posted on January 29th 2018 in Fort Worth CFP Team Posts with 0 Comments /

This is an excerpt from the whitepaper “Exaggerated Returns: How Trading Newsletters & Services Can Make Such Outrageous Claims, and How to Spot Them” by Joshua Wilson, CMT, AIF. Download the full document here.

Be leery of simple answers to complex questions.

Services that make it all sound too easy and simple are the ones that should cause you the most concern. A credible advisor will never speak, write or set expectations the way fake investment pros will. Some questions are well-intended and may seem simple, but are actually incredibly complex! One example is, “What were your returns last year?” When someone asks something like this, they likely don’t realize it, but they may be asking the advisor to misbehave. Unlike the fake financial advice sources, you should expect a credible advisor to be very careful about talking investment performance. Why? Because it’s just not as simple as quoting one return, especially if the advisor offers clients a boutique level of management and not just a short list of model portfolios. There is not just one return the advisor achieved. Any credible advisor is going to want to know something about you before he starts talking about returns. This is because he may not intend for what he’s saying to be considered a setting of expectations, but he knows that’s the way the listener will take it. Consider the following when you’re doing your due diligence.

  1. An “advisor” is different from a “fund.” You invest in a fund, but you invest with an advisor. Reporting performance for a fund is easy because it’s one fund that isn’t personalized. Reporting can be very difficult for an advisor, particularly a boutique advisor who customizes portfolios. An advisor may be able to keep “composite” performance that ignores special client situations and basically reports how the model performed without consideration for individual clients. However, some things the advisor does may be so specialized they aren’t reportable at all. In situations like that, the advisor may set a range of expectations to take into account the differences caused by major variables. Advisors may also choose to list actual model performance as hypothetical performance just to ensure if there is any misunderstanding, they have erred on the side of caution. I believe it is always best to understand a composite as being hypothetical since individual client circumstances can theoretically prevent any clients from getting exactly what the model got.
  2. All clients aren’t the same. Advisors have to be careful not to compare apples to oranges. Some clients have special circumstances such as a concentrated stock position. All clients are a mix between many different variables. They have different definitions of success, risk tolerances, sophistication levels, emotional hangups, and levels of willingness to let an advisor do what he or she is supposed to do. The more customization the advisor offers, the more careful he or she has to be with quoting returns.
  3. Some advisors may run many different strategies, and said strategies will naturally have different returns. Still, the strategy with the “best return” in any given time period may not be the best strategy for you. Different strategies may use different kinds of investments, make sense in different market conditions, trade more or less frequently, have different tax consequences, cost more or less to implement, etc.
  4. Talking returns without talking about the risk it took to get them is the biggest error investors make. Scammers don’t talk about risk, or they promise low risk for extravagant returns. Novice investors will often look at investments that made 10% and 12% and decide they want the one with the higher return. This is a grave mistake! You can only compare the returns of these investments if they were taking the same amount of risk to get their returns! If the one that got 12% took twice as much risk as the one that got 10%, a lot of investors will be better off with the one that got 10%. This is another reason why advisors don’t want to talk returns until they know something about you. A credible advisor does not want to set expectations for high returns for a client who is completely risk averse.
  5. Legally, an advisor can’t show you anything that could be remotely construed as a recommendation, testimonial or reference. That means no individual client performance or record of trades, either recent or historical. Any of that would be considered “cherry picking” of returns and thus considered a deceptive sales practice.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

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