What's The Proof

On the critical question, the best way to judge how a financial advisor might do for you is to look at her investment performance. While past performance is no guarantee of future performance, it is the only objective proof of real results.

My point was not that there is no way to tell whether a Money Manager is doing a good job, but rather that most of those falling under the big tent called financial advisor do not in fact have any performance to show you. That is because they are really financial salespeople whose fortunes are driven by the need to create for themselves an income out of the commissions derived from selling investments. As such, neither they nor their wall street firms track or compile performance on their accounts - it's meaningless to either's needs so long as the broker can keep the client happy and productive from the transaction standpoint.

This category of financial salesperson may masquerade by many monikers, all designed to make you think the are advising you or consultanting for you. I don't have any statistics, but I'm guessing that this group represents a huge percentage of the total number of those employed in the financial world and includes stockbrokers, certified financial planners (unless they just provide planning and don't sell any funds to implement the plan, which is really hard to do profitably,) insurance and annuity salespeople.

For their part, investors aren't driving the industry to show performance either. They pick brokers that establish rapport with them and they will keep that broker so long as the warm and fuzzies are there and those employed by big wall street firms get a presumption of competence. (They're competent alright - just the relevant competence is generating commissions.) The industry reinforces messages of trust and security training investors to value the only thing the industry has to offer - a good vibe.

What exactly does it mean when an investor says that Mr. Merrill has "produced a consistent smooth surface on the lake?" I can guarantee you what it doesn't mean. It doesn't mean Mr. Merrill has performed well or adequately because that investor has no clue. For that matter, Mr. Merrill has no clue.

So, who has performance, how is it measured and what does it mean?

Generically speaking, portfolio managers have investment performance. Portfolio managers work at mutual funds where their job is to get the best return for their asset class which in turn helps brokers sell their fund. Portfolio managers also work in trust departments and increasingly at independent Registered Investment Advisory firms, like Charter Financial Group. The commonality among all types is that they make the decision of which individual stock or bond to buy or sell (as opposed to buying mutual funds or other products) or whether to hold money in cash or to put it to work. The are held accountable for the return from the moment they are granted authority to make decisions over the funds.

A mutual fund portfolio manager's portfolio is the whole fund. It's impossible for her to consider as clients those individuals that hold the fund. If her performance is bad then the sales force (brokers) won't be able to sell it any more and she gets fired. If it's really good and she becomes a star, she leaves the fund and starts her own firm and that's why mutual fund families now use teams of portfolio managers to manage the funds. When one leaves, they can still claim the lengthy historic track record. Do you know who is managing your mutual fund. It could be a team of monkeys for all you know.

Charter is in essence a portfolio manager for individuals. Clients hire and grant us discretionary authority to manage their money. For that, we are paid an annual management fee of 1.25% of the asset value and have no other source of revenue. We make our investment decisions using a well conceived methodology and have a track record that proves our talent. We have about 35 client relationships. Our official minimum is $250,000 but I routinely take up and coming clients with less so long as they have enough for me to create a diversified portfolio comprising 25-30 stocks and perhaps some bonds.

We can, and do, measure performance because all accounts with the same investment objective are invested in the same securities, with minor exceptions tailored to individual preferences or tax consequences. We think that the decision to buy say Cisco over Dell should be driven by an analysis of the market and the companies themselves and not by the character of the investor. We do the individual tailoring at the asset allocation level where the mix of stocks, bonds and cash is designed to meet the individual's risk tolerance, liquidity needs, time horizon and tax situation.

This is dramatically different than the book of business your broker maintains which is likely characterized by several hundred clients invested in a hodgepodge of stocks and bonds and mutual funds and other products reflecting whatever of those was being pushed or brought to market at the time the investor had funds to invest. As an aside, when I worked at Merrill Lynch we were offered an extra payout to sell different stocks each day and kept a greater percentage of our commissions selling certain mutual funds over others.

Bottom line, I'm going to attach our net of fee performance of our Multi-Cap Equity Composite. Note that the record is for stock only. It's the record of the every account we've ever managed for individual clients who would be invested in your kind of portfolio. There is no cherry-picking, it includes all discretionary, fee-paying accounts that have a market value of at least $250,000. We have a system that tracks performance and it captures daily values of every account we manage that meet the minimum criteria I just mentioned.

A number of our clients hold bonds and we separately track their record for that portion of their accounts and show their total (both stock and bond) portfolio return as well. We don't publish our bond return as a composite because there is not enough commonality among our clients' bond portfolios to group them for purposes of preparing a composite. Some have Michigan Munis, some have taxable corporate, etc. Bonds really are driven a lot by tax situs so they're all over the map.

Our track record is considered very strong by those that know investment performance. Any time a manager can consistently outperform the market, it is very notable. I mention this, because in an investing world driven by warm fuzzies as opposed to objective criteria, there is little to compare the strength of a track record. Ironically, those without any track record often disparage even stellar ones and there is not context to refute the charge.

How has your WHOLE ACCOUNT performed FROM THE MOMENT YOU HANDED OVER THE REINS? How does the return of the stock portion, including cash earmarked for stock investments performed relative to the S&P 500 performed for the same period? How has the bond portion, including cash earmarked for bonds compared against the relevant bond benchmark for the same period? Don't let Mr. Merrill tell you about the really big gain you got in one stock trade or the great mutual fund he invested you in once. SHOW ME THE MONEY. Everything counts - all the time.

Whew! You'd think I get paid by the word. Sorry.

Susan