From the April 2007 issue of Wealth Manager Web • Subscribe!

The Black Hole

With the potential to inform both ad-visor and investor about what's driving portfolio performance, monthly brokerage statements should be as valuable as the quarterly performance reports many ultra-wealthy clients receive from asset managers. But despite access to virtually the same data and technology, the brokerage statement remains, relatively, in the Dark Ages.

Sure, the prototypical brokerage statement provides a good deal of data about a portfolio's holdings, often broken down by asset class, individual securities, trading activity, cash flow, realized and unrealized gains and losses, open orders, pending settlements, and fees. And to many, this may seem to be enough--but only until you start to think about what's missing.

How good, for example, is a $2,000 gain on a $10,000 investment? Great, if it was achieved in six months; not so great if it took eight years, especially if it was a high-risk investment. Such a return would hardly have seemed worth the gamble considering a position in a high-quality, medium-term bond would have generated twice the gain over the same period.

But where some performance reports may use the Sharpe ratio or Standard Deviation to make these distinctions, most brokerage statements do not.

Jamie McIntyre, chief technology officer of Rockville, Md.-based financial support firm Fortigent, which tracks $13 billion in assets, believes that "Most monthly reports present data rather than actionable information that can really help both advisor and investor understand the forces that are driving portfolio performance." In most brokerage statements, the bottom line focuses on the end balance--not investment performance--a figure that can mislead an investor into thinking his portfolio has performed better than it actually has. And this deficiency receives surprisingly scant attention from both the industry and media.

Such opacity can degrade investment performance. "First, without knowing annualized rates of returns of individual securities, industries and sectors, it's impossible to gauge how well your investments are doing in absolute terms," explains Tom Herrington, president of Denver-based Investment Trust Company which has AUM of $300 million. "By not contrasting these returns against appropriate benchmarks, which are missing from most statements, relative comparison to the market--the true measure of your value as an advisor--is impossible to discern." How are your domestic holdings doing versus the S&P 500 or your international stocks performing versus MSCI's EAFE Index?

For Kathleen Whalen, director of Dalbar, the Boston-based financial services consultancy, knowing how well a portfolio is tracking investor goals "may be the most important metric of all."

These kinds of comparisons are essential for judging risk--an issue that's just as important to address when portfolios are rising sharply as when they are declining. "When times are good, investors usually don't ask their advisor or broker why their portfolios are outpacing the market," says Jonathan Boersma, director of Standards of Practice at the CFA Institute. "But it's as critical an issue then as when a portfolio is collapsing." Is your portfolio's appreciation being driven by substantially overweighting highly volatile industries? Is the standard deviation of your tech stocks, for instance, greater or less than the S&P Global 1200 Information Technology Index? If your tech holdings have been collectively underperforming this index, can you identify the securities that are causing the weakness in your risk-return profile?

Performance can also be compromised by the inability to track simple historical data. Could your statement help you identify the tranche that would minimize capital gains taxes? Or which lots to sell for the largest possible profit if you had a large tax-loss carryforward? Reports that create this kind of transparency are essential to determine whether you're achieving sufficient returns for the risks you are taking and the targets you have set.

Ultimately, the typical brokerage statement really can't discern the single most important question: How well are you doing? And this issue is compounded for investors with multiple portfolios who rely on multiple managers.

Given the plethora of accessible data, technology that generates thousands of computations per second, and the growing sophistication of individual investors, shouldn't brokerage statements reveal more about performance?

The consensus response is mixed. Many industry observers believe that more telling performance reports should remain the province of asset managers and their high-end clients. Others believe investors are not interested in such refined analysis. And it's this attitude that creates a knowledge gap because for the vast majority of investors, the brokerage statement is their single most important source of account information.

Portfolio as a Company

The depth of this black hole becomes strikingly evident when you compare an investment portfolio to a company. Both are ongoing financial concerns seeking to increase their net worth. For the average investor, therefore, the brokerage report is somewhat akin to a firm's financial statement. But unlike the brokerage statement, corporate financials don't only compare a firm's worth from one month to the next. They consider, for instance, the underlying costs of business, which in investment parlance means the amount of capital invested. P&Ls then determine profitability and various rates of returns.

As brokerages with Web-based services offer more data and analysis, the Internet is changing matters. But many sites reveal potential possibilities rather than provide more complete solutions. Fidelity's Web site, for example, offers a look at various lots that have been purchased and their respective cumulative price return. But these data lines do not assess the value of dividend contributions, and they fail to annualize total returns.

In its annual review of "Trends and Best Practices" across the brokerage industry, Dalbar found statements are indeed getting better. Raymond James recently introduced a new monthly statement that tracks dollar-weighted total portfolio returns over the most recent quarter, year-to-date, and one-, three-, five-, and 10-years annualized. Brian Klakring, the firm's manager of marketing analytics, notes that the company is "moving toward statements that help investors better understand why their portfolio values are changing, not just how much they've changed." Klakring believes the statement is a springboard to help investors launch into more in-depth discussions with their advisors.

