The most-common way is to compare a portfolio against a popular index
like the S&P 500. It also may be the worst way.
investors will look to a broad market index to evaluate how their advisor-recommended
portfolio performed. This can be a mistake since these indexes are a snapshot
of the overall market and may not be an appropriate benchmark for a personal
are tips on how to evaluate your advisor and portfolio:
the right benchmark: For every
sector of stocks—or every type of investment—there is likely to be an index
that can serve as an appropriate measuring tool. Many times advisors provide
these indexes on quarterly reports so that clients can see how they're faring
with any portion of their portfolio.
the many indexes that are frequently used: MSCI EAFE (tracks international
markets in developed countries), Russell 2000 (a U.S. small-cap index) and the
Barclays U.S. Aggregate Bond Index (for fixed income).
the blended route: Since most
portfolios are not constructed purely out of equity or fixed income
investments, a blended benchmark may be appropriate. These can generally be
custom-designed by advisors or a blend of more than two indexes. The key is to
find a benchmark that is relevant to your portfolio.
Consistent Measures: Be wary of advisors
who suggest you change your benchmark midstream because it could mean they're
looking to hide their poor performance, pros say. Unless there has been a
significant, permanent shift in the makeup of a portfolio, it does an investor
little good to suddenly track a different benchmark.
other yardsticks: While indexes may
be useful for measuring basic performance, pros say they don't really get to
the key question for investors: Is their portfolio performing in a way that
will allow them to meet their goals, be it paying for a child's education or
funding their retirement? To that end, many advisors establish a target for the
portfolio—say, 6% average annual returns over a set period—and consider that
the true "benchmark."
alternative to benchmarking, Edward Kohlhepp, an independent advisor in
Doylestown, Pa often asks clients this: "Are you on track to retire on
schedule?" (If they're already retired he might ask: "Do you have
enough money for the rest of your life?")
in the fees: If an advisor beats
the benchmark by 1% but charges a 2% management fee, the result doesn't quite
equate to a win. So, it is important for investors to know their true costs—or
better yet, to have their advisor break it down. Many advisors do this as a
matter of course, but it never hurts to ask.
at the big picture: Many advisors
provide a range of services—from helping clients find a mortgage to helping
them create a lifelong financial plan—that go beyond investing.
such, it may not make sense to judge advisors solely on whether they can beat
an index. Rather, "it is a piece of the evaluation," says Jason Lina
of Resource Planning Group, an Atlanta advisory firm. And that isn't factoring
in the intangibles: Is the advisor quick to respond to a question? Can the advisor
refer you to a good accountant or estate attorney? Such things aren't easily
"benchmarked" and yet they may be what matters most in the long run,
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