For decades, market indexes such as the S&P 500 have been considered benchmarks for measuring performance, but recent changes in the way that investors perceive their financial goals and objectives have called into question the relevance of such an approach.

"Institutions have been setting personal benchmarks for years. When you go to one of the large sovereign wealth funds, they are not so concerned about the S&P 500. They talk to you about portfolio allocation and how they are managing risk and return," said John Hailer, president and CEO of Natixis Global Asset Management.

Litigation from the fallout of the 2008 and 2000 financial collapse is causing not only large sovereign wealth funds but also advisors to create and invest according to a personal benchmark.

"Personal benchmarking has to be the future. If you were around back in 2000, you saw the litigation that took place in our industry over faulty portfolios, and we saw it again after the 2008 crisis," said Hailer at a press luncheon last week at Per Se in Manhattan. "The regulatory environment in Europe is getting tougher on suitability for clients and what's appropriate, and in the U.S. we’re seeing the same thing."

Traditional benchmarking is determined by asset allocation, while personal benchmarking is based on the return an investor needs to earn to satisfy her objectives.

"The two seem to be consistent, but that is not always the case. I’ve encountered plenty of situations where a client has a greater risk tolerance than is necessary to achieve their goals," said Adam Thurgood, a chartered financial analyst, managing director and partner with HighTower in Las Vegas.
Hailer advises personal benchmarking be based on a combination of an investor's risk tolerance and knowledge of what they need to live on and what their goals are.

"When we talk to individual investors or the financial advisors who cover them -- their clients don't know if they should be following the S&P 500 or the Nasdaq," Hailer said. "Sit with a client, go through with them to find out what their risk parameters are and what kind of return they need and then build them a personal benchmark so that they don’t worry about the S&P 500."

On average, the individual investor trails market returns by 4 percent to 6 percent because they tend to sell at market lows due to intra year volatility and buy at market highs, according to Brinker Capital data.

In response, Brinker launched its personal benchmark program online for advisors in May 2013.

"Our Personal Benchmark tool begins the portfolio construction process by framing the choices of safety, income, tactical and accumulation with the goal of closing the behavioral gap and increasing investor returns," said Chuck Widger, Brinker Capital’s executive chairman and architect of the personal benchmark program. "In this way, investors set the portfolio strategy to achieve their personal goals. We call this purpose driven investing."
About 65 percent of advisors indicate they focus on achieving investor goals, not beating indexes when constructing portfolios, according to the most recent Brinker Barometer survey.

"The term personal benchmarking is one of a few names given the same approach. PNC calls it goals-based investing," said Joe Jennings, investment director for PNC Wealth Management in Baltimore.

Not all advisors are convinced of the efficacy of personal benchmarking. "You could use a personal benchmark to hit a specific target or goal, but overall as part of an asset allocation decision, it would be problematic. The challenge is that if the market indices are doing better, the investor will question why you are pursuing this kind of target/benchmark rather than the S&P 500," said Lyle Wolberg, advisor with Telemus Capital, a Focus financial partner.