06 Jul 2012 How Do You Define Investment Success?
The financial services industry defines success quite simply in terms of returns – specifically by how much higher the winner’s returns are relative to all those others out there. With returns as the cornerstone of measuring success, the industry spends millions and millions of dollars bettering its methods of comparing the returns of investment choices, managers, and advisors in hopes that in selecting the best, their clients will be better served.
In his column in the WSJ The Intelligent Investor “New Ways to Weigh an Adviser,” Jason Zweig highlights two companies; BrightScope and Spaulding Group that recently announced a joint proposal to standardize how stockbrokers and planners report their returns (their success) to prospective and existing clients. The CFA Institute, a nonprofit association of financial analysts, is also working on new standards for presenting returns to retail clients.
Zweig goes on to say, “without clear information on returns, you don’t have all the evidence you need to select—or keep—an adviser. There isn’t any doubt that some advisers can pick superior investments. Even those who aren’t particularly good at it might still be better at it than their clients. But there also is plenty of evidence that many advisers are poor performers.”
Mike Alfred, chief executive of BrightScope claims that “any industry that achieves high credibility across society has consistent standards for reporting outcomes so that a third party can judge whether you’re doing a good job or not.”
Doing a good job of what? Beating some index or group of funds by a percent or two or twenty? Is that really the best the industry can offer for weighing the success of advisors? And what about the nagging question, even though armed with the knowledge of yesterday’s ‘best,’ will our results be as good – is history really a guarantor of success? We know it is not, and our experience testifies to that fact.
This definition of success is entirely too narrow. How much of an important life goal will return buy you and when? In fact, how confident can you be that you will meet or possibly exceed your important goals with a strategy of chasing the best returns? In truth you don’t know. There is no way for you to know. You can only hope that because you are flying faster than the rest, you will get there sooner than everyone else does, wherever there winds up being. Just hope that there is close to where you hope it will be.
The industry is built on returns. It is the essential element in most advisors’ value propositions. The draw of beating return averages is so powerful both among clients and advisors that most advisors make it the central tenet of their investment strategy. But if returns and money are the central tenet, where do the client’s hopes, dreams and aspirations enter into the advisor’s strategy?
We each have our own unique goals and dreams, and they change as life changes and as we grow. And with all due respect to Mr. Alfred, when it comes to weighing great financial advisors, there is no such thing as “consistent standards for reporting outcomes so that a third party can judge whether [they’re] doing a good job or not.” The real proof of that judgment is revealed in the improved lives of the clients he or she serves. Successful clients are the proof of an advisor’s success in doing a great job.
Instead of charging into the unknowable, risking his clients’ wealth on a quest to win the returns game, the great advisor understands, plans for, and champions the completely un-standardized causes of each of his clients by methodically and confidently improving their chances of meeting and exceeding their life’s important goals. Planning for the great advisor is more than a sales or a marketing tool. It is the essential element that helps keep what is truly important to his clients at the center of everything he does. He measures success by how many important goals he can confidently meet or exceed for his clients. Isn’t that a better definition of success?