Evaluating Success of an Investment Program

Evaluating private wealth management program success is more involved than an a evaluating the success of an investment fund or ETF. The latter can often be compared to a benchmark. The same cannot be said of an individual investment management program. Return performance is only part of the overall process.

Goal Achievement

A successful private wealth management plan will achieve the client's stated goals, with minimal and acceptable risk, and without the need to make major changes to the original plan. Overall portfolio return, is again, only part of the whole picture.

A successful program will be one that has a high probability of satisfying client goals, and remains on track throughout. An example of an unsuccessful plan would be one in which a client's needs to work many years beyond their initially targeted retirement date, or must accept a drastically lower lifestyle, bequest, education for a child, etc. due to plan failures.

Process Consistency

Following a consistent process is crucial to ensuring the overall success of the client's investment program. The following are some points that wealth managers may consider in evaluating success:

• If the wealth manager uses third-party managers, how has their performance been?
• When the wealth manager has recommended fund manager changes, have those changes improved performance?
• Has management followed the process for rebalancing?
• Has management done everything reasonable to reduce costs?
• Is taxation considered in the client's portfolio?
• For clients with ESG preferences, has the wealth manager respected those?
• If management uses tactical asset allocation, how has that impacted the portfolio's performance?
• Is the wealth manager maintaining a conversation with the client to assess potential changes in the client's goals, life events, and other relevant factors?
• Has the wealth manager coordinated the investment strategy with the client's estate plan and philanthropic goals?

Portfolio Performance

Performance evaluation of a private client's portfolio can be expressed in either absolute or relative terms.

An absolute performance benchmark calls for a simple total return. This could be something like 9% annually, or 3% above LIBOR. The point is that it is not being compared to other strategies or portfolios.

To measure relative returns, a wealth manager compares the client's investment portfolio results to those of an appropriately weighted benchmark.

Equally or perhaps more important is considering the relative risk-adjusted return (think Sharpe-ratio, or related metrics). It is also important to evaluate whether the portfolio's actual downside risk is consistent with the client's risk tolerance. Many private clients tend to compare their own portfolio's performance to the performance of the inappropriate or non-comparable investments or strategies which don't carry the same risk.

Definitions of Success

It can be possible for the client to be disappointed in the investment program when the wealth manager has different definitions of success. Depending on the client's definition of success, superior relative returns may be achieved or a specific return may be achieved. Wealth managers may define success for their clients as achieving specific financial goals. At the beginning of a relationship, both parties should agree on the definition of success. The conversation about how the investment program will be monitored and measured for success is the responsibility of the wealth manager.

Question

A successful private wealth investment management program is one that:

1. Outperforms a benchmark on an absolute basis.
2. Outperforms a benchmark on a relative basis.
3. Achieves client investment objectives with appropriate risk.

Solution

The correct answer is C.

Answer choice is an overarching definition of success for a private wealth investment management program. It is important to note that choices A, and B are likely a part of answer choice C, that is, contained within.

Absolute returns are ones that do not use a benchmark, making answer choice A non-sensical. Answer choice B may be important, but is only a part of the entire picture,

Reading 7: Overview of Private Wealth Management

Los 7 (n) Evaluate the success of an investment program for a private client