My Start as a Broker

“Welcome to Prudential Securities; here is your desk, good luck.” That was my abrupt introduction to the second brokerage firm I worked for. I was not yet 30 years old. I had trained elsewhere, so I wasn't coming in completely inexperienced, but I soon found out that the brand-new reps got only a little more training than I did—basically, just enough to help them study for and pass the Series 7 exam, something most of them did in three months.

I joined Prudential Securities in 1988 as a vice president. Functionally, my position was financial advisor, responsible for financial planning and all investment advice for my 200 clients.

It was a lot of responsibility. If you, the client, are healthy, your financial advisor is more important than any other professional in your life. Even if you're not, he or she is more important than your accountant, architect, attorney, dentist, mortgage banker, or insurance rep.

Your financial advisor's advice will determine what kind of college your children attend. Your financial advisor's advice will determine not only when you will retire, but also your standard of living in retirement. Will you eat at home every night, or can you afford to eat out? Will you be able to travel? Will you get the best medical care?

Despite the importance of the position, financial advisors are more often than not uneducated in their field. Typically, even today, it takes just a few months to get a license. Given how important a financial advisor is, the position should require more than a few months of training.

Financial advising is the youngest of professions—if we can call it a profession at all. Until May 1, 1975, commissions were the standard form of payment. That date is called May Day in the brokerage world because that is when fixed commissions were relaxed, and an advisor's performance actually started to influence his or her earnings. Until May Day, if you wanted to buy 100 shares of IBM, you were charged the same commission wherever you went. Stock brokers sold shares and executed trades; there was no incentive to add value by including financial advice.

Philip Loomis, Commissioner of the Securities Exchange Commission, commented in a June 1975 speech that prior to May Day, “the New York Stock Exchange established the rate…some years ago, the studies on which these rates were based included a fairly generous allowance for the compensation of salesmen who were expected to generate such orders” (Loomis 1975). Rates were deregulated, he said, because a separate market had developed, away from the New York Stock Exchange, which the Exchange, “in its more uncharitable moments, referred to (this market) as a ‘parasite.’” In other words, market forces finally forced the SEC to deregulate.

These market forces moved at a glacial pace. When I got my license in 1984, commissions were generally 2% or more for stocks and up to 3% for bonds.

Investors did not even have the choice of paying advisors a fee (as a percentage of assets or hourly). I could even earn a commission of as much as 8.5% on certain products. It was a salesman's world.

As part of my initial training, I spent two months in Manhattan with new brokers from all over the country. I use the term “training” loosely. We were told to cold call and were given help finding lists of prospective customers. We sat in a very large “bullpen,” one cubicle after the next lined up in a room with close to 100 advisors. Like the brokerage firm in the movie Wall Street, the atmosphere was far from professional.

When I sold my first big investment ($50,000, earning a $2,500 commission), the training manager came over and stood on my desk, wing-tipped shoes and all, announcing the sale to a loud ovation. He later brought me a chocolate cake.

Meanwhile, the financial planning profession had gotten off to a slow start. Even in 1984, nine years after May Day, we were nearly all brokers or salesmen, functionally, and few of us were giving consideration to planning or something approaching a professional relationship with our clients. The newly formed International Association of Financial Planners graduated its first class of 42 students in 1973 (Brandon 2009), but the certification did not gain momentum until much later. As told in The History of Financial Planning, “before financial planners could help the public, they had to help themselves create a credible profession. They faced substantial hurdles.”

Among those hurdles were a lack of university studies and classes in the field, a lack of funding, and, until May Day 1975, a total lack of interest from stock brokers due to a lack of incentives. May Day would unleash competitive forces upon Wall Street, slowly forcing brokers to become something other than stock salesmen.

My career began nine years after May Day in 1984 and the office I started in resembled a scene right out of the 1987 movie Wall Street. Merrill's Staten Island office had four veteran producers and about a dozen of us new guys and one woman. We spent the day cold-calling, selling product. Selling anything with a commission of less than 4% simply didn't interest us; we had to make quotas. The quotas were not based on the number of clients or even assets that were brought in—they were based on commissions.

Because the odds were not with us when it came to making our quotas, most of us would be let go within five years. Though I had a degree in finance, that was unusual, and in the end, irrelevant. I was hired because of my success as a door-to-door salesman the summer before, between my junior and senior years at college. A successful sales record in another industry was the typical entree.