Raymond James certainly appears to be heading in the right direction. But for investors who want a leg up in conversations with their advisor, the statement still has a ways to go. For example, it still does not track risk as measured by standard deviation or the Sharpe Ratio. Klakring sees little advisor demand for such metrics. Benchmarks remain a sticky subject since the company finds it difficult to reach consensus on which ones to use. Moreover, statements don't drill down to the sector level.

However, Dalbar's Kathleen Whalen thinks more sophisticated analysis should only be presented at client-advisor meetings, so that investors are not overwhelmed or misled by too many numbers.

Still, few investors would buy a mutual fund without studying a Morningstar report, posits Mark Robertson, former director of online resources at the National Association of Investors Corporation and owner of, an online investing guide. "But when it comes to a client portfolio," Robertson observes, "which is essentially your own mutual fund, you probably know a fraction of what Morningstar tells you about a mutual fund, and [Morningstar's] information is updated on a daily basis. This is a fundamental weakness of the investment process that should get a lot more attention, but it doesn't."

The CFA Institute's Boersma, goes a step further, positing that many firms still fail to recognize the power of the statement. "Instead of seeing it as a means to improve performance transparency, assuage investor concerns, and get a heads- up on the competition, much of the industry still produces documents that contain only the most basic information," Boersma observes.

Boersma believes that for the free market to properly function in the investment community, "clearer and more transparent performance reporting is essential so that investors can differentiate performance between advisory services." Boersma doesn't think that the government should set reporting standards, preferring instead to see the market respond on its own.

Between the Ideal and Reality

Apparently, neither does the government. One reason why brokerage statements haven't evolved as significantly as other areas of financial reporting is that the NASD specifies inclusion of only the basics in the statements it requires be sent to clients. According to spokesperson Nancy Condon, these are "descriptions of any securities positions, money balances, or account activity to each customer whose account had a security position, money balance, or account activity during the period since the last such statement was sent to the customer."

Condon explains that these minimum standards reflect the need to accommodate the varying sizes of brokerages that deal with various securities. "Inclusion of details, such as annualizing returns or including dividends in total returns calculation--along with the design and layout of a statement--are decisions left for firms to make," Condon says.

Moreover, the Securities and Exchange Commission, which has oversight of the NASD, "generally does not dictate the content or format of monthly brokerage statements," according to SEC spokesperson John Heine. However, it does have jurisdiction over matters of statement fraud.

Dalbar also found that given the vast amount of paperwork investors already receive, many seem uninterested in longer, more complex performance reports.

Dalbar President Louis Harvey believes that additional analysis could require a great deal more disclosure, as specified by the SEC Investment Advisers Act of 1940. "Explaining the methodology behind various aspects of performance reporting can be rather complex," Harvey explains, "and many brokerages may see this as a drag on operations--especially given the greater time it takes to prepare performance reports." This is less of an issue for asset managers and advisors who prepare performance reports on a less time-sensitive quarterly basis.

Despite the arguments for sustaining the status quo, Fortigent's Jamie McIntyre believes that industry leaders are those at the forefront of change. "They realize the value of greater understanding, even at the risk of exposing their own deficiencies," he notes, "because they know such cognizance ultimately drives improvement and profitability of all concerned."


For advisors affiliated with or working in large firms, improving monthly statements can be as easy [or as difficult] as obtaining top brass approval. However, many independent brokers and advisors have moved ahead by licensing software or outsourcing performance reporting.


Two leading software options are offered by Advent Software, a global public company headquartered in San Francisco, and Captools, a Washington state-based private operation. Both offer a wide array of standard and custom performance reporting options that go well beyond the typical monthly brokerage statement. They address key issues, including annualized returns, performance relative to benchmarks, style and sector performance, and risk assessment.

While serving advisors of all sizes, both companies target smaller firms that are looking for a flexible, less expensive solution than outsourcing to assess performance while keeping client data private.

More than 4,500 firms across 60 countries managing over $14 trillion in assets have licensed Advent's products. Financial advisors and registered reps typically rely on Advent's Office Essentials package, which combines its Axys module along with service and training. [Advent Back Office Essentials provides a fully outsourced solution.]

The annual single-user licensing fee for advisors managing under $100 million is $2,500, with multi-user and renewal discounts. Rates are higher for advisors managing more than $100 million.

Clients include institutional money managers, independent advisors, large-wealth management organizations, hedge funds and family offices. They range in size from the $39 billion global fixed-income asset manager Fischer Francis Trees & Watts to Ryan Investment Management, an independent advisor based in Aspen, Colo. with $35 million AUM.

