Performance validation can help true wealth managers differentiate themselves

In the ongoing bull market, droves of new retail investors have turned to equities for the first time, becoming the target of astute investors courting the prospect of excellent returns. Offerings range from brokers showcasing sky-high returns for algo trading strategies to derivatives traders who have become educators, sharing fake P&L screenshots to lure people to their courses. The Securities Exchange Board of India’s (SEBI) proposal for an independent Performance Validation Agency (PVA) to verify benefit claims is a good attempt to give such claims more credibility so investors can separate the wheat from the chaff.

SEBI has proposed that the PVA review returns submitted by registered businesses for a fee. She has proposed that the agency be formed as a subsidiary or affiliate of exchanges. Establishing an independent PVA is certainly positive for regulated players involved in portfolio management, mutual funds, research analysts and investment advisory services, and brokers offering proprietary trading strategies. So far, genuine claims from law-abiding players in these segments have been drowned out by lofty claims from dubious operators. Now legitimate players can highlight their claims by earning a seal of approval from the PVA. In order to prevent bad sales, SEBI had forbidden all registered research analysts and consulting services from passing on performance figures in their customer communication at the beginning of the year. This was a blow to the company as yield is an important factor for investors looking to choose an advisor. The creation of a PVA will allow research analysts and investment advisors to use performance data again.

However, if SEBI expects the PVA to put an end to any over-performance claims by regulated companies or to stop unregulated companies from deceiving investors, those goals are unlikely to be met. In the markets, there are always opportunities for money managers to manipulate performance data. You can use practical start and end dates for return calculations, extrapolate past returns into the future, present short-term results as permanent, or attribute random returns to skill or a “proprietary” process. SEBI has given the PVA the responsibility to ensure companies don’t pick data. However, since the PVA is compensated by market participants seeking validation, it is questionable whether it will refuse allocations based on data-splitting.

The creation of the PVA is also expected to have limited impact on unregulated companies making outlandish claims in private pitches to investors over the phone or via social media. It is the investor’s responsibility to require PVA validation in such cases and to refuse services to players who refuse to provide proof. SEBI can increase investors’ awareness of the PVA mechanism. However, for retail investors giving in to greed, this cannot be a solution.