BrightScope, Spaulding Group Propose Universal Performance Standard

The paper suggests a composite performance report, which shows performance for a collection of accounts with similar strategies, is the best way to convey performance information to prospective clients. This method avoids the bias of a representative portfolio, but recommends advisors use equal-weighted returns, as they are a better indicator of a manager’s performance.

The paper notes that the retail and high-net-worth space differs from the institutional market in three ways. First, client accounts are often non-discretionary, requiring different reporting standards. Second, among their discretionary clients, advisors sometimes develop unique strategies that can’t be used with other clients. Finally, clients often want consolidated reporting from their brokers.

The paper recommends advisors use money-weighted returns for reporting on non-discretionary accounts, as the client controls cash flow and investment decisions. For other clients, advisors should use time-weighted returns.

“BrightScope Advisor Pages has done a good job of bringing transparency into the marketplace, however since there is no clear guidance or industry standard, many advisors refrain from reporting performance out of fear they might run afoul of SEC and FINRA advertising regulations,” David Spaulding, president of The Spaulding Group, said in a statement. “When there is a single standard created specifically for the money management industry, individuals will understandably assume that it applies to them, when it may not. As a result, there can be confusion as well as the use of something that is less than appropriate.”

By introducing a standard designed for financial advisors, Spaulding added, “we should see increased reporting; it will also allow investors to make a more informed decision on which professional is best qualified to serve them.”

In addition to the white paper calling for universal standards, BrightScope and The Spaulding Group established the Committee for a Universal Advisor Performance Standard. Advisors on the committee include Ric Edelman, chairman and CEO of Edelman Financial Services LLC; James Edmonds, executive director at Morgan Stanley Smith Barney; Joseph Klimas, vice president of the portfolio research and consulting group at Natixis; Franklin Tsung, president of Appcrown and Christopher Davis, president of Money Management Institute.