How to Discuss Performance with Clients

“How did I do last year?”  It’s January, a time of reflection.  Clients want to know how their investments performed in 2021.  They like rankings and comparisons.  Competitors attempting to lure them away ask about their returns.  They are smug, as only people with 20/20 hindsight can be!  You need to initiative the performance discussion.  How do you do it?

You face plenty of headwinds.  A major one is your client sees how the DJIA was up 18.7%, the Nasdaq up 21.4% And the S&P 500 was up 26.9%.  They expect their return is equal or better.  Simple as the challenge sounds, it’s tough to win. 

  1. When did the client start investing?  If your client’s money was put to work in March 2021, their money was in the market for about ten months.  The performance of the indexes needs to be prorated.  That shouldn’t be hard.
  2. How much did the client add or remove?  If your client had money in equities on January 1st, but added substantially more on July 1st, a big chunk of their money wasn’t around for those first six months.  An easier to understand example is the client who has been withdrawing money during the year and wondering why they haven’t been making much progress.  Additions and withdrawals need to be addressed.
  3. How much is exposed to the equity markets?  Your client has a portfolio consisting of stocks, bonds and cash.  They look at the S&P 500 return and wonder why they aren’t up the same percentage.  That index is 100% equities.  They need a blended index.
  4. Make the math as simple as possible.  My advisor and her firm do a great job reporting performance.  The bound booklet it about half an inch thick.  Lots of small print and graphs, followed by tiny print compliance text.  It’s not immediately clear where the numbers came from.  Years ago, I would show a client the return on each asset class in their portfolio, then show them a relevant index, explaining this was a very rough calculation.  They didn’t take anything home, because I was writing in my notebook.  It was a rough number, but they could easily understand the logic. 
  5. What return do they need?  Your client has goals.  You are helping them keep score.  The return they need isn’t necessarily what the overall market returned, it’s the rate that keeps them on track to reach their goals on time.  Have you ever had the situation when your commuter train stops between stations?  In some cases, they’ve gotten a red signal because they are running slightly ahead of schedule.  The train is held, so it arrives at the next station on time, not ahead of time.  Measuring progress towards goals makes sense, but it has a drawback:  The return is always expected to be a positive number.  If the S&P 500 index was down 10% that year and your client was down 5%, you did a good job.  Progress to goals requires a higher number.  Otherwise, future anticipated returns need to be revised upward to make up the shortfall.
  6. What percentage keeps them on track?  It’s the same logic as above, but an apples to apples comparison.  If they need a 5% return to stay on track to hit their goal, as long as long as they met or exceeded that return, they got a good outcome. 
  7. How much risk are they taking?  The above examples might be seen as an excuse for underperformance by the client.  It’s easy to see their point.  An index that’s 100% equities is taking a lot more risk than an asset allocation of 60/30/10 across stocks, bonds and cash respectively.  Your investment recommendations are based on your client’s tolerance for risk, not solely on the fastest speed between two points.  You’ve seen California’s Pacific Coast Highway in many movies.  You wouldn’t take that at high speed.
  8. Where are the hidden surprises?  There are often sectors within the S&P 500 index that outperform (or underperform) the index overall.  How are they represented in your client’s portfolio?  This can be a bright spot in your discussion of portfolio performance.
  9. What does your firm say?  I recall meeting a Pennsylvania advisor who would explain to a client “Your portfolio is ideally ;positioned for the economic cycle we just left!”  Your firm has analysts and strategists who have opinions on what they think the market and economy might do next.  The stock market is considered a leading indicator for the economy. What do they think?

Discussing performance sounds simple, but it can be quite complicated.

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