Taking a Look at Measuring Advisors’ Performance

Still, like many investors, over the years, I’ve found the idea of a single, completely objective performance metric for financial advisors as compelling as it would be useful. Yet, the more I’ve considered the prospect, the more problematic it seemed.  Due to the differences in goals between clients, focusing on investment performance would be both unfair and misleading: For a wealthy client with no heirs, long-term Treasuries might be all the risk they need to take—why should their advisor take a performance hit for doing the right thing by them? 

Consequently, to my mind, the true measure of advisor performance would be to gauge how effectively one’s clients reached their goals. But even this would be problematic. To begin with, when you think about it, that’s a pretty subjective analysis. Then there’s the measurement itself: should it be all or nothing (showing that each client either reached or failed to reach their “goals”)? Or would you measure the percentage of each goal attained, and then somehow aggregate the answers? Finally, there’s the problem of time frame: at what point would you consider a client to “have attained their goals”? Not to mention that due to the ambiguities and the potential for inflated “performance,” I highly doubt that the SEC would allow it to be disclosed to clients and prospective clients anyway. 

Yet despite their validity, these—and undoubtedly many other perfectly good reasons that a advisor performance metric wouldn’t work—are way too “inside baseball” for most clients to get their brains around. At the end of the day, the most important question is: What should advisors tell their clients and prospective clients about their lack of a track record? Seems like, after all these years, the best answer is still the simplest one: “All clients—and client goals—are different.”