We received little support. I shared a sales assistant with six or seven other advisors. I shared a Quotron machine with another advisor. From this device, I could get quotes and client positions but little else. Posting of cost basis was done daily, into a written record, which was called our “book” of business. I can remember my manager inspecting our books, and if we did not post in a timely fashion, he would dump the loose-leaf pages all over the floor.

Pressure to Generate Business

We were under tremendous pressure. Once a week, the manager would send out a list with each of our names and our total commissions for the week. Most of us were young and worked long hours. Our motivation was simple: commissions, so we could keep our jobs. There was certainly nothing resembling professionalism. And none of us were doing any financial planning.

Even my stock picks came from analysts' recommendations. I was 22 years old. I did not know how to construct a stock portfolio and no training into how was offered. I had to pick from a large list of “favorites” from the analysts. As time went by, I started to track the analysts' picks. Returns were not good, and worse, it seemed like there was too much activity. Sell recommendations were too frequent, which was good for commissions but not for client returns. Eventually, training programs were offered, but they were certainly not required and most did not take them.

Still, outside forces were gradually forcing change upon us. May Day was having an effect—all of us were losing clients to discount brokers, something that did not exist until 1975. In 1975, the so-called wirehouses, such as Prudential, had a 100% market share of investments.¹ The wirehouses resisted change—but to a certain extent, we, the brokers, did not. Slowly but surely, we started taking courses to become a Certified Financial Planner^TM (CFP^©) or Chartered Financial Consultant (ChFC), despite the wirehouses' absence of leadership, and despite any direct financial incentives.

Donald Priti, president of financial publisher Arthur Weisenberger and advisor to IAFP (the International Association of Financial Planners), recalled that the early years were “difficult…The existing financial companies wouldn't return our phone calls, much less see us” (Brandon 2009).

But if the companies could not see a need to change, advisors could. We were losing business to discounters. To earn a living, we needed to be more than salespeople, because the products we were selling were becoming easier and easier for customers to invest in without paying us commissions. We did not want to call ourselves brokers; we wanted to be known as financial advisors.

Further, those of us who wanted to be part of the newest profession wanted to distance ourselves from salespeople, especially the worst of them. At Prudential, the welcome was short and training even shorter. The manager's office had a revolving door. In my seven years there, I had seven different managers. And with such turnover, scrutiny of the sales force was lacking.

This is where I learned firsthand how bad things could be for clients when they hired the wrong advisor. Though it is hard for one advisor to judge another's stewardship of client money, there is an opportunity to see another advisor's work when they leave. The accounts from departing advisors are reassigned to the remaining advisors. Often, I was startled to find out how clients had been treated.

My first experience getting someone else's reassigned accounts were those from Jeff, an advisor I knew from playing softball. Jeff had a gambling problem. While he had forsaken the casinos, he made his accounts his own little gamble. He would drop a bunch of trades in client accounts, without authorization. He was gambling that they would be profitable and would use this line: “The trade was a mistake but since it worked out, do you want me to leave it in the account?” Jeff's incentive for this scheme was financial—the commissions.

It was the 1990s, and stocks were going up, so Jeff lasted a while, but when Reebok cratered after he had gambled with a bunch of Reebok buys (unsolicited and unauthorized as was his scheme), he was out. When the accounts were assigned to me, I was told to not get involved with the unsolicited trades. The firm did not want to automatically make the client whole—they would do so only if forced and they did not want me forcing the issue (taking the clients' side).

This was not the first nor last time I was advised against helping clients.

The most shocking experience I had with reassigned accounts was with those from Mike, who had done more damage than to just place a few unauthorized trades. Mike was not a friend to any of us. He was so absolute in not making eye contact that it was difficult to have even the shortest conversation with him. And he spoke very softly.

But Mike messed up some lives in a very loud way. He concocted a means to make huge commissions without bringing in any new clients or even churning accounts, the most common type of client abuse. Mike was more inventive than other rogue brokers that I had met.

Why You Don't Invest with Borrowed Money

Mike had his clients margin (borrow) against current positions to buy more commissionable product. While it is possible that margin can increase returns if the assets make more than the interest charged, it magnifies the risk as well as the commissions. Worse, he convinced clients that their investments were worth the gross value, not the net value after deducting the amount borrowed and interest paid. That is, clients consented to borrow against their investments to buy more funds. But that created a gross value (one that did not net out the debt) and a net value (a value with the debt netted out). Mike convinced clients that they could effectively ignore the debt.

