Our surveys show two major areas of investor confusion: First, they are baffled by the various titles of, and differences between, financial advisors. What, for instance, are the key differences between financial planners, investment advisors, money managers and sales representatives? See: Why you should pay attention to proliferating advisor credentials.

A second source of confusion concerns advisors’ track records. Namely, why some financial professionals have records and others do not. There are three primary types of financial professionals who market financial advice, products and services. See: The 4 biggest investment performance myths — and how they can torpedo advisor-client trust.

First, the money managers who provide the same service to multiple clients. Investors expect them to publish track records that document their results.

Then there are financial advisors (RIAs and IARs). Their services vary by client, so they do not provide track records.

And third, there are sales representatives (Series 6 and 7) who are not licensed to provide ongoing services, so they cannot produce track records.

Most money managers have track records and sales reps cannot have track records, so this article focuses on financial advisors (RIAs and IARs) who may also be called financial consultants, investment advisors, and financial planners. See: Should I dump my securities licenses?.

1. Legitimate track records

It may be financially prohibitive for some RIAs, especially smaller ones.

Based on number of accounts, it may cost $10,000 or more each quarter for a financial advisor to produce a fully audited track record. That’s because a qualified third party, not the advisor or his firm, produces the track record based on a fully disclosed set of principles.

The third party has to look at all of the advisor’s active accounts and accounts that terminated his service that calendar year. Then the auditor uses an accepted formula for calculating the performance — for example, a time-weighted formula that is in compliance with global investment performance standards.

This process is used to create a historical track record that may go back five or 10 years, and update it each future quarter to keep it current. Advisors would need billion-dollar practices to afford this type of service, and they may not like the results if their track records do not place them in the top quartile compared to other advisors.

2. Multiple track records

Another reason an RIA may be averse to having a track record is that the third party wants to develop one track record that includes all of the advisor’s accounts. But this distorts the advisors’ results for various categories of clients. For example, their younger clients in their 30s had substantially different results than their retired clients in their 70s. A single composite may understate results for younger clients and overstate results for older clients. Consequently, most advisors would need several track records based on composites of clients that share common characteristics.

So, if you’re set on having a different track records for different client segments, the price of legitimate track records just went up significantly.

3. Discretionary authority

There are non-discretionary and discretionary advisors. Non-discretionary advisors provide advice and services (investment strategy, asset allocation, performance reports), but they do not have decision-making powers.

This type of advisor cannot have a track record because the clients control decision-making. On the other hand, discretionary advisors do make decisions on behalf of their clients and they are not required to obtain client approval in advance for buy/sell decisions. However, there may be limitations on their discretion that would invalidate their track records for particular clients. Auditors would exclude these accounts from the advisors’ track records.

Only a very small percentage of advisors have unlimited decision-making powers that are necessary to produce valid track records.

4. Managing the manager

A similarly small percentage of advisors manage portfolios of securities. That is because they do not have the skills that are required to research and manage portfolios of stocks and bonds. Instead, they manage portfolios of mutual funds, exchange-traded funds and separate-account managers. See: Why many RIAs should start a mutual fund, considering the limitations of SMAs.

The latter entities are the actual managers, because they make the buy and sell decisions for securities. In this case, the advisors are providing manager of manager services: They select the managers, allocate assets to the managers, monitor the managers, and terminate them. A track record would be based on the combined results of the actual managers. Then they have to be able to prove they had been recommending the managers before the performance occurred. Additional layers of expense also reduce returns, so most advisors describe the performance of the managers, but do not take credit for their results.

5. Compliance departments

A small percentage of discretionary advisors, who are independent RIAs or IARs, may be able to publish track records. However, if they also have securities licenses, they will have a very difficult time obtaining approval from their compliance departments to publish track records.

Broker-dealers are not inclined to take on the liability of published track records for advisors. Consequently, most compliance departments have a blanket policy that their advisors may not publish track records. Or, they may have so many restrictions that the development of track records is next to impossible or prohibitively expensive. See: Four hot topics in compliance from the IAA conference.

6. Wall Street obstruction

There is also another major influence that should not be ignored. Wall Street does not want advisors to have track records. It has developed an elaborate sales culture that controls trillions of dollars. Advisor track records would undermine its success. Wall Street wants investors to select advisors based on personalities and sales skills, not documentation for past results, which may be mediocre to bad 67% of the time. According to surveys that have been conducted by Investor Watchdog, one third of advisors outperform the market over longer time periods. Publishing a track track record that lags the market would not be a good marketing decision.

Good luck fighting Wall Street on this one. Add it to the list of other battles that includes transparency. See: How exactly RIAs can leverage the new transparency as a marketing tool.

Jack Waymire spent 28 years in the financial services industry. For 21 years he was the president of an RIA that provided services to more than 50,000 investors. He is the author of Who’s Watching Your Money?, the first book that provided an objective process for selecting higher quality financial advisors. He is the founder of two major websites, www.InvestorWatchdog.com for individual investors and www.PaladinRegistry.com for financial advisors. He is a columnist for Worth magazine, a blogger on major financial websites, and is frequently quoted by the media..