As financial planners - especially those who provide comprehensive financial planning services - try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often.

Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they're progressing towards their goals?

If that's the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often!


The inspiration for today’s blog post was a recent conversation I had with a fellow planner at the NAPFA National conference, who asked the popular question “How frequently should we be sending portfolio performance statements to clients?” Contrary to the popular opinion on this – that sending statements to clients more often makes them think about their portfolios more often – I found myself responding at the opposite extreme: Send portfolio performance information as often as you’re capable of making it available to clients!”

Performance Reporting

Providing performance reporting is a sticky subject for many financial planners, especially those who provide holistic and comprehensive financial planning services and don’t want to be judged on their investment performance alone. Yet in a world where clients have a relatively limited number of tangible financial planning results by which the planner’s results can really be measured, investment performance often still rises to the top as one of the most immediate and straightforward ways to evaluate both how the planner is doing, as well as evaluating how well the client is progressing towards his/her own financial goals.

The implication we have drawn from this dynamic is that by delivering regular performance reports, we make clients obsessed about performance, leading them to be even more performance-centric in a self-reinforcing spiral that distracts them from all the other value provided from the planning relationship. Yet the causal link is not necessarily so straightforward. After all, we are potentially talking about a lot of money that is supposed to fund the client’s entire future. As I have written previously on this blog, isn’t it just possible that things like AUM fees and regular performance reports aren’t making clients investment-centric, but that instead
clients simply are already investment-centric
as they (legitimately and prudently!) worry about their life savings, and are simply trying to stay informed about their current financial health?

Reducing Frequency of Performance Reports

If we assume for a moment that performance reports don’t make clients investment-centric, but instead just accept that clients are focused on their financial health and simply want to be good stewards of their own wealth, then the idea of reducing the frequency of performance reports creates not a healthier outcome, but a remarkably unhealthy one.

For instance, a shift from quarterly reporting to only annual reporting means that the client may have absolutely no idea how he/she is doing for an entire year; given volatility of the markets, that’s a long time, and a lot of potentially bad stuff can happen. Yet as I've written in the past, with infrequent reporting the client may have little or no information about whether he or she is still doing okay, and the natural result is that client anxiety levels rise, because not knowing can actually be far more stressful than just getting the facts themselves!

In fact, I’ve often wondered if the typical quarterly performance reporting process has already created this phenomenon with many clients, and we as planners just didn’t realize it. After all, the reality is that even “just” a quarter is a pretty long time in terms of the markets, especially when they're volatile. By the time the end of the quarter arrives, a lot of damage could already be done, and clients simply aren't willing to wait that long in the face of extreme uncertainty - as witnessed by the client phone calls throughout October, November, and December of 2008 in advance of the 4th quarter performance report.

All of this leads to the counter-intuitive result that when the client only gets quarterly statements, the pressure is on even more to scrutinize them… knowing that no more information may be coming for another 3 months! In other words, only delivering quarterly statements may actually be the cause of why clients are so focused on them!

Increasing Frequency of Performance Reports

So once again assuming that performance reports aren’t making clients investment-centric, but instead that rational (and occasionally emotional!), concerned clients who want to be good stewards of their wealth simply want to keep aware of how they’re doing, what happens if the frequency of performance reports increases? Or at the extreme, what if clients could simply access performance reporting every week or even every day, at the client’s discretion?

In this scenario, going from quarterly reporting to continuous reporting means the client doesn’t have to scrutinize the quarterly performance report. After all, information can be evaluated anytime; the pressure is off. Instead, clients can simply evaluate what’s going on with their investments when it’s desirable or meaningful for them, knowing there's no pressure to do so because the "when" can be anytime! Perhaps that’s part of a regular review process. Perhaps that’s in response to some concerning news about the markets. Whatever it is, the client knows the client is in control.

The implication here is that when clients have more access to continuous reporting, they may actually be less focused on getting those updates; knowing they’re available as needed takes the pressure off scrutinizing them as provided.

Feeding Client Fears Or Alleviating Them?

Some planners I know have expressed concern that giving clients access to continuous performance reporting and monitoring encourages bad client behavior. “If clients can access their performance information anytime, aren’t we making it easier for them to see, and then react, to short-term market fluctuations?” Or put more simply: “If we make it easy for clients to see how much money they’ve lost the day the market is crashing, doesn’t that increase the risk that they’ll react to the (temporarily) reduced balance and make a panic decision?”

