Measuring Investment Adviser Performance

Hiring an investment adviser is an important step toward securing your financial future. When going through this process, it’s natural to be interested in advisers’ past performance, but advisers may offer flawed performance figures and investors can focus too heavily on performance as a hiring factor.

“Past performance is no guarantee of future results.”

If you have ever looked at the marketing materials of an adviser or a financial product, you have likely seen this sentence somewhere in the fine print. Yet the first—and sometimes only—thing that some investors want to know from an investment adviser is how they have performed in the past.

This may seem like a simple question, but the answer may not provide the information an investor is actually looking for. For example, ETFs and mutual funds publish their performance in relatively straightforward, clear numbers. But even though their performance is clearly presented, it is not necessarily good indicators of future performance.

Take, for example, the findings of a Wall Street Journal investigation into the performance of mutual funds rated by Morningstar—one of the most well-known fund-rating agencies.1 From the article:

“Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating. … The Journal’s analysis found that most five-star funds perform somewhat better than lower-rated ones, yet on the average, five-star funds eventually turn into merely ordinary performers.”

When it comes to investment advisers, performance numbers can be deceiving as well. Clients have different financial objectives, investment time horizons and comfort levels for risk, making it difficult for some advisers to show average client results. In response, advisers may cherry-pick performance or simulate it by back-testing—both of which are inherently flawed methods. When showing individual client results to represent an average, an adviser may show more favorable results over less, which may not be an accurate picture of average performance. Or they may show results for a client with a set of investment goals, time horizon and risk preference that doesn’t match your own. Back-testing can be even less indicative of average historical performance, as it involves taking a prospective client’s current investment recommendation and showing how it would have performed if it had been held in the past, regardless of whether actual clients held that portfolio in the past. Of course it’s easy to pick winners after the results are in—and yesterday’s winners won’t necessarily be winners tomorrow.

A Higher Standard

At Fisher Investments, we take a different approach toward measuring our performance returns from most retail investment managers. Our approach is based on Global Investment Performance Standards (GIPS), a framework of rigorous measurement standards with some important features:

  • Performance represents of the majority of a firm’s client portfolios, not just a select few
  • Quoted performance numbers are those that client portfolios actually achieved
  • Firms that claim GIPS compliance can be compared on an apples-to-apples basis with other investment managers who claim GIPS compliance.

The cornerstone of this type of performance measurement is a benchmark. Once a benchmark is selected that aligns with client goals, it acts as a basis for portfolio creation and a point of reference for measuring performance. Typically, the benchmark should be a broad, well-constructed index. The benchmark for most Fisher private clients’ stock portfolios is the MSCI World Index, which is designed to represent the performance of stocks across 23 developed international markets.

We believe the MSCI World Index is generally an appropriate equity benchmark for a number of reasons:

  • It is well suited for helping clients achieve their long-term financial goals
  • It reflects our view that well-diversified portfolios should invest globally
  • It accurately reflects the global developed stock market’s composition
  • It has data going back to 1969, allowing us to scrutinize historic trends to inform our analysis

More Important Than Past Performance

Although adviser performance is a valid consideration, it is only one factor to consider and, in our view, not the most important. It neither guarantees nor reliably predicts future returns because it is backward-looking by nature. An adviser should represent more than just the investment recommendations they’ve made in the past. One of an adviser’s greatest services should be to act as an effective, trusted coach who helps you avoid significant mistakes you may make on your own.

According to DALBAR, a leading independent financial research firm, in its annual “Quantitative Analysis of Investor Behavior” (QAIB) study, the average self-directed investor is likely to underperform the market whether investing directly in stocks and bonds, or through mutual funds.2

One culprit: emotional thinking that often drives investment decisions, resulting in poor market timing and, as a result, subpar performance. Investors may let fear drive them out of the market at its lowest point, just before it rebounds, or let euphoria drive them to over-invest in particular areas of the market. One of the hidden values in having an investment adviser is how he or she can help you stay disciplined with your financial decisions, one of the key components of long-term performance results.

At Fisher Investments, we strive to provide high-touch service and education so that our clients fully understand their investment strategies and are able to stick with them despite the temptation to do otherwise. A primary way we do this is by providing you a dedicated Investment Counselor who, among other things, will:

  • Keep you up to date on your account
  • Provide information and updates on the state of the markets and economy
  • Answer questions about your Fisher portfolio and on other investment advisers or products you are considering
  • Facilitate any operational needs you have for your account

Your Investment Counselor is just one way in which Fisher Investments helps you break away from the past and focus on your future financial goals.

If you have questions about how to measure adviser performance, or the current performance of your investments, contact us to request an evaluation. We can review your asset allocation and discuss how our services may be able to help you reach your goals.


1 "The Morningstar Mirage,” Wall Street Journal, October 25, 2017.

2Quantitative Analysis of Investor Behavior,” 2017 Report, DALBAR, accessed November 28, 2017.