? about performance reports for brokers

[crazymans economics]

I have an honest question here. I'm not trying to start a debate, I just want to make sure I have my information correct.

If I were a new client and went to a broker and asked for a performance report tracking the success or failure of their clients, is there a brokerage house policy, SEC/FIA rule and/or Federal Law that requires them to supply or not supply that information?

I'm familiar with the rule about sharing information with accredited investors as defined by Rule 501 of Regulation D of the Securities Act of 1933, as well as the Investment Advisors Act of 1040. I also know that regulators have ruled that sharing information is considered general advertising in violation of the act. But that doesn't appear to fully address the issue.

What I've been told (by those willing to even discuss it) is that in terms of specific individuals, not only NO, but hell no. It would violate nearly every fiduciary compliance regulation out there (though they don't mention which ones).

So, if I were a potential investor and wanted to know a brokers' track record of success, could they provide me with an accurate and specific tracking of their clients' performance?

Most professional have to keep records of their activities, I'm just curious as to why brokers don't?

Again, just want to make sure I'm not missing anything.

[sharesunited]

1. Privacy aside, not clear enough data.

With an investment company like a mutual fund, the fund manager is solely responsible for the portfolio activity.

With a brokerage account, a customer can be exercising all the trading decisions or he can give the broker some or exclusive trading authority.

With a brokerage account, a customer can be relying on all, some or none of a broker's advice on positions to pick up or divest.

With an online brokerage account, there may be no relationship with a professional broker at all. The customer may be relying on information made available by internal analysts at the firm or through links to outside sources.

Given all these variables, how would performance of a "broker" be measured?

[Coyote_Bandit]

2. Performance information

on brokers is worthless for the most part. The nature of what they do is sell securities on a commission with the final decision to purchase or sell securities being at the direction of the client. A broker cannot make those decisions. Brokers have a financial incentive to churn accounts to generate commissions. Also, less scrupulous brokers do not treat all clients the same. If they see potential with one client or have more contact with a client they may tend purposely or otherwise to give that account priority.

Meaningful performance information is available for money managers - and it's computation is standardized among money managers who have earned the CFA designation or who work in firms that are AIMR compliant. Firms that manage money often use some very sophisticated software that enables them to trade in all accounts buying and selling a given security simultaneously. Effort is made to see that clients have comparable performance.

If you intend to rely on the recommendations of others regarding investment decisions then you will be better served by getting a money manager and permitting the manager to have discretion to buy and sell without prior approval. Usually there are policies in place that limit and define what managers can do. Usually those would be something like no more than 30% turnover is assets held annually and no more than a 10% realized gain or loss annually.

Better yet study the industry a bit and learn the fundamentals of investing. The basic principals are not hard to grasp. Nor is the difference between investing and trading. You should understand how your money is being used. Don't be intimidated.

FWIW, I used to work as an investment portfolio manager and was responsible for a portfolio valued just under $1 billion in total securities. As a matter of policy the firms that employed me would not invest individual equity (stock) portfolios of less than $250,000 in individual stocks. We used mutual funds in these accounts in order to get adequate diversification. Many firms require a substantial initial investment and will not undertake management of an account valued at less than $500,000 to $1 million. Some firms do not consider a client to be of high net worth unless their investable assets exceed $5 million. Some firms will provide private office management of your account (and only your account) if your investable assets exceed $25 million.

There are some very good no load mutual funds available with documented long term performance history and well defined investment strategies that guide holdings. You would be well advised to consider diversifying among a variety of funds. If you do it right total fund expenses will be far less than broker commissions. In many cases you can purchase the funds directly without having to utilize brokerage services and pay the resulting fee. This is how I have chosen to invest my own personal equity holdings.

Good luck.



Edit to clarify that some brokerage accounts do allow the broker discretion to trade. These are usually a minority of accounts. To my knowledge there are no standardized performance measurements for such accounts. Depending on how performance is calculated you can see a wide range of measurements given the same data. Brokerage accounts do not have the same regular account reviews by external personnel that are required in the banking system. If a bank manages the money and has discretion to trade you can be certain that at least every 12 months there will be an investment committee that reviews documents and account holdings. Money managers in a bank environment are required to document quarterly account reviews in order to satisfy the internal requirements of their own review committees. The investment houses I worked in had a review system similar to that required in banks.