Viewpoints | Advyzon

How to discuss performance with clients

Written by Advyzon Team

When it comes to choosing (and keeping) a financial advisor, performance matters. The way you discuss that performance might matter even more.

Not only do regulators have strict rules around how you can discuss performance in public, how you discuss returns with clients can impact how happy they are with you as their advisor.

To help you tee up these all-important conversations about performance, we spoke with two industry veterans.

  • Advyzon Investment Management’s Chief Investment Officer Brian Huckstep shared his tips for framing the conversation.

  • Stacie Craddock, the Senior Lead Consultant and Co-Founder of Integrated Compliance Advisors, explained how to keep your marketing, performance reports, and client communications compliant.

Build better performance reports

It’s not uncommon for advisors to design their performance reports and then automate as much of the process as possible. While we work hard to ensure that kind of automation is possible, it’s also important to make sure you regularly review the data you’re including, the benchmarks your using, and the way you’re presenting that information to clients. A well-executed performance report can go a long way to instilling confidence in your existing clients.

What’s better: Gross performance or net performance?

Whether you send performance reports quarterly, monthly, or at a cadence all your own, how you share the numbers matters. “An advisor should deliver performance reports displaying net of fee returns over relevant time periods. Gross performance does not disclose the impact advisory fees have on a portfolio’s return,” Craddock explains.

She adds that net of fee performance is the most transparent way to present client returns based on the investment management services you provide.

Using a range of standard time periods can help clients understand how performance has changed over time. Typically, we see quarterly, year-to-date, one year, three year, five year, and 10 year reports. If you don’t 10 years of data, consider including “since inception” as a timeframe.

If you have your heart set on sharing gross performance in one-on-one meetings with clients, Craddock includes a word of caution: “You must have full disclosure around the fees that are not included in that gross figure, and you must include a chart that reflects the compounding effect the fees have on the performance over the same period.”

Select better benchmarks

Think twice before you default to traditional indices, like the S&P 500®, as your go-to benchmark. According to Huckstep, these indices simply show the “straightforward, weighted average of security returns. They don’t include real-world expenses, such as management fees, operating fees, and trading expenses.”

Instead, Huckstep recommends using peer group averages from your preferred data aggregator can provide a better picture. Of course, you may still need to contextualize your performance and your benchmark. Remember, peer averages reflect more than just the fees and expenses that can impact total returns. They also reflect total return instead of price return, as well as real world trading expenses, such as bid/ask spread impact, that indexes do not include.

“Many investors who focus on the current level of the S&P 500 just look at price levels. They don’t realize that they may be receiving something like 2–4% in dividends and/or interest payments,” he said.

In addition to explaining how net performance differs from gross performance with clients if an advisor elects to display both, Huckstep suggests reviewing the difference between simply looking at price return and looking at total returns, which include dividends, capital gains, interest payments, and buybacks into account, as well as price.

Have better conversations

While you can certainly add context to your performance reports—via data selection, disclaimers, or customized reporting tools—one-on-one meetings offer a more personalized approach. If you think your clients might have questions or concerns about performance, consider the following.

When there’s an elephant in the room… address it

When the stock and bond market closed lower in 2022, Huckstep said it was more difficult than usual to contextualize the downturn. Stocks managed to close higher after a steep COVID-induced selloff, and the S&P 500 gained value throughout the lingering closures in 2021—so investors wanted to know what made 2022 different.

“It’s important to explain the fundamentals,” Huckstep said. Continuing with the 2022 example, Huckstep points out that advisors might have explained interest rates in context: Yes, higher rates caused a pullback in 2022. In many ways, however, this is a reaction to the low rates that helped boost returns starting in 2019.

“I sometimes describe performance in 2022 as taking back a bit of the returns we enjoyed from 2019 to 2021,” Huckstep said. “Explaining that not only helps investors process lackluster returns, it signals they may have something to look forward to when we start to see rates come back down.”

