The Evolution of the Customer Complaint - Portfolio Evaluation Tools

Since 1979 the financial services industry has been undergoing a paradigm shift from transactional business to what is called managed money. That shift has accelerated within the last few years. Most full service firms today engage in managing assets far more than in transactional business. The dramatic rise in the popularity of the Registered Investment Advisory firm (to say nothing of the hybrid firms now being created) only confirms this trend.  True transactional business is alive and well, primarily with online discount houses. There will always be a small portion of the business that will be transactional in nature but the lion’s share going forward will be in asset management.

On that basis I think we can safely expect that customer complaints and arbitrations in the future will focus on the acquisition and maintenance of an investment portfolio. This focus may be on the portfolio itself or its components. Therefore, I believe that virtually everyone associated with the financial services industry should develop a working knowledge of what can be loosely characterized as portfolio evaluation tools. If you are an investor you should also become acquainted with them as well, whether you pick your own investments or let someone else manage your assets. I have composed a short list to get you started.*

You may wish have to have some familiarity with:

Standard Deviation – in the financial services industry, a measure of systematic and unsystematic risk of an investment or portfolio.

Beta – a measure of the volatility of a stock or portfolio against a benchmark index.

R-squared – a statistical tool used to determine the relevance of Beta.

Alpha (Jensen Index) – a tool to measure the risk adjusted performance of a diversified portfolio.

Sharpe Index or Ratio – a tool to measure the risk adjusted performance of an undiversified portfolio.

Sortino Index – a modification of the Sharpe Ratio using downside variance only.

Treynor Index – another tool to measure the risk adjusted performance of a diversified portfolio.

Duration – a tool useful in measuring the volatility of bonds versus changes in interest rates.

Value at Risk - a tool that calculates the maximum loss expected (or worst case scenario) on an investment, over a given time period and given a specified degree of confidence.

You may also wish to be familiar with the interrelationships some of these tools have (e.g. R-squared and Beta).  I don’t think that you necessarily have to know how to do the actual calculations but rather have sufficient familiarity to know the appropriate circumstances for the use of a particular tool and the significance of the results of its application.

Google is a good place to start your education.

*For the brokers reading this, I know you know this material already; however, many other persons associated with your industry (including your clients) do not and should.  For those of you in the dispute resolution business these tools add new dimensions to concepts such as suitability or the nature and extent of a duty owed to the client.