Aligning Investment Managers and Clients through Utility-Based Performance Measurement

Conventional investment performance reporting often fails to communicate risk in terms that reflect client objectives, creating incentives that can distort portfolio decisions and manager behavior. We propose a utility-based framework that incorporates client-specific risk preferences directly into performance evaluation through an explicit assessment of loss-bearing capacity. This approach integrates risk and return into a single performance measure, improves communication between clients and managers, supports more effective manager selection and customized benchmarking, and strengthens governance through more informative performance evaluation. By making client risk preferences explicit rather than implicit, the framework provides a practical foundation for aligning manager incentives with investor objectives and improving long-term client–manager relationships.