In many of Credo’s analyses, we do not use financial performance as the ultimate measure of results. Rather, we use something we call investor outcomesWhy? Let us illustrate by posing the following question:

As financial advisor, in which of these two situations would you prefer to be?

  1. Situation #1: You have developed a set of portfolios for your clients. Each portfolio has consistently delivered 11% returns on a risk adjusted basis during a 7-year period where a reasonable, comparable benchmark has delivered only 8%… but 70% of your clients feel as though they have not been financially successful while working with you; or,
  2. Situation #2: You have delivered for your clients a set of portfolios where each portfolio has consistently delivered 6% returns on a risk adjusted basis during a 7-year period where a reasonable, comparable benchmark has delivered 8%… but 85% of your clients feel as though they have been tremendously financially successful working you.

That’s ridiculous, you say. Returns are what make people feel successful.  We say, it’s not ridiculous. We say a whole host of things make people feel financially successful. Returns are certainly a part of the exercise… but other things are at play, too.

If you’ve done any research on the subject at all, you’ll appreciate that investors are not fully rational, logical beings. They are certainly not ONLY pleased when their portfolio grows. Nor are they displeased ONLY when it declines.  There’s far more to people than meets the eye.

Exhibit 1. Are advisors focused on money management or on clients?

About 77% of advisors, when asked if they are returns focused or client-centric, tell us that they would prefer to meet clients goals than to simply deliver returns (see Exhibit 1 above.) Essentially, advisors aren’t simply returns generation machines. Most of them are client satisfaction machines. So, Credo does not focus on returns alone. We focus on investor outcomes – their state of financial satisfaction.

Are you Ahead or Behind, Financially?

Credo has a number of different means for measuring investor outcomes. One involves a bellwether statement we refer to as “The Ahead or Behind Test.” We ask thousands of investors to react to the following question:

Which of the following statements fits best for you? Considering my financial situation at this stage of my life, I currently feel:

  • Well ahead of my expectations
  • Ahead of my expectations
  • On par with my expectations
  • Behind my expectations
  • Far behind my expectations

We can examine a response distribution for this question for 30,000 randomly selected investors. It shows that only about 3% of investors feel well ahead of their expectations while 15% feel far behind. A plurality (42%) feel on par with their expectations, but more clearly feel behind than ahead.

Exhibit 2. The proportion of Canadian investors who feel ahead of the game or behind the 8-ball.

In a different section of our study, we ask investors whether or not they work with a financial advisor and also what investment companies they have managing their money.  By doing this, we inconspicuously gather the data we need to test whether or not investors who have their investments with any specific company are different from the overall industry average we’ve presented above.

For instance, when we look at a response distribution to this same question (The Ahead or Behind Test) that includes only investors who have investments with Fidelity investments, we see a distribution of a somewhat different shape. Exhibit 3 shows that relatively more investors feel ahead of their expectations if they are invested with Fidelity Investments and relatively fewer feel behind.

Exhibit 3. The Credo Ahead or Behind Test and Fidelity Investors

A couple of quick statistical tests provide that there is almost no chance that the factor we’re measuring — feelings of being ahead or behind — isn’t related to the only thing that’s really different between the two distributions, i.e., the fact that the money manager is Fidelity.  Credo concludes that Fidelity’s investors feel better off than the average investor.

So that, in some respect, is how Credo prefers to measure investor outcomes. Do they feel as though they are getting ahead? Or do they feel as though they are falling behind?

We look at the same response distributions for all of the major players in the industry and we can evaluate which companies are performing best. (That’s Credo’s WIBO Research.) It eliminates the need to debate about whether we should be comparing money management competitors based on ten-year returns rather than five-year returns… rather than three-year returns. Those matters come out in the wash when we focus on how the end investor feels about their financial state of being… and that is what it’s all about, isn’t it?