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Q&A: "Do Financial Advisors Ever Give Out Information On How Well They Do For Their Clients?"

Investment Special Interest

Perhaps on occasion you've found that, when you asked a question, there were 10 other people wondering the same thing. That's the impetus behind this post.

I've been writing a fair bit lately over at the NerdWallet's Ask an Advisor site, answering questions posted by folks around the country. It's a helpful public service and a tasteful low-key way of marketing my expertise...plus writing keeps you sharp. 

Earlier this month, someone asked: "Do Financial Advisors Ever Give Out Information On How Well They Do For Their Clients?" If you've ever wondered the same, here was my response:

A great question! And there are several angles and regulatory restrictions to this....

First, it depends on what you mean by "financial advisor" and what you mean by "how well they do." I assume what you're really asking is "Do investment advisers who discretionarily manage client portfolios ever provide investment performance reporting?" ("Discretion" means the client has authorized the adviser to make all investment decisions without first checking with the client.)

Some provide it, most don't.

An investment adviser is not permitted to advertise ("give out") investment performance unless the data has been independently audited by an accountant and then approved for compliance purposes by the adviser's firm's compliance officer.

If the adviser is managing a single fund and all client assets are pooled in that fund, then the performance reporting can be a fairly simple matter. If the adviser is managing several different client portfolios (most commonly the case), then it's a different matter entirely and the audited performance reporting must include a "composite" of accounts.

As such, many investment advisers feel it's somewhat pointless to go through the (considerable) expense and time of obtaining audited results when those may not be representative of how they'd manage your portfolio as a client. Similarly, it may be just plain cost prohibitive for smaller advisory firms.

If your financial advisor simply sells you investments, then there's nothing to report. S/he was not managing anything for you but simply making recommendations to which you could say "yes" or "no." Similar for a fee-based advisor who simply non-discretionarily advises your portfolio. Investment adviser performance reporting only makes sense when they have discretion and can therefore be responsible for performance.

If a financial advisor gives you performance information or verbally claims they've done such and such, ask if they'll provide you with audited results. If they can't, then they're in violation of the rules--and you should be done with them right then and there.

I've heard and read comments from a few financial "advisors" claiming that their clients never lost a cent through the 2007-2009 downturn on the money they managed. The reality? These were basically insurance agents selling fixed index annuities that were guaranteed not to lose money. It was a product sale and the insurance company was on the hook. The "advisors" weren't really managing anything for their customers. While their customers may actually have been well served during that time frame, it's deceptive to milk the results as if the advisor did something phenomenal.

Now, a good financial advisor provides more than just investment-related services. Financial planning covers a much broader field including: retirement, taxation, estate matters, cash flow & debt management, risk management through insurance, etc. And a good financial advisor will generally help educate and answer questions, keep in touch about upcoming changes or changes in your life that affect your planning goals, etc.

How does one measure performance on that front? It's individualized to each client. The only way an advisor could give out such information is to share what other clients have said about those broader non-investment services.

But guess what? There's regulation against that too.

Essentially, client "testimonials" and endorsements (including LinkedIn) are not permitted. So if you're approached by a financial advisor who hands you a list of client references with quotes, that advisor is violating the rules as well.