TITLE:
Paradoxes of Portfolio Performance Calculation for Wealth Management: Avoiding Reporting Pitfalls
AUTHORS:
Claude Diserens, Emmanuel Fragnière, Christophe Holenstein, Stephen Rufino
KEYWORDS:
Client Trust, Financial Reporting, Portfolio Performance, Portfolio Profit and Loss, Wealth Management
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.7 No.3,
September
21,
2018
ABSTRACT: Clients of wealth
management banks are usually informed about their portfolio through regular
reporting. To maintain client trust, it is important that this reporting be
both comprehensive and comprehensible. This reporting is grounded on complex
mathematics in order to calculate myriads of profit and loss, performance and
risk indicators. As the amount of information provided to clients increases so
does the chance that certain elements will be confusing to them, at the risk of
undermining their confidence in their wealth management bank. This risk is
compounded by the general increase in portfolios of complex financial products
involving different time horizons. The reporting is typically a decision aid
tool for the client to monitor and control and make investment decisions. One
example of such risk is that the calculated risk and performance indicators are
delivered to the client with no explanation and can, in some cases, lead to
incorrect perception due to misunderstanding of these numbers, even if
calculations are correct. A typical example could be that the client is informed
that the performance of the portfolio is 7% and in reality, the portfolio is
losing money. In this paper, we
want to address this kind of problem. As such we have identified a set of
typical pitfalls that we are faced within the profession. Then, based on a
rigorous reference to the scientific literature we have popularized these
pitfalls and employed a series of simple and didactic illustrations to provide
an appropriate toolbox in order to reduce the risk of financial reporting
misunderstanding. In order to maintain client confidence, we highlight the
importance of identifying areas of potential misunderstanding prior to
providing reports to clients and of offering clear explanations for unusual
numbers. We address the following themes: Profit and Loss Analysis, Performance
Calculation, Performance Contribution, Realized and Unrealized Profits and
Losses, and Bond Yields.