It's not just who and what-it's who needs to know what.

The past ten years have seen a dramatic change in the level of services that wealthy investors are demanding from their investment service providers. Portfolio reporting plays a major role in these enhanced wealth management services. Unfortunately, while the innovations in portfolio reporting technology have provided advisors with mountains of information and increased efficiency in their back-office operations, the client's specific needs have often been forgotten in the process. Frankly, many portfolio report designs forget that, as investment advisors, we are not in the "data providing business" but in the "data interpretation business." Customized reporting plays a central role in providing better more focused data interpretation. It is most effective when it draws on the client's specific needs in its design.

Let's explore customized reporting and its integral role in any comprehensive wealth management program. The choice of information and how it is aggregated, displayed and analyzed provide the focus necessary to proactively plan, execute and monitor an investment policy, thus producing better long-term investment performance.

Who Is The Reader?

Much as a doctor does not prescribe a medication until after a detailed physical examination, the investment advisor cannot recommend an appropriate reporting solution until the client undergoes his or her own "reporting examination." The first key question to be asked is, who will read the report? This drives the entire process. You have family patriarchs, their children, grandchildren, accountants, lawyers, trustees, planners and others who may be among the audience, each with different requirements. Their different requirements are what drive the need for customization.

The investor's professional specialists will require certain specific information. Accountants, for example, need tax information on realized and unrealized gains as well as investment income. The needs of all important client advisors should be identified and addressed as part of the reporting solution.

Family members likely have very different areas of concern and focus than their hired professionals. The head of the family is likely to be more interested in broader governance and investment issues. An emphasis on issues and recommendations for the portfolio as a whole is essential. They may also want to be sure that other relatives only see information relevant to them. Therefore, determining "what family members see what" can be a particularly important issue for complex families.

Another key factor in determining the report content is an understanding of the relative sophistication of the readers. As investment advisors we see a wide spectrum of client sophistication; some clients are highly sophisticated while others are not at all. While some basic information would be required for each of these extremes, it is clear that providing reams of analysis to an investor not requiring such detail might actually impair their understanding of the key issues, while the more sophisticated investor could find review of such information vital.

What Is Being Reported On?

Just as the intended audience of a report has a profound impact on the eventual report design, the nature of the assets themselves also has an impact. During the client assessment phase, identifying the various pockets of wealth, whether supervised or unsupervised, is vital. These pockets may be managed portfolios, trusts, charitable accounts or nonliquid wealth, such as real estate or private equity. All the assets, supervised and unsupervised, should be viewed in a consolidated manner, because they impact asset allocation from a risk and reward standpoint.

Also, with respect to the investments themselves, it is important that "hot button," client-specific issues are identified and monitored in the customized reporting solution. Whether it is the management of a stock concentration for an individual or tracking grant making for a not-for-profit, an in-depth understanding of the client's needs should be acquired and an appropriate solution crafted to respond to the specialized issue.

These questions, "who reads the report" and "what are we reporting on," may seem simple but they are vital questions to ask. The answers provide the insights needed to properly design a customized reporting solution.

Level Of Consolidation

To continue with our medical analogy, after performing an examination of the patient, the doctor applies his knowledge of medicine to the facts before recommending a therapy. In our case, we need to take what we have learned about the client and apply that against what we know about reporting before recommending a solution. There are several key report design concepts to consider. The first broad concept to consider is the level of aggregation and disaggregation to be applied to the report. A report can be consolidated or disaggregated in such a fashion that each reader only sees that which is relevant to him or her, providing focus to the reader as well as confidentiality to other parties.

For extremely complex family structures that utilize dozens of vehicles, each with different income and principal ownership, the aggregation and segregation process can be complicated. Regardless, it is an exercise that provides a deeper level of understanding and communication between the client and the advisor.

