How to discuss underperformance — real and perceived

Clients sometimes mistakenly think their investments are underperforming. It’s typically a result of using the wrong benchmark. Other times, your advice doesn’t work as expected and portfolios actually do fall short. Here are some strategies for handling both.

Strategy #1: Apples vs. Apples

Market indices did better than your client’s portfolio.

Problem: The client is comparing the results of her portfolio, which holds multiple asset classes, to an all-equity index.

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Solution: Develop a blended index appropriate for your client’s allocation. Using indices for stocks, fixed income and money funds, balanced proportionately, gives a fairer estimate of what the client should consider as a point of comparison. Drill down and show how the equity portion did versus the equity index.

How to Explain: “Let’s compare apples to apples by looking at how you did in each asset class….”

Strategy #2: Use the Correct Time Period

Your client opens her account statement and sees she’s up 2%. She checks the S&P 500 online and sees it’s up 5% for the year. She’s unhappy.

Problem: She started invested five weeks into the year. The index includes activity that occurred before she invested.

Solution: Get the proper numbers for the indices on the day she invested. That’s the measuring point.

How to Explain: “We got started investing on February 7. The index as at (X). That’s where we should measure from.”

Strategy #3: How Much Risk Did You Take?

The indices soared, but your capital-preservation or income-and-growth client didn’t.

Problem: It’s been said that in a bull market most clients see themselves as aggressive investors. They’re not, which they made clear during planning process. Some are at an age where they can’t make up losses.

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Solution: You should have excellent portfolio review tools on your desktop, including a report showing a chart of risk versus return. Where’s the index? Where’s your client?

How to Explain: “The index and its return represent a higher level of risk than we’re taking. The market can go up like an escalator but it goes down like an elevator. The market is up (example 5%) year to date. You’re up 4% over the same period. Look at this chart. You got that return by taking far less risk.”

Strategy #4: Account for Concentrated Positions

Let’s assume the equity markets are up 5% YTD. Your client is even for the year.

Problem: The client has a concentrated position of low-cost basis stock from her former employer. She refuses to touch it. The position’s down 10%, but she holds you responsible for everything.

Solution: Break out the portion of the equities you advise on from the concentrated position she won’t touch. Report on each separately, and advise on the dangers of concentrated positions.

How to Explain: “The stocks in your account fit into two categories, the ones we invest together and the ones we don’t touch. The second group didn’t do as well as the first. Let’s look at how each category did….”

Strategy #5: Highlight Successes

She takes your advice. Some suggestions worked, others didn’t. She feels her portfolio has underperformed.

Problem: Even after accounting for fees she didn’t do well.

Solution: Highlight successes and share the credit with her. Explain why some investments underperformed and your original reasons for suggesting them. Clients respect accountability.

How to Explain: “Let’s look at everything. These selections worked out. It was good you got into the utility sector. Those stocks are up about 4%. Stocks in other sectors are lagging. The fundamentals are good (explain) but it looks like we got in early. The signs are positive….”

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