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Where Prior Performance IS a Good Indicator

One of the hallmarks of compliance in the financial industry is the requirement that advisers make clear to their clients and potential clients that prior performance of a particular investment is NOT predictive or indicative of future performance. It is not wise to assume that an investment that performed well at some point in time is going to be depended upon to continue with that good performance on an ongoing basis. Too many things, most of which are out of our control or foreknowledge, may happen for us to depend on such continuation.

However, it is useful for advisers to remember that in other areas prior behavior is a strong indicator of what may occur in the future. One such area is the personality and approach of clients to their finances and related aspects of their lives. The examples – and the contrasts between approaches – are many and have a pronounced impact on how your working relationship progresses along with the client’s financial plan.

Clients who have kept to the accepted plan tend to continue in that fashion: making regular contributions to their retirement plans and investments, avoiding unsound ideas for purchases and investments, communicating changes in their lives, participating in planning and reviews, and so on. By the same token, those clients who fail to make planned contributions, call you only after they purchase that second home or shiny new annuity, keep back information about their investments and goals, are much more difficult to work with and cause both you and themselves problems.

This is not to say that there are not events in client lives that require adaptation and change of the financial plan as well as to planned inflows and outflows, but clients who understand and value your services will be working with you and not at odds. Clients in one group tend to remain there and continue in their chosen behavior. It is very unlikely that they will change – past performance is a part of who they are – and you would be foolish not to understand that. Here is where past performance may be relied on when you determine which clients to continue to serve and which to let go.


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