Level Of Detail

Somewhat related to the level of consolidation is the level of reporting detail provided. Just as in our previous example, the family patriarch could "drill down" into the components of his wealth. A report should allow for the reader to "drill down" and receive quantitative and qualitative information at all levels of the portfolio. In the modern portfolio the levels of detail can be broadly classified to include the following, from least to most detail: the total portfolio, the asset class level, the manager level and the holding or security level. Any report, whatever the audience, will contain information at all of these levels. The detail provided should be sufficient to appropriately analyze deviations from the investment plan but be presented in a manner that does not bury important issues within that detail.

In addition to the investment plan, the audience also determines the information that is desirable at each of these levels. Some readers will naturally want to focus on portfoliowide issues, while others may wish to review manager level detail more closely. The amount of detailed quantitative informationæparticularly at the manager and security levelsæshould be controlled, especially for less sophisticated investors, and replaced by a greater emphasis on broader summarized statistics and on qualitative observations made by the investment advisor.

Lastly, the level of detail should be tailored so as to complement or replace the client's existing information infrastructure, whichever is required. Many complex families come to an investment advisor with an existing capability. They are accustomed to seeing things a certain way. Designing a solution that complements or replaces the client's system, as appropriate, can be very important to many complex families.

Benchmarking

Benchmarks in a portfolio report provide vital comparative information. Managers, the portfolio and even the investment advisor are all graded, if you will. It is important to choose benchmarks that most specifically grade each of these entities and clearly communicate the value they add. Managers should be benchmarked against the style and asset class benchmark that is most appropriate to them. If a portfolio crosses multiple styles, multiple benchmarks should be provided. Portfolios can be graded against a "blended benchmark," which is a weighted average combination of the various style benchmarks corresponding to the strategic investment policy.

Grading the investment advisor is more difficult. The advisor is obviously judged on the performance of the managers and portfolio against the benchmarks previously mentioned. These benchmarks, however, do not grade the investment advisor on broader asset allocation, asset class choices and tactical allocation decisions that the investment advisor may make. Therefore, in addition to style-specific and blended benchmarks, certain generic benchmarks should also be provided to help gauge overall investment advisor performance. In all cases gross, net of fees and even net of tax performance, should be set out.

Last and most importantly, it is vital that the investment advisor provides commentary on why benchmarks were exceeded or trailed. How much a benchmark was missed or beaten only tells part of the story. Why a manager or portfolio exceeded or fell short of a certain benchmark can sometimes be more important than the amount of over-or underperformance indicated. Was performance due to stock selection, currency issues, tactical allocation or other factors? Most clients who are presented with just the statistical information may not be able to draw these conclusions on their own.

The Report As The Agenda Driver

By following these guidelines, defining the readers' needs and applying those needs to the reporting concepts we discussed above, a portfolio report is well positioned to focus on the issues most important to the client. The completed report will contain important information on strategic investment policy, investment activity, tax information, manager information, client specific issues and other analysis, with the emphasis and level of detail appropriate to meet the client's needs.

As previously mentioned, the report itself should provide not only analytical information comparing actual results to the strategic investment plan but also interpretative observations made by the investment advisor. This qualitative analysis forms the basis for the use of the client report as a driver of appropriate changes in the client's managers, asset allocation or overall investment program. The most effective method for using the report to drive the agenda is to accompany each report with a communication to the client that clearly identifies the most important issues drawn from the report. It is vital that the investment advisor not only identifies the issues, but also suggests possible courses of action to resolve those issues. In the process of explaining the issues at hand, the report detail can be called upon as required. In this manner a client letter in tandem with the report drives the agenda for changes in asset allocation, managers or other areas.

Conclusion

Providing customized reporting in the manner described is not easy. Advances in technology and the drive to automate in the name of costs savings continually push us toward utilizing more "cookie cutter" solutions for all services, not just investment reporting. We should not let our reliance on technology and the advances in information availability blind us to what is useful and beneficial to the client, nor should we forget that our role as investment advisors is to provide not just information but advice. By thinking more clearly about the exact information needs of the audience and displaying that information in the best manner possible, increased focus is attained, the investment plan is defined and communicated and decision making is more proactive, producing enhanced investment performance.

Jeffrey A. Hollowniczky,CPA, is chief administrative officer for Ashbridge Investment Management LLC (www.ashbridge.com) in Philadelphia.