Whenever the topic of performance measurement comes up in conversation, I think back to a story someone told me about a woman who took the number two spot in a race. Proud of her accomplishment, she telephoned friends and family with the news. Here’s the catch. Only one other runner competed. Technically, her statement was correct but probably a stretch. A typical listener would likely interpret her claims to mean second best out of a large group of athletes.

When it comes to investing, context is likewise critical. A classic fallacy is to describe a security as riskier based on its standard deviation alone and ignore rates of return. If it turns out that the “riskier” security realized large enough gains compared to a second security, the resulting coefficient of variation (“CV”) would flip the ranking. (Ignore for now the notion that relying on a single statistic alone is ill-advised.)

It’s not always easy to construct an appropriate investment benchmark but the exercise is nevertheless vital since performance monitoring drives other decisions. The topic continues to receive focus from practitioners and scholars alike. A deep dive about construction and review is left for another day but the urgency may accelerate sooner than later.

As I listened to a series of compliance Q&A sessions this week about the Fiduciary Rule, I kept pondering how asset allocations are likely to change over the next year. Revised business models, the use of algorithms via robo-advisors and modified sales compensation arrangements will almost surely result in portfolio composition shifts for some investors. Should that occur, it will be incumbent upon a service provider to craft an appropriate benchmark that reflects the new regime and then explain its rationale to each investor. Otherwise, an individual or a plan sponsor may question why the performance of a post-Fiduciary Rule collection of assets is being graded against a stale benchmark.

This issue of dynamic performance evaluation is not new. However, given the regulatory focus on numerous factors that influence asset allocation, one can readily conclude that benchmarks will be part of the Fiduciary Rule implementation agenda in the months to come.