The Adhesion Wealth® Platform has been constructed as a flexible performance measurement tool that permits advisors to review return data within a variety of different dimensions. Performance can be viewed organizationally – analyzing data at the firm, branch or advisor level; or alternatively, users may “drill down” to get an account or household view of performance. Within these contexts, observations can be cross analyzed into a variety of categories, which include Asset, Asset Class, Asset Category, Asset Type, Asset, Sector, Subsector and Manager / Sleeve. We refer to these as performance dimensions.
A Simple Case
Looking at a very straight-forward example of performance, consider a new client who invests $100,000 with you on Jan 1. For the first half of the month the portfolio appreciated by 20%, valuating at $120,000 on Jan 15th. The second half of the month wasn’t very kind, and the investment strategy gave back nearly 17%, bringing the portfolio back to its original valuation of $100,000. Since there were no contributions or distributions to this portfolio, all widely accepted performance methodologies will yield the same results: a 0% return over the month. Regardless of the volatile swings of the portfolio returns intra-month, the account is worth exactly the same as when it was initially handed over to the advisor.
On January 1, a new client decides to sample your investment services and commits $10,000 to your program. For the first half of the month, the markets do not perform well, and the strategy declines 5.75%, turning the $10,000 into $9,425. Nevertheless, you outperformed the agreed-upon benchmark and are being rewarded with another $100,000 account to manage.
The back half of the month is much better, and the portfolio appreciates 6.25%, growing the investment to $117,120.
For the month, counteracting the effect of cash flows, the investment strategy had a time-weighted return of .144%. In other words, had the whole $110,000 been invested on day-one, the portfolio would have earned $158. As a manager, the investments you made produced what is effectively a break-even return. However, because of the timing of the cash flows (which was outside of the control of the advisor), the cash invested in the back half of the month was exposed to a greater return period and thus the client earned $7,120 over the period.
The inverse condition often occurs and is usually a more difficult conversation to field: When an advisor reports a positive return, however the portfolio is worth less than the net of all the contributions. Obviously, this occurs when a small value is managed during an up market, and a significantly larger amount is managed during a down market.
As an example, consider the following scenario:
On January 1, another client deposits $1 million with your firm. The market then proceeds to correct immediately following the large deposit and within a few weeks the portfolio has declined by 5.75%, reducing the portfolio to $942,500. The client then withdraws $850,000, so on the 16th, the portfolio is now valued at $92,500. The market stages a considerable recovery during the back half of the month and generates a 6.16% return, resulting in a portfolio value of $98,200.
Over the course of the entire month the advisor managed this portfolio, the recommended investment strategy effectively yielded a ‘break-even’ return (+.058%). Nevertheless, it’s challenging to explain this to a client with a net contribution of $150,000 ($1,000,000 - $850,000) and a current portfolio value of $98,200.
Explaining these results requires one look under the hood of the computations to understand what makes them tick.
The Adhesion Wealth Platform is considered a “true” time weighted performance system. That is, every single day, a return computation is generated for each and every performance dimension. Cash flows, which are effectively transactional activity that should not count towards performance (such as deposits, withdraws, etc.) are backed out to compare daily market values on an apples-to-apples basis. In addition, the Adhesion Wealth Platform goes a step further to identify inflows vs. outflows and provide each with a distinct daily observation. Inflows are treated as beginning-of-day flows and outflows are treated as end-of-day flows.
Each sub-period (i) represents a single day, and all market values are inclusive of any accrued income. This assumes all gains (or losses) that day are based on the total assets present in the account at the beginning of the day, prior to the outflow.
Each sub-period (i) represents a single day, and all market values are inclusive of any accrued income. This assumes all gains (or losses) that day are based on the assets present in the account at the beginning of the day, along with the inflow.
Return observations for each daily dimension are then generated and geometrically chain-linked together for any range of dates requested by the user.
RTR is the requested period’s total return and R1, R2… Rn are the sub-period (aka daily) returns for periods 1 through n, respectively.
IMPORTANT INFORMATION
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting Adhesion at 800-664-5345.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation.
It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.
Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.
The exclusion of investments based on industry or ESG factors reduces the number of available investment choices and can impact overall investment performance.
Adhesion, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission.
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7688821.1 | 05/2025 | 05/30/2027