On the face of it, the typical modern brokerage statement is a tribute to the detail that number-crunching technology can deliver. Fidelity's institutional brokerage statement, for instance, weighs in at 16 pages and lists the current state of a client's holdings broken down by asset class, individual securities, trading activity, cash flow, realized and unrealized gains and losses, open orders, pending settlements and fees.
Yet, for all that volume of data, the statement comes up short in a number of areas. Specifically, it does not show annualized returns, nor does it assess risk (standard deviations or Sharpe ratios), much less compare those figures to appropriate benchmarks. In short, it lacks what clients need most: a customized assessment of how a portfolio performed in either absolute of relative terms.
This is not to single out Fidelity. (Indeed, Dalbar, the Boston-based financial services consulting company, ranked it as the industry's best two years running.) But Dalbar's survey of 28 brokerage statements found them wanting when it comes to understanding a portfolio's performance. In short, most brokerage statements are long on data but short on information.
Although many top advisors create their own performance attribution reports for clients by outsourcing the task or by buying software themselves, too many financial advisors do not. The implications are obvious: Advisors may not know what is driving a client's portfolio. And for the client, well, he may find himself befuddled and disappointed in his advisor's services.
In general, the largest firms' statements garnered high marks from Dalbar. Fidelity Institutional, AXA Advisors, American Express, Merrill Lynch, Edward Jones and Linsco/Private Ledger rated “very good,” though, significantly, none rated “excellent.”
Dalbar's director, Heather Hopkins, notes that brokerage firms are devoting “significant resources — technological, financial and human,” to statement-upgrade projects, and “this is evident by the rising average benchmark score.” Many firms are working to expand the range of statement customization they offer to investors and financial advisors.
However, Hopkins says, “Many firms still fail to recognize the power of the statement and therefore continue to produce statements only to satisfy regulatory requirements.”
If this sounds like hair-splitting, it's anything but. The deficiencies in printed monthly statements are fundamental omissions that handicap brokers and advisors in serving their clients. The most important component missing from most statements is true performance reporting. In the area of total performance, statements typically identify cash flows, but bottom-line figures tend to be net of these changes. The statements usually contain all the necessary data to compute true performance, yet they typically opt to show the less-informative total-worth figure instead.
Statements are equally lacking in their rendering of individual equity performance, failing to show annualized rates of returns for individual securities or how returns compare with appropriate benchmarks and/or client goals. Further, they lack more sophisticated measures, such as risk-adjusted returns, costs of investments and aggregate rates of returns and tax implications of securities bought in tranches.
Without this information, an advisor has a much harder time evaluating how worthwhile certain investments are. If, for example, an investor was up $2,000 on $10,000 worth of, say, Veritas Software over a six-month period, then this investment was worth its high risk. If, on the other hand, it took five years to realize a 20 percent gain, the advisor made a poor risk-reward decision.
Analytical reporting is also important on the industry and sector level. Most statements would not give advisors much help in explaining, for example, why a client's tech stocks as a group deviated from the Philly Semiconductor Index by 20 percent. If, on the other hand, the statement showed specifically where the stocks broke ranks with the benchmark — or better yet, gave the advisor information that would let him correct a wide deviation by selecting stocks that hug the benchmark better — he fares far better in the client's eyes.
According to Todd Lowe, president of Louisville, Ky.-based Parthenon Capital Management, there are three reasons why brokerage statements have not evolved at the same speed as other areas of financial reporting. First, the NASD, which holds say-so on reporting requirements, has set low minimum standards. Second, a surprising number of investors do not demand much detail in statements, perhaps preferring to get such information during meetings with their advisors. Third, and perhaps most important, many brokers are unaware of the levels of analysis that could be made available through the statements.
Making a Statement
For advisors — particularly independents — who wish to deliver more statement analysis to their clients, there are plenty of options. Two leading software firms — Advent Software of San Francisco and Captools of Issaquah, Wash. — offer a wide array of standard and customized performance-reporting tools that can help make the information in a typical brokerage statement more meaningful. Both companies' software packages are designed for “smaller-sized firms that are looking for a flexible, less expensive solution than outsourcing to create a wide range of standard and customized reports that, in the process, keep client data private,” says Douglas Aronson, a financial software consultant based in New York. Single-user licenses start in the $2,000 to $2,500 range, with multi-user discounts available.
For those who favor outsourced solutions, Investment Scorecard of Nashville and StatementOne of Lawrenceville, N.J., offer attractive options. The appeal of outsourcing its ability to reduce an advisor's exposure to administrative tasks. Like the software mentioned above, the outsourcing services require a direct interface with clearing and back-office functions. Outsourcing services cost between $50 and $200 per account per year.
Many advisors might wonder if delivering better client statements is worth the effort and cost. To Hopkins, the answer is obvious: “Statements can be used to alleviate customer concerns, increase loyalty and maintain confidence,” she says, noting that these benefits take on added importance “in these times of tumultuous markets and corporate malfeasance.”