get, and they get suddenly nervous at the smallest downturn.  Sometimes they want to engage in ad-hoc market timing, based upon an emotional response to the results, and it is best to figure this out quickly, before something tragic happens.

2. Reasonable benchmark comparisons provided

Clients and advisors need to have a proper benchmark for comparison, and these can betricky.  A proper understanding of a client’s goals, objectives, risk tolerance and overall asset allocation can lead to a better understanding of what expectations a client should have for their portfolios, and a performance measurement system that can utilize these benchmarks for comparison makes life a lot easier for folks, and helps keep them on the appropriate path.  If the only thing you compare yourself to is an arbitrary index of the U.S. stock market, and that is not what your portfolio is comprised of, it is easy to wander off in an unrewarding direction.  A proper performance reporting system can provide blended benchmarks that closely resemble the allocation of a client’s portfolio, and custom benchmarks organized around a client’s goals and objectives.  An advisor is responsible for providing appropriate comparisons, and making sure that the measuring sticks chosen continue to be meaningful.  A client is responsible for understanding these, and for making sure that the advisor is using a measurement that makes sense to them.  Different measures serve different aims, and knowing your aims should help both the you and your advisor choose the right benchmark for comparison.  We will be publishing an article on this in the next few weeks.

3. A proper understanding of a client’s comfort with risk

I have mentioned risk tolerance a volatility a few times.  All of the discussion in the world, and all of the “risk tolerance testing” that you might do only create a set of potential boundaries around what a person can tolerate, and what they expect.  Often, we find out that even with all the up-front testing in the world, when the market fluctuates in real time, a client does not respond in ways that they might expect.  Sometimes they find out that they are far more sensitive to downturns than they thought.  Obviously this means that an advisor needs to revisit their assessment of a client’s risk appetite.  A client is accountable to their advisor to let them know if this is happening, rather than suffering in silence.  A responsible advisor should listen to them when they make that call.  Sometimes all a person wants is reassurance, but whenever that call comes in, people like us have to take notice, and not dismiss the concerns.  We are accountable for understanding the client’s worldview, and for investing appropriately to that.   Having the ability to easily look over a person’s performance at any point in time is a valuable tool for having this discussion. 

4. A basis for future return expectations, and a discussion around this aspect of a financial plan

If an advisor is doing financial planning, they will often use long-term assumptions about the long-term growth of a client’s net worth based upon the information they are given, such as the aggregation of the client’s holdings. (In our previous articles we have illustrated the tool that we use for modeling the results of these projections, and we will have more of those down the road.)  We are often fiduciaries both regarding the investment accounts and in the execution of a financial plan, so we feel it is very important to keep checking back to see if the long-term assumptions are being met by the investments.  This poses a bit of a quandary.  If you base your projections on the average 20 year results of the client’s asset allocation, and for the last five years you have either under- or over-performed these results, should you change the expectations in the plan?  Not necessarily, but you should certainly be talking about it.  We tend to say that if the investments are underperforming, we want to scale back the plan expectations, or consider a change to the investments, but one must be careful not to be chasing yesterday’s results.  An advisor should be accountable for the estimates they use, and be providing guidance about when and why they might change them.  Having a good idea about the actual returns that an investor receives is an invaluable way to check your expectations, and to take the necessary steps.

5. A means to measure the impact of advisor and client-driven investment decisions on the overall investment and financial plans

If a client inherited a stock, and held it for a long period of time, or developed an interest in stock picking and buys and sells on their own, we sometimes find that the net effect on the overall portfolio can lead to unhappiness when something goes wrong with that stock or that portfolio.  Alternatively, sometimes a client’s unmanaged holdings are carrying the day, due to their acumen or some outside factor.  Over time, the client and the advisor need to be able to separate out the areas where they each influenced the long-term results of the investment mix.  At different points in time, they each might be the relative winner, depending upon the situation.  Both the advisor and the client need to be able to understand the overall portfolio, and the overall experience that a client wants to (or needs to) have.  The influence of outside holdings must be part of this discussion.  Everyone should be accountable for their decisions and being able to separate one from the other is the key to fostering that accountability. 

Given that a financial advisory relationship is based upon the pillars of engagement, trust and accountability, it is important for an advisor to provide tools that can be leveraged to encourage these attributes.  By clearly articulating where responsibilities lie, being constantly curious about the client’s interests, goals and risk sensitivities, and open and transparent in their actions, an advisor finds ways to serve their clients to the best of their abilities.  A proper performance monitoring system helps to identify areas for improvement, points of discontinuity, and sometimes even flawed assumptions.  It is a valuable tool for an advisory relationship, which is why we take it so seriously.  Therefore, we are pleased to be so committed to best-in-class performance reporting.  Get ready for the roll-out of our Orion Performance reporting environment, which has been a year or more in development.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.