Wealth Management Vocabulary Terms For Investment Performance

When you receive your investment statement or you talk to someone who works on investments, you will see or hear terms like “client account,” “fund,” “benchmark,” “attribution,” and/or a “composite.”  Here, I will address this vocabulary. 

1) Client Account

If you have a brokerage account or a 401K that holds stocks, bonds, and funds, the aggregated performance of these investments is referred to as your “client account” performance. It may also be referred to as a “separate account” or a “portfolio.”
Example 1: Sally has invested in 3 stocks and 2 bonds. Her account performance is how well all of the 3 stocks and 2 bonds are doing together
Example 2: Bob’s Clam Shack Company has extra money and wants to invest it. They hire an investment manager who invests in 10 mutual funds, 5 ETFs, and 7 stocks.  Their account’s performance is the combined performance of the mutual funds, ETFs and stocks together.

 

2) Client Composite

Sometimes you will have multiple accounts at an investment company (e.g., you have a stock account and a bond account Fidelity), or your family members will each have their own account managed separately. If you want to see all of these accounts grouped together, it will be aggregated and called a client or relationship composite.  I have also seen it called a “master account,” “aggregate account,” or “parent account.”
Example 1: Jim hires Investment Manager A. Manager A finds a professional that is good at picking stocks and a different professional good at picking bonds.  He gives some of Jim’s money to the stock manager and some to the bond manager.  The composite of these two accounts is Jim’s client composite.
Example 2: Tom and Michelle Smith have two daughters. The family opens 4 separate accounts with a manager, but wants to see how their family is doing overall.  The performance for the Smith family will be called a relationship composite.

 

3) Fund or Pooled Vehicle

A big “shared account” that different clients can invest in.
Example 1: An investment company knows how to pick good stocks. Rather than set up separate client accounts that invest in the same stocks, they create one big account that invests in those stocks.  Clients can buy part of the fund and therefore be invested in those stocks through the fund.
Example 2: An investment company creates a fund that intends to mimic a market like the US stock market at a low cost. These are typically structured as an “Exchange Traded Fund.”

 

4) Strategy/Composite

Let’s say you’re looking to hire an investment manager. If you’re smart (which you are for reading this site!) you will ask the manager “How did you do with other people’s money?  Show me the performance for the strategy I would invest in!” The firm would hopefully show you a composite of how all their clients have performed.
As an aside, to protect the investor, the industry has put together guidelines of what firms should show to prospective clients.  These guidelines are called the “Global Investment Performance Standards,” also known as the GIPS standards.  They set rules that the firm must include all accounts, have to show all time periods, must calculate the return in a certain way, must disclose fees, etc.  They prevent a firm from picking their best account and claiming “look, we made 15%.”   Well, maybe they did earn one client 15%, but they also have lost 20% in a different account.
 

5) Benchmarks

Have you ever turned on the TV and heard that “S&P has gained 200 points” or the “FTSE has gained 100 points?” These are actually referred to as “benchmarks” or “indices” when measuring performance.  S&P, FTSE, MSCI, Barclays are just some of the companies that are dedicated to creating these benchmarks and indices so that we can monitor how the markets are doing.
 
For measuring performance on your investments, these benchmarks and indices are used to see how well or poorly you are doing.  For example, if your manager says you made 8%!  Well, that is good if the benchmark is 2% but that is pretty bad if the benchmark is up 30%!
 

6) Attribution

If your manager says your account earned 8% and the benchmark earned 6%, that means your “excess return” is 2%. If you wanted to know what decisions make up that 2%, and attribution will tell you that – maybe the firm put more money into a better performing sector, or maybe picked a winning stock or bond, or maybe they made a good bet on interest rates. 
The attribution will say something like “1.5% out of the 2% outperformance was due to holding more of Company A than the general market holds.”  Or maybe it will say “1% of the 2% outperformance was due to holding more bonds than the benchmark holds.”  Basically, it will explain why you did well or poor compared to the benchmark.
 
Hope this has helped you be armed with information, either when reading your investment statement or meeting with professionals in the industry!  Let me know if there is anything missing or you need clarification on any of the above points.  I would LOVE to hear from you.
 

Leave a Reply

*
*

Required fields are marked *
Insert math as
Block
Inline
Additional settings
Formula color
Text color
#333333
Type math using LaTeX
Preview
\({}\)
Nothing to preview
Insert