After he was fired, some of his clients were reassigned to me. One of them was a retired priest who had invested his life savings. Mike had mismanaged the investments because he was in it for the commissions. The priest's investments had declined and he didn't even know it; he thought that his investments were worth the gross value.

I explained to the priest that there was one number, the larger number that was the gross value, and another number, which was less, because the debt was subtracted out. When he realized his investments were only worth the smaller number, he was devastated. After our meeting was over, I saw him walking in circles outside the building. Watching the priest helped me realize that I wanted to be entirely different than Mike.

I learned that Mike found another brokerage firm to hire him because of his ability to generate commissions, which are shared by the brokerage firm.

Over time, I have realized that lonely, elderly people were the most vulnerable to the likes of Mike. Mike would visit and spend time, and this encouraged the clients to look the other way on questionable trades. Or perhaps they liked Mike so much for spending time with them that they were blind to his transgressions.

Many of us took steps to differentiate ourselves from advisors like Mike. But there was certainly no wirehouse requirement to move in this direction. I spent another 10 years at wirehouses, admittedly unable to say no to the “prestige” they offered in the industry. I believed the scorn they heaped on advisors who didn't work for wirehouses. And I should have been more suspicious after each of the two wirehouses I worked at after Prudential greeted me the same way on my first day: “Here is your desk. Good luck.”

Face it; neither brokers nor financial advisors are saints. We go to work to get paid like everyone else. But over time, I came to realize that if I worried about more about my clients' welfare than I worried about making money, the money would take care of itself.

But that was not the culture at the wirehouses. In fact, there was no culture at all. Shouldn't there have been some effort to create a culture? There may have been a fancy advertising slogan like “we make money the old fashioned way—we earn it” but it was an empty slogan. If there was to be a culture of “earning” it, there should have been policy or training that made it true. There wasn't. There was nothing that these firms did, policy wise or through training that was taught to new hires, regardless of their prior experience.

For my own part, I accepted large bonus checks with each of my moves, before leaving the wirehouse environment almost 10 years ago. (The practice of paying these bonuses is still common. The wirehouses pay up large bonuses to attract veterans with a large list of clients.)

It took me 21 years to leave the wirehouse environment and in the early years after I left, I frequently questioned myself—why did it take so long? The principle reason is that the alternatives were not very attractive. It took a long time for companies like Charles Schwab, Fidelity, Raymond James, and LPL Financial to offer financial advisors a viable alternative to wirehouses.

Has the Industry Made Any Progress?

Is the commissioned broker still the norm? I go back to The History of Financial Planning for the answer. They asked the question in 2009: “Forty years after financial planning's inception, had the dream of a dream of a profession been realized? Was financial planning on par with the traditional professions of law, medicine, and theology? Was it in fact ‘the first new profession in four hundred years’”? (Brandon 2009)

Before I get to their answer, consider again that the financial-planning profession can both help people more and hurt them more than other professions, save your doctor. The financial advisor's recommendations will determine how early you can retire, the quality of life that you have in retirement—and even whether you'll outlive your money.

When I discuss this at conferences with my peers, especially when I point out how important it is to give good investment advice, I am often asked, somewhat defensively, isn't it the responsibility of the brokerage firm to invest well, and not the advisor?

To some extent, yes, the financial advisor normally passes on the responsibility of security selection (choosing which specific bond or stock to buy) to a portfolio manager. Security selection, however, is the least important aspect of investing. Much more significant is asset allocation—deciding how much to put into stocks and how to put into bonds, whether a mutual fund is recommended or portfolio of stocks—and that's a financial advisor's job. It's the financial advisor who interviews the client to determine how much risk is appropriate, not the fund manager. The financial advisor plays that most important role in guiding the client to the appropriate amount of risk.

In 1986, an award-winning article by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower determined that asset allocation was responsible for 93% of a portfolio's return (Brinson 1995). The article received much attention and even debate, but the basic concept is really not debatable. How much an investor puts in stocks rather than bonds is far more important than which stocks or which bonds. How much money goes into junk bonds instead of safer bonds is more important than which highly leveraged or AAA-rated ones are chosen.

The financial advisor and the client jointly, or in many cases, the financial advisor alone, determines how much money to put in bonds, how much to put in junk bonds, how much to put in stocks or how much to put in foreign stocks.

