Investing and allocating capital
How Can a Family Measure Performance After Fees, Taxes, and Inflation?
Short answer. Start with portfolio returns after investment fees and expenses, then account for taxes and inflation to understand what wealth was actually retained and what it can buy. Use a consistent calculation across periods and asset classes, and show the assumptions clearly. Talk with your CPA about the tax treatment of specific holdings.
Measure performance after fees, taxes, and inflation so you can see whether the portfolio increased the family's usable purchasing power. A gross return can look satisfactory while costs, taxes, and rising prices reduce what remains. Keep the calculation consistent and make the assumptions visible to the family and investment team.
Start With Net Investment Results
Begin with the portfolio's reported return, then subtract investment management fees, fund expenses, transaction costs, and other charges that apply. Ask whether each figure reflects actual costs or an estimate. For private funds and direct deals, include the expenses that materially affect the family's return, not only the headline fee. The blended result across several investments can differ from the returns of individual holdings.
Compare net results with an appropriate benchmark and the family's required return. If the portfolio uses different vehicles and fee arrangements, show how each affects the combined outcome. Keep the reporting period and treatment of contributions and distributions consistent so the family can compare one review with another.
Account for Taxes Carefully
Tax effects depend on the holding, entity, jurisdiction, and the family's circumstances. Ask the CPA or tax adviser to help determine the appropriate after-tax method for the family's reporting. Do not assume that every investment is taxed in the same way or that a tax estimate in a manager report is complete. Record the assumptions behind any estimate, including whether taxes are actual, accrued, or illustrative.
Talk with your CPA about specific tax treatment before relying on an after-tax figure. A family may find it useful to present both pre-tax and estimated after-tax results, clearly labeled, so it can distinguish investment performance from tax assumptions. Keep confidential tax details within the appropriate reporting process.
Translate the Result Into Purchasing Power
Inflation reduces the amount of goods and services a dollar can buy over time. After establishing the net and tax-adjusted return, compare it with a suitable measure of inflation to estimate the change in real purchasing power. A positive nominal return does not necessarily mean that family wealth grew in real terms.
The family should decide which inflation measure is useful for its spending profile. A household with significant education, travel, property, or charitable costs may experience a different cost pattern than a general index. Treat the selected measure as a planning reference, not as a claim that every family expense moves at the same rate.
Use One Method Across the Portfolio
Agree on the performance definitions before the review period. Show gross return, return after fees, estimated after-tax return, and inflation-adjusted return as distinct measures. Keep their order and calculation consistent, and have staff explain any change in assumptions. This prevents the team from switching measures when one produces a more favorable result.
To connect costs with the family's return target, see setting a return target around real needs. Families can review inflation assumptions, compare performance measures within the broader investment review, and consider portfolio models as part of their allocation process.
Such a constructed hurdle rate or required rate of return would consider the relevant risk-free rate + risk premiums + inflation effects to yield a minimum real rate of return.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.