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Submitted by: Howard B. Aschwald, CFA
Howard B. Aschwald, CFA is Executive Vice President and Chief Investment Officer of Quantum Capital Management. Howard is a current member of the Security Analysts Society of San Francisco and the Marin County Estate Planning Council. He has over 25 years in the financial services industry and holds MBAs in Finance and Financial Planning. Quantum Capital Management is a full service, SEC-registered investment counselor and advisor.
According to a survey of 4000 investors conducted by the Paladin Registry, 91.4% of investors want their advisor to have a track record of their investment performance. Paladin Registry concluded that track records were not typically available from advisors. In lieu of track records, they offer a number of valid qualitative factors to utilize when selecting an advisor. (See www.paladinregistry.com for details).
Fiduciaries
In my opinion, investors should utilize Paladin’s factors, but should also start looking for track records from advisors that have management discretion on their investment accounts. Once an advisor has discretion to make buy and sell decisions on behalf of a client, they automatically become an investment manager. Furthermore, they are then considered fiduciaries. As fiduciaries, they are legally held to the highest standards of loyalty to their clients. By law, they have to put the interests of their clients ahead of their personal or corporate interests.
Since there is no conflict of interest, the quality of advice from a fiduciary advisor should be of a higher caliber than from an advisor that is not a fiduciary. If an advisor does not have investment discretion, then they are not considered a fiduciary unless they charge a fee for their consultation services. The investor has the final say on whatever is bought or sold and it is up to the investor to accept or reject the suggestions given by their advisor(s). By that standard, whatever performance results are realized becomes that investor’s management track record.
Performance Track Records
It is perfectly understandable why investors want to see a record from an advisor that has management control of their investment account. A track record is a reflection of the advisor’s investment judgment and decision making that is independent of an advisor’s presentation skills. If an investor is going to turn over control of the buy and sell decision to an advisor, then it would be prudent to see how that advisor has handled other decisions in the past. Even if the advisor is just buying and selling mutual funds or choosing separate account managers on behalf of the investor, they should have a record of their past choices that would match how they intend to invest client funds. It’s not enough to site the record of a mutual fund or separate manager unless that record coincided with the actual results achieved by the advisor’s clients in the past. As a side benefit of using an advisor with a track record, a client can be sure that the advisor/manager will be extra diligent in his management process since the client’s results will be included in the manager’s future record.
GIPS
Fortunately, there are global standards as to how track records are to be calculated and presented. The CFA Institute’s Global Investment Performance Standards (GIPS) are the criteria that institutional investors require of their investment managers. These standards allow clients to evaluate track records from any firm in the world that adheres to them. In much the same way that public corporations have to present accounting data in accordance with Generally Accepted Accounting Principals (GAAP) in the U.S., investment managers have to present their track records in compliance with GIPS. In this way, it is possible to make consistent comparisons across managers. Furthermore, the records of mutual funds, which are GIPS compliant and audited, can be compared directly to the records of separate account managers.
Any advisor that has investment control over accounts can adopt GIPS. The requirements are not difficult to implement and manage. The standards require managers to calculate performance in a uniform way and present their results into meaningful composite reports. There is broad leeway to include and exclude performance results from each composite, but the standards greatly diminish the potential for “gaming” track records by including only the best performing accounts or showing a potentially misleading “representative” account. While managers can legally show records that are not GIPS compliant (with enough fine print to protect them from regulators), most institutional clients will not accept them. In addition, most institutional clients expect managers to not only have GIPS compliant records, but have their results audited by an independent third party as well.
At the very least, individual investors should expect their advisors to provide them with separate account investment managers who have audited and GIPS compliant track records. If the investor has to choose among various separate account managers presented by an advisor, audited track records have an accurate basis for comparison to other managers, indexes and mutual funds. Finally, if the advisor has the responsibility to manage the client’s investment assets, an audited track record is not asking for too much.
*Quantum Capital Management’s performance records have been Audited and Verified in compliance with the Global Investment Performance Standards (GIPS) by Ashland Partners & Co., LLP.
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