Goals-Based Portfolio Theory

CHAPTER 9Goals‐Based Reporting

“I don't understand you, you don't understand me. What else do we have in common?”

—Ashleigh Brilliant

I remember, early in my career, I was excited to show a client what a good job we had done in the recovery post‐2008. Through some effective stock picks, we had generated substantial alpha relative to the market as a whole. During the meeting, I pointed out the alpha figure and, much to my disappointment, my client responded, “What does that mean?” Unfortunately, rather than take the hint, I dove headlong into an explanation, equations and all, of how important alpha was as a risk‐adjusted measure of returns. It did not help. My client did not care about his risk‐adjusted performance relative to a benchmark. My client cared about achieving his goals! Alpha, to him, was a meaningless statistic.

So much of our current client reporting paradigm is consistent with the quip at the top of the chapter. We, as an industry, spend inordinate time and ink presenting metrics and data that we care about, and quite little on what it is the client cares about. Financial plans are a staple, of course, and that is good. But when it comes to monthly or quarterly performance reporting, the financial plan is drawered, and the meaningless metrics come back in force.

I want to explore how we might update our reporting to be consistent with a goals‐based framework, to move away from the myriad meaningless metrics toward the metrics real people actually care about. ...