Labor Day weekend represents the end of summer for many people. I think of Labor Day as the beginning of fall, which I love! As I write this, my philosophical self leads me to think how some people look mostly backward while others look mostly forward.
I certainly have regrets and would like to have a “re-do” for some of my previous choices, but my reflex is to look forward and view history as history which cannot be changed. I value history to the extent it adds to my learning and knowledge which I can use in the future.
This approach is helpful in my role as a Financial Advisor. You may have read or heard from people in my industry; “past performance is not indicative of future performance”. This type of language is a disclosure in every prospectus, on every brochure, etc. If a financial professional touts past performance to imply it will represent future performance then this would be misleading and would subject that financial professional to regulatory scrutiny.
Prospective clients often ask “what’s your track record?”. This may seem like a natural, if not logical question. How would you answer that question if sharing past performance without a lot of disclosures were unethical? Do you read every word of all the disclosures my industry has? In many other industries, you may ask about customer service, experience or reliability related to a product and get a useful answer. In my industry, it is difficult to answer accurately while still being compliant with my industry’s regulations. For this reason and others, I don’t tout or “sell” historical performance numbers. You see it doesn’t matter what historical numbers were, because they are history.
If a financial professional gave an answer with a percentage like “My clients made 12% over past five years”, then how do you know the claim is true? Even if it were true, is the financial professional saying he/she invests the same for every client? What if your objectives are different than the other “clients”? Making a high rate of return claim doesn’t make the investment recommendation appropriate for you. Chase rate of return at your peril.
Existing clients often want to keep an investment that has done well and get rid of an investment that has not done well. That point of view comes naturally but is completely disconnected from what is in the client’s best interest! If investment “A” has done well and investment “B” has done poorly, then the appropriate analysis is whether investment A, investment B, both or neither have a bright future outlook. Emotion is powerful and has damaged client portfolios since the beginning of time, but past performance, good or bad, is history.