We hear this often, the problem is that rarely do advisors tell you how they are doing versus a benchmark - which is the only way to objectively measure their results.   Sound too complicated?   We will do these calculations for you at no cost or obligation.

First you need to get the total account balance at beginning and end of the year.   Lets' say your 12/31/2009 account balance was $567,000 and your 12/31/2010 balance was $682,000.

Second, you need the total amount that was added or subtracted to the account during that year.   Let's say you you reviewed all deposits & withdrawals and the total was a net $30K withdrawal.   (Internal buy/sells inside the account are irrelevant.)

Next is the calculation:

( (Balance year ending - Balance year beginning + amount subtracted or - amount added)/Balance year beginning)) X 100%.

For our example:  ((682,000-567,000) + 30,000)/567,000)x 100%= (145,000/567,000) X 100% = 25.5%

That is your return for the calendar year 2010.   To calculate for multiple years it is exactly the same except for one last step - divide by the number of years.  These is your "annualized compound return.  Do not separately calculate each year and average the results.  Average annual returns DO NOT provide an honest assessment of performance.  (Call us if questions!)

Let say on 1/1/2007 your account was $750,000.    In 2007, 2008, 2009 and 2010, there was a total $100,000 subtracted from the account and you ended up at $682,000.  Using the formula:

((682,000-750,000) + 100,000)/400,000 x 100 = 8% (over the entire 4 years)  Now divide by 4 years and you get 2%/year annualized compound return across the 4 years of 2007-2010.    Doesn't sound so hot.  Read on.

So far you have a number for performance but no idea if it's good performance.

Next Step:  S&P500 Benchmark Calculation

You can look up the S&P 500 different ways.    Here's one way. 

1. Go to finance.yahoo.com
2. In the "get quotes" at top, type in: ^GSPC   Click on "get quotes"
3. On left side of screen click on "historical prices"
4. Insert the dates you of the time period you want and note those prices.
5. Note: you can repeat the process for Dow Jones (^DJI) and NASDAQ (^IXIC) indexes if you want to see more than the S&P500 comparison.

For our example for SP500 index we got 12/31/2010: 1257.64 and for 12/29/2006: 1418.30

 To calculate return for all 4 years:    (1257.63-1418.30)/1418.30 X100% = -11.33% and divide by 4 years =          -2.83% annualized compound return over '07, '08, '09, '10. 

Your annualized return of +2% beat the SP500 by nearly 5% per year.   That's quite good although 4 years is a very brief time to look at since there is a lot of statistical noise in the stock market.  If your advisor can achieve the SP500 over the long haul, they are doing pretty well for you.

A note about your fiduciary duty and fees

We think it is wise for the leaders of a family/business to think of themselves as their own fiduciaries.  A fiduciary has responsibility to understand fees and then assess if the fees are reasonable for services received.

Step 1:  What are the fees?  Before you compare fees, you first have full disclosure.   Sadly, often you do not have full disclosure.  Banks, brokerages and insurance companies are all NON-fiduciaries and sometimes even the salesperson to whom you are speaking cannot explain the fees.   If fees are not fully disclosed, you will likely have the impression that fees are lower than they really are.    So then you may incorrectly conclude they have lower fees when in fact they are more expensive and the way the fees are paid, they create conflicts-of-interest.    You may not be able to get past Step 1 if you are working with a non-fiduciary.

Step 2:  Once you have full disclosure - if you can get it - then you need to understand services received for that fee.  If you have all that, now you can finally make a reasonable assessment.

Be a good fiduciary to yourself - you deserve it!