One of the questions that I get quite often when speaking to prospects is, “What has your performance been?” My response to this question used to be to go into 1, 5, and 10-year performance deliverable and discuss the performance of each position and why it did well or not. At that point, the prospect’s eyes would more or less glaze over and they would say that it looks good or bad.
Are You Overweight?
The problem is that the performance has no context. I currently weight about 195 pounds. Am I overweight? You don’t know because you don’t have any context. You don’t know how tall I am, whether or not I have a muscular build, or what percentage of my body is fat. I weigh less than JaVale McGee, but he is about a foot taller than me and in much better shape.
The same concept is true for portfolio performance. Whenever a client asks me what my performance is like, I show them the chart below and tell them that my portfolio is up +382% while the US stock market is up only +69% over the last 5 years.
I actually don’t do that, but I may start, just to prove a point. The graph above shows the S&P 500 (SPY) compared to the 3X Leveraged S&P 500 ETF (UPRO). What that means is that UPRO will go up three times what the S&P 500 does when it is up and go down three times what the S&P 500 does when it goes down. The point being, it is not difficult to show higher returns, you just have to take on more risk.
What Should You Ask Instead?
For a financial advisor, it is way too easy to cherry pick data to show prospects what they want to see. The other side to return is the risk. Ask your advisor how they are mitigating risk. I discuss the idea of mitigating risk in my previous post What the Heck is a Hedge. Unfortunately, the risk of an investment is much more difficult to quantify with metrics like standard deviation and the sharp ratio.
Ultimately what you want to know is whether or not the financial advisor is competent and if they have your best interest in mind. To answer these questions I would suggest staying away from the performance question altogether. I probably wouldn’t ask a financial advisor their weight either. What you should ask them first is how they get paid. Are they paid by commissions, do they charge a flat rate, or do they charge based on a percentage of assets? If the financial advisor is paid on commissions then they may be just looking to sell a product rather than do the best thing for you. Also, ask about education. Did the advisor just graduate with an associates degree in English? Or do they have a master’s degree along with a Chartered Financial Analyst designation?
*Featured Image by Tanvir Alam