If you've ever reviewed a portfolio and asked yourself, "Is this doing well?" you are in good company. Every financial advisor runs into that question sooner or later. A smart way to answer it is to compare portfolio performance to a benchmark. This can give you a reference point for judging results.
A benchmark also acts like a report card for investments, helping you see how returns stack up against a market index or a specific segment of the market. In this article, Wealth Professional Canada will explore financial benchmarks, with definitions and examples. Scroll to the bottom and see all of the latest financial benchmark news that we've published!
Financial benchmarks are reference points used to compare performance. When it comes to investing, a benchmark can be an index used to measure how other assets or portfolios perform over time.
This can also be a blend of indexes or a basket of assets that represents a certain market or strategy. When your clients ask whether their portfolio is doing well, they are really asking how it compares with a benchmark.
For example, if a balanced client portfolio earns seven percent in a year, that number means little by itself. If a suitable benchmark earned five percent, the portfolio has done better than the benchmark. But if the benchmark earned nine percent, the result would look weak.
The benchmark turns an isolated return into a meaningful comparison. For financial advisors, benchmarks are beneficial because:
Watch this video to learn more about benchmarks:
Aiming to be an award-winning financial advisor? Make sure that you have a deep understanding of the financial benchmarks your clients rely on.
As a financial advisor, you'll face rising expectations around transparency and value. Your clients can easily view online performance charts, especially from the best robo-advisors. A good benchmark helps you:
Without a benchmark, your clients might draw their own conclusions from headlines or social media. That can increase doubts and weaken their trust in your process when markets turn.
Many benchmarks are used around the world, and each one serves a different purpose. Some focus on a large group of companies. Others are more focused on a region, sector, or style.
For instance, a market index is a common financial benchmark used by investors. The TSX Composite Index is widely used as the standard representation of the Canadian stock market.
Financial advisors can compare portfolio returns to such indexes to see if clients are outperforming or underperforming a relevant market standard. As mentioned above, financial benchmarks in this sense act as a yardstick for performance.
Some benchmarks can also be interest rate benchmarks. The Canadian Overnight Repo Rate Average (CORRA) is a benchmark designed as a transaction-based, risk-free interest rate that reflects overnight repo trades.
These rates are used for loans, bonds, and derivatives, and for calculating interest payments that reference these rates.
Here are some benchmarks used around the globe:
A benchmark rate in finance is an interest rate that serves as a standard reference for setting and comparing other interest rates. It is usually published regularly and is publicly available, so many contracts can refer to the same rate.
Lenders and investors use benchmark rates to price loans, mortgages, derivatives, and other products. They also use it to value financial assets on their balance sheets.
One example is the Bank of Canada (BOC)'s benchmark interest rate, also called the overnight or policy rate. This is the target rate for overnight borrowing between Canadian banks and strongly influences mortgage, savings, and other retail rates.
Not every index your clients see in the news is a good benchmark for their portfolio. A strong benchmark usually meets these four tests:
If a client wants long-term growth with high risk tolerance, a benchmark with a high equity allocation makes sense. If a client needs stability and income, a benchmark with more bonds fits better.
The benchmark should reflect the target asset mix you agree on with your clients. If the portfolio is 60 percent equity and 40 percent fixed income, the benchmark should follow the same structure.
A benchmark should represent a market that your clients can access through exchange-traded funds (ETFs) and mutual funds. If the benchmark includes very illiquid assets that cannot be bought at reasonable cost, the comparison becomes less useful.
Indexes from established providers are easier to explain. They have long histories, documented rules, and widely available data. That helps you show your clients performance over full market cycles and in different conditions.
Let's use a sample scenario. A retiree with expenses in Canadian dollars obviously cares about returns in Canadian dollars. If you use foreign benchmarks, you should decide whether to show them in Canadian dollars and explain the effect of currency moves.
Remember, for a benchmark to be useful, it should:
If these elements do not line up, the benchmark might tell the wrong story about performance.
Choosing benchmarks for your clients' portfolios involves these five steps:
Not every use of a benchmark is advantageous to your clients. Some approaches can harm trust or create confusion. Here are two mistakes to watch out for:
If your clients compare a conservative balanced portfolio with a pure equity index, they'd make their own process look weak in strong bull markets. They might also wonder why they're behind a headline index that holds much riskier assets.
Instead, use a benchmark that reflects the asset mix and risk level you agreed on. If a client still wants to see a high-risk index, show it as an extra line and keep the policy benchmark as the main reference.
Advising clients to switch benchmarks after a period of underperformance can look like you are moving the target. That can damage trust. Any change to benchmarks should follow a formal review, have a strong rationale, and be documented.
Good reasons to change include:
Aside from these costly mistakes, investors' portfolios can suffer when they focus on just chasing a certain index or benchmark. Watch this video to see if your clients' investment goals might need some tweaking:
Want to know the pitfalls of using broad equity benchmarks? Read this article.
Investment funds such as mutual funds and ETFs often publish benchmark comparisons in their regular reports. Your clients can find semi-annual performance reports on the fund's website or on SEDAR+. These documents usually show how the fund performed versus one or more market indexes.
Investment fund benchmarks can be beneficial in many ways such as helping you:
When you choose benchmarks that match your clients' objectives, explain them in simple terms. Also, use them consistently across your practice to give your clients a stable way to judge progress. That builds trust, supports better decisions during stressful markets, and aligns your practice with regulatory expectations.
A thoughtful benchmark process also highlights your true value. It shows that advice is not only about chasing the best index, but about building and managing a long-term plan that your clients can live with through every part of the market cycle.
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