Investopedia defines a “benchmark” as “a standard against which the performance of a security, mutual fund or investment manager can be measured.”
Financial institutions and advisors are notorious for altering their benchmarks to support returns in whatever way most conveniently illustrates that they have outperformed the market. In reality, very few advisors outperform the market over any extended length of time. It’s easy to criticize the banking and investment profession for moving the goalposts, but the truth is that many people outside the financial industry are no different, albeit they mislead themselves rather than their clients.
To the surprise of few, a massive example of manipulation was uncovered in the world’s banking system about a decade ago. For those who do not live and breathe banking regulation, I am referring to the LIBOR Scandal. This is an extremely complex topic, which has resulted in lengthy banking repercussions and regulations; however, to keep it simple, Wikipedia offers a very concise explanation of what happened:
“The Libor scandal was a series of fraudulent actions connected to the Libor (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.”
Why does this matter? The LIBOR market is hundreds of trillions of Dollars (“trillions” was not a typo). Where there’s lots of money, there’s lots of incentive to manipulate and deceive.
On a much smaller scale, when financial advisors show you returns that do not include their fees, they are also guilty of moving the goalposts. There are many reputable advisors who adhere to a fiduciary standard, putting their clients’ needs first to deliver crucial, long-term benefits to their clientele. But, there are a lot of advisors who don’t and several different ways those advisors can obfuscate their fees and the effect the fees have on a client’s returns. Here are a few:
They can show the portfolio’s performance in comparison to a stock market benchmark like the S&P 500 before their fees are included (once included, the performance often underperforms the benchmark index). Advisors can switch benchmarks from year-to-year to demonstrate outperformance in a given year, but overtime against any single benchmark, they very likely underperform. If the client owns mutual funds, those charge their own internal fees, which rarely appear in the statements clients receive.
What is worse is that these strategies often prove so effective that most people have no idea how much they are paying in fees. If you are worried that you fall into this category, ask your advisor how much you are paying in fees. Have them tell you the percent you are paying, and then ask them to provide you with a dollar amount that you paid last year in those fees. Put another way, ask them how much money they made off of you.
I have a feeling the answers you get are going to shock you.
It’s easy to look at these financial professionals – from institutionally large banks to smallest mom-and-pop financial advisors – and cast blame. And undoubtedly, malfeasance is worthy of enormous blame (and occasionally administrative or criminal penalties). Because of an inability to be content with a lot of money, they greedily move the goalposts to obtain even bigger payouts.
Here’s the problem: we do something similar in our own lives, except when we lie about money, it’s to ourselves.
Many people claim they will be happy and feel safe if they have more money than whatever they currently have saved and invested. Once they get there, they’ve already moved the goalposts and benchmarked a new number that will make them happy.
We know that once the average American earns $75,000 in income per year, they reach an objective, “optimal” level of happiness. If they earn less, they rate their level of happiness lower, and if they earn more, it doesn’t change their happiness level. Clearly, money doesn’t buy happiness indefinitely.
In fact, in a study of 2,000 millionaires, who have a net worth of at least $1 million (including many whose wealth far exceeded that threshold), each participant was asked to rate how happy they were on a scale of one to 10, and then how much more money they would need to get to 10. All the way up the income-wealth spectrum basically everyone said they needed two or three times as much money to be perfectly happy.
Think about that for a second. Unless they were a lottery winner or inherited a large sum of money, at some point previously, they presumably had half as much money as they have currently. But that study clearly shows that they were not “perfectly happy” then, now, and they won’t be in the future.
We are quick to the point the finger at malfeasance in the financial community (and rightly so). There is an undoubted moral and ethical (and sometimes legal) difference between greed at the expense of others and our own belief that we will be happier if we just have more money. In the end, however, the motivation to get more money is closely related – it comes from a place of not being satisfied with having “enough.” It’s not a big stretch to say that a little more honesty and introspection about what our benchmarks actually are would make all of us happier.