The asset allocator answers all of the important questions: Should the client buy small-company stocks or large-company stocks? Should the client use index funds? Which investments should go into an Individual Retirement Account and which should go into the taxable account? If a client needs money, where should it be taken from? Where should new deposits go? These are asset allocation decisions, and they are made between the client and the advisor, not by the fund manager or someone in the home office of a brokerage firm. The advisor can and usually does hire someone else to pick the stocks or bonds, but the crucial asset allocation decisions are made by the advisor and the client.

The advisor therefore needs to be very qualified and should put forth every effort to make sure the asset allocation decisions are well thought out and researched. Have financial advisors realized this, accepted the increased and large responsibility, and advanced past their commission-based roots? Are financial advisors becoming professional in their approach to investing?

The evidence is mixed. A Journal of Financial Planning article, “Reducing Wealth Volatility: The Value of Financial Advice as Measured by Zeta,” studied results from a US Bureau of Labor Statistics survey (Grable 2014). Respondents were repeatedly interviewed over many years, but in 2006, a retirement module was added to the survey in which questions were asked about their wealth.

In the retirement module, respondents were asked whether or not they had asked a financial advisor for help. Wealth was measured again in 2007 and 2009, providing an opportunity to compare the change in wealth of those who had gotten help from a financial advisor and those who had not. And the period covered the Great Recession.

The conclusion? Those who had met with a financial advisor increased their wealth by a cumulative 3.31% over a four-year period as compared to those who had not met with an advisor. Helpful, but not significantly so.

Dalbar, a research firm, releases a study each year showing investor results as compared to various indices. In one of those studies (Dalbar 2006), Dalbar compared the results of those who had an advisor to the results of those who did not. Similar to the survey by the Department of Labor, results were better for those who had an advisor, but not by much.

Neither the Journal article nor the Dalbar study tries to differentiate between the results of advisors who were commissioned-based or sales-oriented and those who might be considered professionals. It would be interesting to see investment results comparing those two sets of advisors.

Is Financial Advisory a Profession?

The History of Financial Planning is asking whether financial advisors attained the status of professionals.

The authors conclude that, well, there's really no conclusion, at least not yet. Even within the ranks of financial advisors, opinion remains divided. But they make an interesting point that it will not be the financial advisors who will ultimately answer this question, or even the government. “Bill Carter, who served on national boards of several financial-planning organizations in the 1980s and 1990s, spoke for many when he observed in 2008, ‘We are in the baby stages of being a profession. But we don't determine if we are a profession. The public determines it’” (Brandon 2009).

That sounds good, but I'm just not sure it's right. So let me try to answer the question throughout the rest of this chapter.

My experience is that the public struggles with the question. I have worked with thousands of families as a financial advisor, for more than 30 years. In conducting initial interviews, I have found that people who ask the right questions are rare. People can judge the service level that they are getting, and that often becomes the only basis for whether they choose and stay with an advisor. Let me give you an example to illustrate my point.

Pat was a broker from the second wirehouse I worked at, what I call the rogue broker office. Pat was one of the most enjoyable people I have ever had the chance to be around. He laughed often, complemented people at every chance, remembered names, and liked to have fun. And his clients also liked him because he returned phone calls and called them frequently.

But for all his great qualities, Pat was not a hard worker, and he did not have enough clients because he did not put in much effort to recruit more. Like most brokers at that time, his income was based on commissions. He could increase his income if he did more trades.

Making a trade for a client strictly for the purpose of generating a commission is called churning. Clients may struggle deciding the difference between churning and making a legitimate trade. Where is the line drawn between the two?

In Pat's case, he ventured well into the realm of illegality because many of his trades were put through without the knowledge of his clients. It is clearly illegal to put in a commissioned trade without client authorization. That he was doing this was not obvious to me until after Pat left and some of his accounts were assigned to me. (Pat left before being fired and ended up doing time after he promoted a Ponzi scheme in his next job.)

In looking at Pat's account records, I could see frequent trading. The clients told me that they had not authorized the trades. Since I knew that confirmations would have been mailed, I asked them why they did not complain once they saw the confirmations. They said that because they trusted Pat, they felt he was doing this to help them.

Most statements do not show returns. They usually show the results of specific holdings, and how much the investments are up or down since the client bought them, but the statements usually do not show the returns. Worse, many statements show how an account is growing but include deposits as part of the “growth.”

In Pat's case, it would have made it easier for clients to see if in fact Pat was working on their behalf if they could have seen the investment returns for the account. Showing returns on the statement make it harder for the advisor to twist the truth. If there are deposits and withdrawals, most clients cannot calculate the returns. If the returns aren't known, the advisor can dance around the facts by pointing to the winners and not the losers, for example.

