Advertiser Disclosure

Be Careful What You Ask For – “Performance” is Not Perfect

Sept. 29, 2014
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

By Jonathan DeYoe

Learn more about Jonathan on NerdWallet’s Ask an Advisor

I would say that a solid 50% of folks who cross the threshold of my office for the first time ask, “What are your returns?”

And, I will tell you exactly what I tell them: “I am happy to discuss our returns with you, but just before I do…”

Now, before you think this is a dodge, please take a deep breath.

I am happy to discuss my “returns” or my performance with you, but why do you want to know?  What information will it give you about our potential future together?  If my past performance is good (however you might define that from looking at a digit or two followed by %), will you more likely hire me?  If it is not good, will you not hire me?

Will “performance” — which must, by definition, be past performance — become a criterion in your decision making, even though both the Financial Industry Regulatory Authority and the Securities and Exchange Commission requires notification that “past performance is no guarantee of future results”?  If so, I believe you may have come to the wrong place.

As if the desire to see performance numbers needed any kind of popular boost, in the July 11 edition of the Wall Street Journal, Jason Zweig (The Intelligent Investor), whom I regularly read and find to be agreeable most of the time, wrote Financial Advisors: Show Us Your Numbers.  And, while I hear the concern in the article and understand the desire for data with which to make better decisions, I cannot think of a worse idea than turning performance numbers into that data for two reasons.

First, even for those financial advisors who use models to manage client portfolios (which I do and I believe is smart), there is still enormous variability in client needs and, therefore, in portfolios. The number of portfolios I have that are fully on a model (meaning we haven’t built around some unsellable-due-to-tax-reasons holding), on a specific model (meaning preservation vs. income vs. balanced vs. growth vs. aggressive), and with no performance altering cash-flow effects (meaning big liquidations to buy a car or put a down payment on a house or contributions from an inheritance or 401(k) rollover) is so small as to not be statistically relevant.

Second, past performance data are absolutely meaningless.  What has happened is in the past and has no bearing on what might happen next.  You cannot step in the same economic or market river twice.  There is an incredible volume of research on this point.  There is really nothing more important for a potential client to know about my own (or anyone else’s) performance.

With perfect timing, two days later on July 13, Sam Ro of Business Insider, another individual I read regularly and find most agreeable, penned a piece titled, The Past Performance Of A Mutual Fund Is NOT An Indicator Of Future Outcomes… 96% Of The Time.

The inverse of this title, and the important implication for Zweig’s request two days earlier, is that information about past performance is incredibly helpful 4% of the time.  We would still be challenged to determine which 4%, but this is, I assume, probably a minor issue easily solved by a simple equation, right?

Ro is quoting from research done by Aye Soe, the director of global research and design for S&P Dow Jones Indices.  Soe reviewed 2,744 domestic U.S. equity managers and, for the lack of a better way to say it, found them lacking in persistent performance.  There were always some managers to be found at the top of the heap; they were just different managers.

Of the roughly 687 managers whp were in the top quarter of performers in March 2012, only four were there just two years later in March 2014.  Of the 1,372 that were in the top half, only 19 remained.  Those managers who had done well in the first timeframe have little (almost no) relation to those managers who do well in the following timeframe.  I would bet the same is probably true for advisors.  “There is no statistical evidence for the persistence of performance.”  Yet, anecdotally from my own practice as well as from Zweig’s article, there is tremendous evidence that people very much want to see it, and one can only assume it is because they think it somehow matters.

Be careful what you wish for.  When you come into my office and you ask me about returns, I will happily tell you.   I will directly answer any performance questions I can answer.  I will inundate you with data for whatever timeframes you choose as long as I have the data to share.  I will give you performance numbers for model portfolios; I will discuss aggregate performance of actual client experiences (without naming names); we can talk aggressive portfolios or conservative portfolios; we can add to it broad discussions of “risk” and even a little bit about attribution if you can stand it.  I will happily share with you all kinds of gruesome performance details in any fashion you like.  At the end of the day this will tell you absolutely nothing about how well we might do working together towards your personal and financial success.

If I have recently done well, relative to whatever index you bring into my office believing is the appropriate benchmark, then you will feel as if you should hire me based on this information.  Some advisors may even subtly suggest this belief or will just quietly allow you to believe it without argument.  It seems like a valuable insight, it is concrete, and you can hang your hat on it.  But this would be the wrong reason to hire any advisor.

Or, perhaps the opposite is true.  I may recently have done poorly relative to whatever index you take as your benchmark, and you might feel as if hiring me would be a mistake based on this information.  But this would, in the exact same fashion, be the wrong reason to not hire me.

Either way, the advisor knows what you are looking for when you ask about “performance” and knows that no advisor can offer it.  A good advisor will try to talk you off of your performance ledge.  If you listen, you will embark upon a life visioning and planning process wherein you will discuss your values, your fears and your dreams.  You will talk about what absolutely must occur in your life and what you might live without.

This process will result in better protection for your family, a portfolio appropriate to your circumstances and needs, much improved psychic energy around money and a much greater sense of happiness.  You may or may not get better “performance” —  there is no way to predict. But, if you do the vision and planning right, you can live the life you dream of regardless.


Jonathan K. DeYoe, AIF and CPWA, is the founder and president of DeYoe Wealth Management in Berkeley, California, and blogs at the Happiness Dividend Blog.  Financial Planning and Investment Advisory Services offered through DeYoe Wealth Management, Inc., a Registered Investment Advisor.  Securities offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.  For your individual planning and investing needs, please see your investment professional.