"If your clients can't tell how well they're doing," observes principal Chris Ryan, "then you're not doing enough." He addressed the issue with Advent Office Essentials, including the Axys portfolio accounting and reporting system, accessing the Advent Custodial Data network of over 400 custodians. The service comes with personalized implementation, and a dedicated consultant. Ryan also signed up for a three-part online training course.

Ryan found the software implementation to be streamlined, with accounts uploaded and assets reconciled in about a week. In particular, he found the custodial component to be much more efficient than using a point-to-point interface with his custodian.

With 2,500 individual users, Captool's SQL server-based system, Captools/net, is designed for investment professionals ranging from small RIAs to mid-size broker/dealers and foundations. With direct online assistance from the company, clients can install and maintain the software on their own server without the need for outside consultants. Products range from Pro-1 for the solo startup advisor [one user with up to 100 accounts that starts at a yearly cost of $2,000] to Enterprise-4 for larger advisors and mid-size broker/dealers [with more than 10 users and/or 1000 accounts starting at an annual fee of $6,000].

Captool's products contain complete packages of management programs that, unlike Advent's software, cannot be separated from the statement package. They provide a full range of customizable services, from investment recordkeeping to performance measurement and management.

High-end versions of Captools/net offer additional reporting power, including the ability to generate reports containing data merged from multiple accounts, consolidation of multi-currency portfolios, optional data encryption, and "batch" generation of reports ready for email dissemination.


Two leading outsourcing solutions are Investment Scorecard and Albridge Solutions. Like the in-house software, they require direct interface with clearing and back-office functions to offer seamless on-demand analysis.

Joe Maxwell started Nashville-based Investment Scorecard in 1995 on the premise that outsourcing performance reports is a more viable and easier way to improve client communication. "The investment management industry," explains Maxwell, "has traditionally considered in depth analysis of investment performance a highly cumbersome, mysterious and expensive task. But that's just not so with today's technology and databases."

His firm's SCORECARD(R) Performance service provides continuous, customizable study of returns and risk by asset class, sectors and individual securities, while monitoring total returns over all time periods against relevant benchmarks. This makes the portfolio more transparent, which Maxwell believes helps put brokers and clients on the same side of the table.

The firm has more than 700 clients--primarily trust companies, private wealth managers, and independent financial advisors with assets ranging from $20 million to $50 billion.

Annual costs range from $36 to $180 per account, depending on the number of clients, level of service, and account complexity. One-time per-portfolio setup charges range from 15 pecent to 25 percent of annual fees.

Investment Trust Company's Tom Herrington found that Investment Scorecard eliminated considerable manual labor and "cut time and costs, while ensuring more timely action."

Just as intriguing, says Herrington, is that the system has encouraged some clients to provide his firm access to their other accounts to create a complete asset picture.

Re-branded several times since its inception in 1992, Lawrenceville, N.J.-based Albridge Solutions serves 140 financial institutions and registered investment advisers, including AIG and ING Advisors. All tolled, Albridge reaches more than 90,000 investment advisors managing more $1.3 trillion in assets.

While Albridge Solutions can generate a wide range of flexible performance reports and is capable of consolidating assets from multiple accounts, the system does not measure risk and volatility. However, Jake Rohn, executive vice president of corporate development, says Albridge intends to track this metric.

Another feature expected to roll out in this year's third quarter is foreign currency security performance. "With international exposure playing a growing role in most diversified portfolios, it is more important than ever for both advisors and investors to discern the percent of performance being generated by actual stock price movement versus shifts in foreign exchange rates," Rohn says.

Monthly cost per advisor ranges from $150 to $250, depending on the number of subscribers. One-time installation charges run from $15,000 to $250,000 per broker/dealer, based on the size of the operation and the sophistication of assets being managed.

With $11.5 billion in AUM and $42 billion of assets under administration, Omaha-based broker/dealer Securities America recently went live with Albridge's Wealth Reporting Platform. Dennis King, senior vice president of Business Development, explains that with 45,000 fee-based accounts and total accounts of 600,000, the firm outgrew Advent's in-house software.

"We subsidize the cost of this service for our registered reps," King says, "giving it free to those with more than $25 million in assets under management because we regard it as an essential account management tool, from data reconciliation to performance analysis." Furthermore, he believes the Albridge reporting platform will help him retain and attract assets.

While it's no given that greater portfolio transparency will make advisors or brokers better investors, it's certainly much harder to improve returns without this knowledge. Superior statements are a compelling sales tool for attracting both reps and assets, raising the bar for investor understanding. And as Kathleen Whalen explains, "more transparent statements can alleviate customer concerns, increase loyalty, and maintain confidence, especially during turbulent markets."

Eric Uhlfelder ( has covered domestic and international capital markets over the past 13 years for various brokerages and publications.

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