More surprising to me, when I interviewed Pat's clients that were reassigned to me, none of them had an interest in pursuing any resolution of the losses from Pat's bad trades because, they told me, Pat was such a nice guy.

To the extent that clients hire us because we are nice guys or women, we are not professionals. Even if we are good at returning phone calls, making clients laugh, or are nice enough to send birthday cards, we are only professionals if we have pursued the knowledge we need to help clients with asset allocation and other important investment decisions. Being nice to the clients and being likeable are certainly desirable traits, and probably good for business, but those are not the traits that make us professionals.

What about the government? Does the government have an opinion as to whether we are professionals? Again, quoting from The History of Financial Planning, “Law professor Jonathan Macey told the Journal of Financial Planning in 2001, ‘They don't. They're very compartmentalized—securities regulators worry about securities and insurance regulators worry about insurance. They don't really know what financial planning is and they certainly don't view it as this holistic profession like those practicing do’” (Brandon 2009).

The good news here is that since Macey made that quote, there has been change from the government, along the lines of helping investors. While the government has not demanded that financial advisors become professionals by requiring more education, they have moved to differentiate between those advisors who are salespeople and those who meet a fiduciary standard.

Why You Want a Fiduciary

The fiduciary standard is a higher standard than that which is applied to commissioned salesmen. Commissioned salesmen merely must be truthful. The fiduciary standard requires that the advisor do what is in the best interests of the client, even if it means the advisor doesn't maximize his or her own earnings.

While commissioned salesmen do not have to meet the fiduciary standard, many of us do. For example, those who use the CFP^® certification and charge a fee instead of a commission, must meet the fiduciary standard. This is how the CFP^® Board puts it: “All CFP^® professionals who provide financial planning services will be held to the duty of care of a fiduciary.” (CFP Board) For the discerning public, a CFP^® certification is helpful in discriminating between a salesman and a professional, but it is not the only professional designation for financial advisors—those are covered later at the end of this chapter.

Clearly one would rather work in a relationship defined by the fiduciary standard than one with only a standard of truthfulness. If Carter's observation that only the public can decide whether financial advisors have created a new profession is true, then certainly the advisor meeting the fiduciary standard is closer to that ideal.

The fiduciary standard is causing quite a stir within the profession. The Securities and Exchange Commission and the US Department of Labor are currently pushing for the fiduciary standard to be applied more frequently. Mary Jo White, the current head of the SEC, speaking at an industry conference, said it was her “personal view” the SEC should act to implement “uniform fiduciary” standards among the brokers and other financial professionals overseen by the agency (Baer 2015).

The Department of Labor is pushing to have the fiduciary standard applied to all qualified pension plans, which it regulates. To which the CFP^® Board responded: “As a fervent advocate for strong fiduciary standards in the provision of investment advice, the CFP^® Board is pleased to see the White House and Department of Labor take a critical step toward protecting American investors and their retirement savings through a fiduciary rule.”

There are those within the industry fighting the standard, however. Many of us feel that there are situations where the fiduciary rule should not apply. Clients may insist on a commission-based structure, where they pay a commission and not a fee, because trades are infrequent. In those relationships, there may be years where there are no commissions. It would not seem fair to require a higher standard to that type of relationship because it is not a relationship between a professional and a client; rather, it is a relationship between a salesman and a customer.

For anyone who wants to have an ongoing relationship with a financial advisor, it seems to be common sense that they would like that financial advisor to act in accordance with the higher standard, the fiduciary standard.

For that part of my career that I was a wirehouse employee, I was encouraged to be a salesman and not a planner. Not only were there the lists ranking advisors' revenues, but we were encouraged to sell investment products that were more lucrative to the firm. In one instance, I was scolded by the firm's wholesaler (salesperson selling mutual funds) for not selling more profitable (to the brokerage firm) mutual funds.

I ignored the wholesaler, but shortly after that I was called into New York headquarters. The regional manager asked me why I wasn't selling the more profitable funds. I answered that I thought there was a conflict of interest because my compensation was higher for those funds. He got very angry and told me that I was not a team player.

Being a team player is a conflicting idea. All compensation should be aligned so that it is in the interests of the client. The team concept should not apply to loyalty between firm and employee; it should support a structure where the team's interests are in making happy clients.

