I was researching another story the other day, and came across a nice piece that Jack Waymire penned for RIA Biz back on July 3, 2012 called “6 Reasons Why RIAS can’t—or don’t want to—have track records.” Jack is also a columnist for Worth magazine, at which, back in 1994, I created Worth’s list of America’s Best Financial Advisors (I believe the current word for this is “synchronicity”), and have had more than a passing interest in measuring advisor performance since. Consequently, I read Jack’s story with great interest.
He focused on the drawbacks to having a track record, such as: the cost of audits; differences in client goals; determining what counts as AUM; regulatory issues, and the brokerage industry’s reluctance to having half of its “advisors” performing in the bottom 50%, or having a substantial portion of their salesforce lag behind “market” performance. Yet Waymire also noted the substantial motivation for advisors having such a performance metric: “Our studies show that a [major] source of [investor] confusion concerns advisors’ track records: Namely, why some financial professionals have records and others do not.”
At Worth, back in the day, we essentially punted on the performance issue, relying instead on nominations from reputable and/or leading financial advisors, and then screening for education, experience, specialization, compensation and conflicts. We also looked at sample financial plans, ADVs and credit reports. (While the vast majority of them were “independent” advisors, using independence as a screen hadn’t occurred to me back then.) It may not have been a very comprehensive list, but I’m happy to say that very few of our selections have come back to haunt me.