Yet if clients are really living in fear in such moments of duress, it hardly seems clear how restricting access to information can help alleviate the concern. A client who knows "the market is crashing" and sees a 3%, or 5%, or 10% decline might be worried; but a client who knows "the market is crashing" and has no idea whether or how it's impacted his/her own investments is inevitably even more concerned, in more of a panic, and may be more likely to pull the trigger in the face of uncertainty! Or put more simply, it's hard to differentiate between noise ("the market is crashing") and good information ("here's where your portfolio really stands") if clients can't avoid the noise but we restrict their access to the good information!

And in point of fact, that’s exactly what Blueleaf - a company that provides a web-based platform to consolidate portfolio information for advisors and their clients) has seen in their data. Clients who have regular access to the information when they want it actually don’t check it very often at all; instead, it’s those who know that the latest statement is the last one they’re going to get for a while who feel that the stakes are raised and that they must focus on the performance information while they can. Or as Blueleaf puts it more simply:

More Information = Feeling In Control = More Peace of Mind 

So what do you think? Does more frequent performance reporting really make clients more investment-centric, or are investment-centric clients simply naturally concerned about performance reporting? Is it possible that by restricting access to "only" quarterly statements, clients are actually more anxious while waiting for the next statement than they would be if they knew good information was available anytime? Could we actually make clients less fixated on performance by giving them access to results more often?

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  • http://www.AppleTreeWealthManagement.com Joseph Perrotta

    I am a believer in more transparency, more information, and in relation to this post more frequent performance reporting.

    I certainly understand the argument that you don't want the client to focus on investments too much (for comprehensive planners), but flash back to 2009. How would a client feel if in March of 2009 they called and asked how their portfolio was doing, and you said that you would go over a more thorough report at the end of the year? Nervous and skeptical.

    I personally use managers, whether they be SMA's, MF's, or other alt. investments. When a manager does not perform well, it is on them. I discuss with clients why that manager may have underperformed, and then either "fire" that manager, or help assure the client that given their track record, this is just a small blip on the radar screen.

    I think it is also important to have blended benchmarks on your performance reports, and that the client understands why that benchmark was chosen, so they're not complaining if they are up more/less than the market.

    This is also a good opportunity to continue building your relationship with that client. We've all been in a situation where a client says they want more risk, and then complains when the market tanks and their portfolio goes with it. Reviewing the portfolio more often allows us to hone in on what the client wants even more, making us better at what we do.

    If we're truly confident in our planning, and our clients believe in our process, there should never be a situation where three months, a year, or longer, of poor portfolio performance, or market depreciation, should create any long-lasting marks on that relationship.

  • Scott Bell

    We've been using weekly summaries for over a year now and most clients love it. It's a chance to have conversations more quickly when they are feeling unsure about things. It's been one of the best moves we've made using technology to enhance the client experience.

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  • http://www.pathfinderfs.com David Jacobs

    The problem with current performance reporting is it doesn't answer the client's real question: "What effect does the latest portfolio change have on the pursuit of my goals?"

    Give them continuous access to that information and they will sleep much better. Some of the financial planning systems that accept balance updates from custodians are starting to be able to do something like this.

    David

    • Mark Brice

      I completely agree David. The portfolio makes a poor master, and should be positioned to clients as what it is, a slave to the plan (i.e. goals). Needless to say, traditional performance reporting doesn't do this. Instead, we benchmark to an index which is completely unrelated to if the client is on track to achieve their goals or not.

      • Meg Bartelt

        I've certainly heard this sort of thing before, and it seems logical to me: performance/portfolio numbers in a vacuum are at best meaningless, and instead clients should know how those numbers affect their ability to reach their goals. From a technological perspective, it's easy to compare portfolio performance to the standard benchmarks (i.e., "the vacuum"). Are there *tools* out there that allow you to map a client's portfolio/performance to client goals? So you and the client can easily see that, say, their desire to retire at age 65 is now in jeopardy and it looks more like retiring at 67? Or how their ability to pay for their next car/take their dream vacation/switch careers has been impacted by recent portfolio performance?

        • Mark Weber

          Meg -

          Check out Asset Dedication, LLC. They are an SMA that link retirement income portfolios to client goals developed as part of the financial planning process. To ensure the portfolio stays on track to reach the client goals, they measure the portfolio against a "critical path", which is the trajectory of the portfolio that needs to be realized to meet future goals. Before starting the SMA, they published a book detailing their approach(Asset Dedication).

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