Most of my clients have told us that they would like us to meet the fiduciary standard. The fiduciary standard is a desirable trait in the relationship between client and financial advisor. A financial advisor who accepts the fiduciary standard is closer to the “professional” ideal. Are there other traits that the public can look for to help distinguish between a professional financial advisor and a nonprofessional financial advisor?

Or put another way, how can you make sure the financial advisor is qualified, especially given the importance of their role in your life?

Good service and having a nice person as a financial advisor are good traits but those are traits most people can discern for themselves. What are the traits that are not so obvious?

This is a list of questions that I would recommend in conducting interviews with financial advisors, and in order of importance:

1. How many years of experience do you have?
2. What is the fee structure?
3. What designations do you have and what have you done to educate yourself in your profession? (A full list of designations is provided at the end of the chapter.)
4. What is your investment process?
5. Do you offer financial planning?
6. Do you offer reviews?
7. Who is your custody firm, and does it offer online access?
8. Does the custody firm calculate and make available investment returns?
9. Do you have any complaints on your CRD? If yes, what for?
10. How old are you?
11. Do you have a website?
12. What is your minimum fee or asset level?

Some of the questions, like the first one, are clear. But some require explanation:

More Things to Consider When You Choose Your Advisor

Assets are the major consideration for advisors because unless fees are calculated on an hourly basis, there will be a strong correlation between the amount of assets under management (AUM) and fees. Clients with a small amount of assets, less than $200,000, may find it difficult to find an advisor. Their choice may be between an inexperienced advisor or perhaps one with a questionable record. One possible solution would be to work with a junior advisor working under the supervision of a mentor.

Finding an advisor is difficult for people. For me, it is like finding a doctor. I don't know medicine, so what's the best way to figure out the difference between a good doctor and a bad doctor? I mentioned this on my last visit to my dentist, and the hygienist laughed and told me how right I was. She said she often gets new patients who come in after they have moved or maybe when their doctor retires. The new patients will often brag about their dentist, but when she looks inside their mouths, she often sees bad fillings or overlooked issues.

Knowing, then, that people see what they want to see, how can you find an advisor capable of doing a sustainably good job once you've hired him or her? The questions listed earlier should help you get going. And common sense can guide you in determining your satisfaction with the level of service, and probably whether the financial planning issues are answered. But what about the investment advice?

Sadly, the simple answers don't work. Simplest of all is to compare your portfolio returns to a popular stock index like the Dow Jones Industrial Average or the Standard & Poor's 500 (S&P 500). But unless the portfolio is all stocks, this is a mismatch of asset classes. It is not even apples and oranges, it is more like apples and celery. Your portfolio probably has cash, bonds, foreign stocks, and maybe alternative investments such as REITs. Both the Dow Jones and the S&P 500 are pure stock indices.

Less simple and somewhat logical would be to construct a combination of benchmarks to mirror your portfolio. Let's say you have half stocks and half bonds. You could use an average of the S&P 500 and a popular bond index, the Barclays Aggregate Bond Index.

But even this more sophisticated approach has two big flaws. The first is that your portfolio, as noted above, probably has more than just US stocks and US bonds in it, making the approach too geographically simplistic. The second, more important flaw is that this method misses the forest for the trees, and ignores the most important element of the portfolio return—who chose the mix, the allocation of stocks and bonds (and alternatives), and how do you evaluate that decision?

A further problem in mixing benchmarks is that it leads to a moving of the target to match the result. That is, the advisor can find a benchmark that compares well with the results. The advisor can paint the target around the arrow.

Even Warren Buffett has been guilty of this. For many years, Mr. Buffett, the legendary CEO of Berkshire Hathaway, has told investors that for his company, investors should look at the book value to properly evaluate his performance. If the book value goes up more than the stock market, he says he is doing a good job.

After struggling to match the returns of the most commonly used stock market benchmark, the S&P 500, in his most recent annual report, Mr. Buffett has switched the benchmark, suggesting that the return of Berkshire Hathaway stock should be compared to the S&P 500 (Berkshire Hathaway). This is because Berkshire's book value is no longer keeping up with the benchmark, but the stock price, something Berkshire's managers have no control over, is keeping up. Conveniently for him, he switched.

While book value may have been a good measurement for Berkshire Hathaway, for investors, it's a moot point; there is no such measure for the portfolio. Investors need to worry about the returns of their portfolio and should start by demanding the reporting of the returns. If an investor is going to invest in a portfolio that is 100% US stocks, the S&P 500 is not a bad benchmark. But how can investors evaluate their returns if they have a mix of different types of investments?