Maintain a long-term focus

As much as Huckstep thinks it’s important to address and contextualize any short-term market moves that might worry clients, he also warns that zeroing in on a short period—namely quarterly or annual performance—can be dangerous.

If your client sees a quarter of poor performance, they may feel discouraged. This is where you can step in as an advisor and remind them to focus on their goals and long-term outcomes and why it’s important to show longer performance periods.

You can remind clients that the stock market trends toward positive returns over time. For example, Credit Suisse recently put average annualized returns from 1900–2022 at 9.5%. Put another way, the S&P 500 index produced negative returns in roughly one out of every four calendar years between 1926 and 2023.

As Huckstep puts it: “Maintaining a long-term focus can help investors sleep much better at night.” It’s very important to manage expectations and align them with client objectives.

Know how to stay compliant

Anytime you’re talking about performance outside of a client meeting, you need to be aware of the SEC’s marketing guidelines, Craddock says. That includes webinars, newsletters, and social media. But it also includes conversations with a group of people who aren’t current clients, even if the meeting feels informal.

The best way to stay compliant, Craddock advises, is to substantiate any composite level performance-related claim you make. An advisor cannot select a particular account (or group of accounts) and display or distribute the performance as an indication of what a client may experience. Equally important: You can’t call out your top performers—any statement you make about performance needs to reflect your entire composite model based on the objective identified. Let’s take a closer look at both.

Back it up

“You must be able to back up the performance you’re claiming,” Craddock says. “You should be fine as long as you have the required performance criteria and can substantiate it. To avoid complications and to comply with the rule, fully disclose how you came up with your performance claims as part of any written communication.”

Ideally, you’d set your performance metrics and stick with them. This way, you can create one general disclaimer that works anytime you discuss performance. Otherwise, you’ll need to update your disclosures any time you adjust your performance metrics or benchmarks. (Beyond that, updating criteria can impact how you discuss performance over time, which can cause another layer of compliance complications.)

One easy way to ensure compliance? Hire an expert to set you up, then consult with them whenever you want to make a material change. “A good compliance consultant will not only help you with disclosures, but they’ll also give you guidelines. ‘If you’re providing hypothetical performance, use this disclosure; if you’re providing predecessor performance, it’s that disclosure.’ A consultant should give you the tools to make that determination independently,” she said.

Craddock is sharing a generic version of the checklist her firm builds for advisors with Advyzon users. You can find that document via Knowledge Base

Beware the rave reviews

As more advisors consider testimonials keep overall performance in mind. If a client raves about their returns, and you “claim” that review—meaning you feature it on your website or social media—it’s subject to the same rules as if you made the claim yourself.

That means you’d likely want to add context around past performance, overall returns, benchmarks, and other factors. Because the rules around this are still largely untested, you may want consult with a compliance expert about how to handle any client reviews that mention investments or performance.

Power your performance reporting with Advyzon

Helping you have better conversations about performance is a key part of our DNA at Advyzon—portfolio reports were the first piece of technology we developed. We’ve worked hard to design beautiful, customizable performance reporting templates that you can adjust to meet your needs. We also work with compliance experts to add helpful features to our technology when possible.

To better understand how Advyzon can help you improve your client reports, schedule a demo.

If you want additional compliance help or have questions for Craddock, explore Integrated Compliance Advisors.

Finally, if you’d rather outsource asset management so you have more time to focus on clients, Advyzon Investment Management may have a solution to meet your needs.

Advyzon Investment Management LLC (“AIM”) is a registered investment adviser registered with the United States Securities and Exchange Commission, and a wholly-owned subsidiary of yHLsoft Inc., doing business as Advyzon (“Advyzon”). All references to investment advisory services are provided by AIM, while some technology and administrative support services are provided by Advyzon. AIM’s advisory services are available to financial advisers for use in managing assets for their clients. We do not provide advisory services directly to retail investors. Opinions expressed are as of the current date; such opinions are subject to change without notice.

Written by Advyzon Team