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.

Still, his contrarian philosophy is likely to keep his clients in the black when everyone else is in the red when the bears take over, Spangler claims.

In the late 1990s when he committed to this approach, Spangler was having problems signing up new clients. But the world has turned since the glorious late 1990s, and so has Spangler's reputation. Today, he says, clients are now delighted. And Spangler is having few problems attracting new clients.

So how did Spangler go from laggard to star?

Three years into the bear market, Spangler now appears to be a master of the universe. His clients are obtaining strong returns during dreadful markets. None of them has been in the red.

"My worst clients have gotten strong returns over the past three years," he said. Spangler's clients have had cumulative returns of "from 28.2% to 52.9%" over the past three-and-a-half years, according to a second quarter update in a Spangler newsletter. And this positive performance-at a time when many advisors brag that they have been able to limit their losses-includes expenses. This also comes in the same period that the S&P 500 lost 11.19% annualized, according to Morningstar.

Advisors are divided about what this proves.

"There are periods when benchmarks work and there are periods when they don't," says Louis Stanasolovich, a Certified Financial Planner licensee with his own practice in Pittsburgh. An example of that, he notes, is the period from 1966-1982. In that time, the S&P was only up about 6.3% a year, lagging the Consumer Price Index by about a half-percent. Stanasolovich has mixed feelings about Spangler's stand. There are indexes that are reliable, he believes, and others that are flawed. But, as with most other advisors, he believes that is difficult to ignore them.

Nevertheless, Spangler is the advisor who has racked up big gains for his clients when many of his peers have been deep in the red.

But his critics say that the last three years is too short a period to measure his absolute returns philosophy, and that benchmarks, with all their faults, still remain relevant when used carefully.

Despite his record, and despite the suggestion by some that planners should consider adopting Spangler's philosophy as a way of escaping what one called "the tyranny of benchmarks," several of Spangler's colleagues disagree.

"I think Mark is a very bright guy. But many of us are getting too focused on investment returns and not on what we're supposed to be doing first and foremost, which is planning," says John Sestina, a CFP licensee with his own firm in Columbus, Ohio. He argues that no one can ignore benchmarks, but that they should be used carefully and on a limited basis.

Sestina says he constructs individualized benchmarks for clients to ensure that popular benchmarks such as the S&P 500 don't distort their expectations. Sestina also warned that planners should not be money managers. "I make money for clients as a planner, not as a money manager," Sestina says. He cautions that, if planners insist on managing money, it is inevitable that "even the best of us are going to have a down year."

"Then what do you tell clients? Even Warren Buffett, even Peter Lynch, can have down years," Sestina adds.

"The problem is not the use of benchmarks. It is the inappropriate use of benchmarks," says Harold Evensky, another CFP licensee with his own firm in Coral Gables, Fla.

Evensky says using benchmarks can sometimes make sense for a planner when he is working with a money manager, but that planners should not be running money. Evensky sometimes uses some of the standard benchmarks plus another one: Every year he wants to see most of his clients beat the Consumer Price Index (CPI).

"This is the only one that always makes sense," said Evensky, another critic of many of the standard benchmarks. "By targeting the CPI, we're not trying to make you rich. We're not trying to make you poor. We're trying to make sure that you can sleep at night."

Stanasolovich agrees: "What's most important is how much a client earns at the end of the year over inflation."

Still, Spangler's clients probably aren't the ones suffering from insomnia these days. And he also has colleagues who applaud his maverick views.

"What he's doing makes so much sense. I applaud him," says J. Michael Martin, a CFP licensee with his own practice in Columbia, Md. "More planners should be doing exactly that. We generally ignore benchmarks in our firm. One never makes money for clients based on relative returns."

"Relative returns can often make for relative losers," Martin continues. He adds that his practice will inconspicuously mention benchmarks in its literature, but it has nothing to do with evaluating the performance of client portfolios.

"Our clients have been up about 5% a year over the past three years and most of them are thrilled," Martin notes. Their portfolios have been heavily weighted in various kinds of bonds in that period. However, he argues that his performance should have been much better, that he has not tried to take credit for easily outdistancing most benchmarks in that timespan.

There's another reason why Martin supports Spangler's stance. "I believe that many planners are really closet indexers, although it is hard for them to admit it," he says.

Enlightened advisor or eccentric crank? Clients, says Stanasolovich, can be very fickle. How will Spangler perform in the next bull market? Will he retain this maverick point of view when and if he starts to lag benchmarks again?

That will probably be the greater challenge for an advisor who has declared war on the conventional measures that mean so much to many advisors.