Monday, December 7, 2009

We Don’t Sell Performance Here

Pinnacle Advisory Group, like most private wealth management firms, doesn’t “sell” our portfolio performance. The broader industry doesn’t sell performance because they are strategic, buy and hold, asset allocators and investment performance is considered to be completely random depending on the whims of the investment markets. It is far better to “sell” relationships. The relationship sale is much less dependent on volatile market performance that can be good or bad in any year, and much more dependent on selling things like trust, communication skills, dependability, organization, and financial planning benefits of all kinds. We understand the difference between selling features versus selling benefits, and clearly investment returns fall under the category of features. What are the benefits that we sell? It turns out that they are pretty much the same as those sold by the rest of the industry. In addition to the benefits mentioned above, how about less stress, more confidence in the future, and the ability to be happy in your life worrying about something other than finances. And of course, we sell ourselves.

I know we don’t sell investment returns, but it’s interesting to note that Pinnacle’s investment analysts got every major turn in the market correct since the end of the bear market in 2002 when we first started to actively manage money. The net result of overweighting risk in managed accounts in early 2003, underweighting risk by the summer of the 2007, and adding risk back to the portfolios by the beginning of 2009 has been a huge BENEFIT to our clients. They have earned higher returns with less risk than an unmanaged benchmark of stocks and bonds with similar risk/reward characteristics. Our moderate growth portfolios are generally only a few percentage points away from making all-time highs. A comparison to Morningstar’s Moderate Allocation universe of funds, which are managed with a similar risk exposure to our moderate growth portfolios, would result in our being ranked among the top 5%…if we were a mutual fund. This propensity to outperform is an interesting FEATURE to keep in mind.

For consumers of Pinnacle’s investment services, they will have to evaluate exactly how we managed to outperform. Is our process systematic and repeatable? What is the likelihood that we will continue to make good decisions in volatile markets? If we make a mistake, is it likely to be a big mistake or a small mistake? Could our clients do better themselves, or can they find another firm that does it better? These are all good questions and we stand ready to provide the answers to the best of our ability. But don’t misunderstand us…we don’t sell investment performance here.