Investment Performance Presentation

[MjInvestments]

So I work for an RIA - we are the investment advisor on retirement plans. We have created risk-based models for our clients to invest in (Conservative, Moderate, Aggressive, Etc.)  Every time we present to employees on education or do trustee meetings, we present a sheet showing those models performance the last 1,3,5,10 years.

We have begun changing how those models are constructed, for example like 10% of our models is in US Small Cap Funds, we are moving from a Fidelity Fund to a Vanguard Fund.

For the investment performance presentations we give EE/Trustee, it would be easiest for me to just show the 1,3,5,10 year performance of the updated model allocation, disregarding the old models.  My boss claims that according to ERISA - we need to show how the plan models actually performed, so I need to track when each plan switches their funds within the model, and calculate the actual performance. (Much like how GIPS would require past performance to be presented).

I'm new to retirement plans - this sounds crazy to me - does ERISA require actual historical performance of models to be shown, or can I show the returns of our models once their plan switches?

 

[Bird]

I think your boss is right.  If you are creating the model portfolio, and making decisions about the content of the portfolio, then you should be showing actual results.  You appear to be talking about subtle changes, but suppose you had an "aggressive" portfolio that was invested in an S&P 500 fund for a year, and the fund lost 20%.  If you then change the portfolio to cash, or a short fund, you'd be able to show no loss or even gains on the model.  Not in the least bit accurate; it's like retroactively changing the results for a mutual fund by changing the investments to something that "could have been."

[401king]

If RIAs could display performance based on current allocations' historical returns then everyone would show the same returns (which would consist of the best performers over the last 1, 3, 5, 10 years). 

[MjInvestments]

38 minutes ago, Bird said:

I think your boss is right.  If you are creating the model portfolio, and making decisions about the content of the portfolio, then you should be showing actual results.  You appear to be talking about subtle changes, but suppose you had an "aggressive" portfolio that was invested in an S&P 500 fund for a year, and the fund lost 20%.  If you then change the portfolio to cash, or a short fund, you'd be able to show no loss or even gains on the model.  Not in the least bit accurate; it's like retroactively changing the results for a mutual fund by changing the investments to something that "could have been."

Got ya - I guess a situation like that never crossed my mind, cause the firms I've worked for would never do anything like that. But yeah I can see why if allowed you would be tempted too.

Thanks! 

[MoJo]

The thing to keep in mind here is that the performance measurement that is important to the fiduciaries of the ERISA plan is *your* performance in managing the models - NOT necessarily the performance of the underlying individual investments.  What your firm decides to include or not include in the model portfolio is key - because it is your firm who is being paid to manage those models....

[Peter Gulia]

Beyond others’ observations, consider (and get your lawyer’s advice on) two further ideas about how to illustrate past performance:

 

If you intend a communication as one meant to follow 29 C.F.R. § 2550.404a-5 for disclosures to directing participants, one counts average annual total return and total annual operating expenses for an investment alternative that is not an SEC-registered fund as if it were.  Even if an RIA’s model is not an investment alternative, someone might prefer to illustrate it as if it were.

 

Consider how the RIA would comply with investment-adviser law standards for making a communication not misleading.