We have seen a wide range of benchmarks being used by other wealth managers over the years. From credible to ridiculous but none of them perfect. Benchmarks are important because no client can really judge how their wealth manager, investment manager or adviser is doing without a comparison. Most clients don’t move managers for decades and so need something to judge performance against.
We have been dealing with one client for decades and they have always maintained a small portfolio with a well-known private bank.
The benchmark for this portfolio has been built by the bank itself. It is a very complex one constructed with different weightings to several different market indices. So it is a combination of cash rates, bond market returns and several different geographical stock markets. In their case at least it is made up of a series of true market returns.
Unfortunately, they were underperforming their own choice of benchmark year after year. The compound underperformance was built year on year and the graph of performance vs the benchmark looked worse each year we reviewed it. After about a decade, the firm removed the benchmark entirely from their charts and just showed the portfolio performance.
There are other worse benchmarks that firms use, some that are so easy to beat that they don’t have to remove them due to underperformance.
The ARC indices are a good example of this. Instead of comparing themselves against a true market index (as they should because it is their job to at least match this return), firms get to compare themselves with each other. ARC is made up of the self-reported performance results of lots of wealth management firms. Essentially this benchmark just shows how a firm is doing against the average of a poor set of results.
Firms can supply performance data that is poor knowing that it will drag down the average return of the index and make it easier to beat.
These benchmarks (and ARC is only one of many) are not a good measure of performance. If you are going to pay a manager to manage your money, you want to know how close they are to a market return after their fees. If they are returning market returns less the cost of their fees, then you might as well buy the market return cheaply via a passive solution (essentially buying the benchmark index directly).
An even better benchmark is to measure your portfolio returns against market returns and your advice returns against the growth goal from your financial plan.
If a blend of asset class indices gives you an annual return of 7% and you achieved 6.8% from a passive solution but only needed 4% for your cashflow plan to work, then it has been a good year.
We are currently benchmarking client portfolios against Morningstar, MSCI, inflation and Cashflow goals for our clients from our office in Hook, Hampshire and throughout the UK.