Why do we persist in showing ONLY time-weighted returns to individual investors? We know it’s not right to use money-weighted returns when evaluating a manager’s performance, but we’ve let that go too far in my opinion. Does an individual investor really evaluate their manager’s performance at every meeting?

The usage statistics in our system confirms that out of the 18 million reports run from four of the largest wealth managers in 2019, .06% of the reports generated contained money-weighted returns.

Some of the issue today is about avoiding complexity and introducing an area where an investor might think there is ‘sleight of hand’ going on. Let’s make it easier by using an analogy: Measuring volume and mass tells us two different things about the same substance.  One calculation uses data that helps you compare to other managers and the alternative calculation measures your growth and when you add and remove money.

Many years ago, the money-weighted returns requirement was a deterrent when firms thought about rolling MWR out at scale. Reports, databases, hardware, and data transfer speeds are all much faster now – this isn’t a problem in today’s day and age.

Is the lack of money-weighted benchmarks a factor? Traditionally, reporting performance grew out of the institutional and asset manager space. Time-weighted returns were used for evaluation and with them came the data to support the time-weighted indexes for an apples-to-apples comparison. Now, we’re reporting to the end investor, and there hasn’t been a focus on creating money-weighted versions of the indexes for comparison. First Rate has only had one client that valued this method in the last 30 years. In fact, they were the only client that consistently used money-weighted rates of return. With that said, there shouldn’t be any issue with showing progress to goal reports and an investor’s money-weighted return without a benchmark.

Individual investors are not likely to shop advisors every year or perform a formal evaluation requiring time-weighted rates of return. Studies by large wealth firms have shown that investor satisfaction was more highly correlated to the number of times the advisor reached out to them than it was to the manager’s performance. So, why not give investors the returns they should have?