A misguided or an enlightened advisor?
To hell with the Nasdaq 100! Chuck the S&P 500! And the EAFE, you can just forget about that loser of an index!
How many planners, hearing complaints from clients or prospects about not beating benchmarks, have harbored these ugly thoughts? How many of them wish they could throw away the bothersome yardsticks of relative performance? Well, one advisor has done just that.
A certified financial planner in the Northwest, underscoring the sentiments of some of his peers, says he's no longer ruled by, or even concerned with, indexes. He ignores them. His philosophy is just make money for the client. Make money every year. Better yet, don't lose any of the client's money. Indexes, he warns, often are flawed and inappropriate. But more importantly, there is a danger that they can mislead investors and can be used as a crutch by financial professionals looking to rationalize egregious performance.
"The point is it isn't OK to lose 20% of your client's money just because the index lost 30% last year. You need to get that individual a positive return each year because many clients don't have a long period to achieve their goals," declares Mark Spangler, who runs a financial planning practice, Spangler Financial Group, in Mercer Island, Wash.
Spangler sets absolute return goals for clients based on the amount of risk they want to take. Over the last two years, his goal was to obtain a 6% to 10% annual return. He has succeeded using a strategy that includes hedge funds, real estate and private equity along with the standard mutual funds, stocks and bonds. How did he decide to use this approach?
Some five years ago he became fed up with the race to beat benchmarks. And, at the height of the bull market rally in 1998, he started telling clients and would-be clients that he would no longer use them.
But with many clients then used to seeing outsized returns, and implicitly expecting that these historical anomalies would go forever, Spangler's decision came at a bad time for his practice. "Many of them thought, "What's wrong with him?'" Spangler says.
Still Spangler, who saw that some of his clients were developing unrealistic expectations, decided that it was time to ignore the yardsticks that rule the lives of many financial professionals. That's because their huge returns-for example, the S&P 500 was up an incredible 38% in 1995-were distorting judgments, he says.
Instead of benchmarks, Spangler decided to concentrate on absolute numbers-making money each year for clients, regardless of whether it was a bear or bull market. Measuring performance against benchmarks is fine for institutions, Spangler argues. But for individuals it is often the wrong approach. The decision, he believes, makes sense for his clients-most of who are individuals.
Spangler's "damn the indexes" decision was initially an unpopular one, he says. It drew criticism from some clients and prospects back when tech stocks were obtaining huge returns, and even he concedes that the philosophy has some drawbacks. Because it means less volatility in the average portfolio, Spangler says, his clients receive about "two-thirds" of the fat returns of a bull market. Some clients are upset about missing upside volatility, Spangler agrees.