It may be the case that one of your clients saved a significant amount of money by listening to your advice to stay in the market after a downturn. Alternatively, maybe you saved them money by telling them not to invest heavily in an overheated market. While the arguments may be intuitive to financial professionals, the magnitude of the savings won’t be apparent to an average investor. A counterfactual portfolio is one tool to demonstrate the effectiveness of your advice.
What is a counterfactual portfolio? A counterfactual portfolio is a portfolio applied to a benchmark that allows you to modify the magnitudes and timings of your investments.
For example, imagine your client’s portfolio consists of a basket of mutual funds that, when aggregated together, hold stocks and bonds at a 60/40 ratio. This client invests $10,000 per year and closely follows your investing advice.
During the financial crisis of 2008, they panic and want to sell half their portfolio, promising to reinvest the cash once the markets have calmed down. Eventually, they listen to your advice and remain in the market.
You can show them how much money they’ve saved by listening to your advice using a counterfactual portfolio and applying it to a benchmark with a 60-40 stock-bond split. As shown graphically below, using the CRM2Plus analysis software, you can set up the counterfactual portfolio to include a massive withdrawal in 2009, followed by an investment some years later.
The counterfactual panic portfolio includes a withdrawal of half of the portfolio ($100,000) in 2009, and an investment at the end of 2018 of the same amount to show the gain in your portfolio with $200,000 invested in both cases.
The chart above is a snapshot from CRM2Plus showing the fair market value of your portfolio and your counterfactual portfolio alongside your custom 60/40 benchmark. In the software you can easily slide the pointer to see your performance at any point in time, showing a clear breakdown of portfolio performance over your investment period.
You can see from the summary below that is also generated by CRM2Plus that the investor would be worse off if they had decided to sell half of their portfolio. This is shown by our counterfactual Panic Portfolio. This is the difference between an overall internal rate of return of 5.41% vs. 5.94%. It seems like an insignificant amount, but this is around $50,000 of your client’s money that you just helped save ($329,550.36 vs. $387,408.77).
This is shown by the Fair Market Value (FMV) of the 60-40 panic.
As a financial advisor, you want to show your clients the value of your advice. The use case is even more compelling using CRM2Plus as it makes discussions with clients much easier and more intuitive.
About the CRM2Plus Analysis Software
CRM2Plus is a software application for enhanced reporting that gives an advisor a graphical analysis of their client’s investing history. The purpose of the software is to allow a financial planner to demonstrate the value of their advice to clients in the clearest possible form. The portfolio history can be extracted by uploading quarterly PDF reports, or by inputting the transaction history and market values manually. Advanced features include the ability to combine multiple portfolios for a single analysis, and the ability to create a benchmark portfolio using one or more indices/ETFs to compare your portfolio against.
With CRM2Plus, you can set up counterfactuals and benchmarks to show your client’s portfolio performance in context, in a matter of a few clicks.
CRM2Plus blog 