Opinion | Consumers should know investment performance and costs – TheSpec.com

This is the time of year when most Canadians receive their financial reports.

Everybody is concerned about the shape of their finances. A retired family asks their adviser: “Will we have enough income to live on?” A charitable foundation CEO asks her Treasurer: “Warn me before our cash flow turns negative.” Both want the same thing — the bottom line.

For a long time, clients of dealers and managers received statements showing the current value of their investments compared with the previous month.

But those snapshots didn’t show if the overall portfolio made any progress from year to year. Even for the do-it-yourself investor, yearly comparisons are too important to be scribbled on the back of an envelope.

Fortunately, things are changing for the better.

The Canadian Securities Administrators believe investors should know how their investments performed over time. They also think it’s important to know the cost of fees and services that affected that performance. So, all advisers now must provide two performance and costs summaries, each year.

The investment performance report presents the annual percentage return for the first year and at Dec. 31 for the last three, five and 10 years when an account was open. That way each client can see how the portfolio performed over several years.

A special advantage is the way performance is calculated after all withdrawals and contributions. It’s too easy to forget the withdrawal covering 20 per cent of a dental bill that the insurance plan didn’t reimburse, or the deposit of a Christmas cheque from Nana.

This will also help to compare the portfolio’s progress with an index representing similar securities. We usually see various indexes on TV or smartphone or newspaper, but without such comparison we can’t determine whether our investments are keeping pace.

Much more importantly, it reveals if that progress matches what we want to achieve. That’s the objective clients must specify at the beginning, in the information form that authorizes the adviser. The performance report shows if the adviser’s guidance met our objectives.

Some people let the bull market roll on until the panic last March. Then they sold. When the market rallied sharply, they climbed aboard again. Sounds like a crapshoot? In-and-outers will now be able to see how costly the commissions were and how much they eroded the net results.

A previous article reported that computers, algorithms and passive managers are responsible for 60 per cent of transaction volumes. Trading is idealized in TV commercials. Shallow acquaintances boast of their trading successes; smart friends don’t go there. Consistent trading gains are rare and involve costs. During the COVID-19 panic, investors sold and repurchased funds in seismic proportions. Advisers seemed absent, while commissions shaved their clients’ net returns.

That’s why investors look for a reliable measure that summarizes costs, and does it simply too — their net results.

The cost of advice report is just as important as the performance report. Advisers are required to disclose the total of all fees and commissions charged to your account.

The Investor Office of the Ontario Securities Commission states in their Investment Performance and the Cost of Advice report: “No matter what type of investment you buy or advice you receive, you will be charged fees.”

For investment fund accounts, there are operating charges, transaction charges, third-party payments and trailing commissions. For managed portfolios, there are management fees.

The last 10-year data show investors made large purchases of mutual funds and ETFs each January-February (probably for deductible RRSP contributions) and almost as large March-April reductions. Commissions minimized investors’ returns. Who benefited more, clients or advisers?

The purpose of these regulatory requirements for fund dealers and portfolio managers is to ensure transparency in their communications with clients. With tens of thousands of advisers across Canada, the regulators leave it to investors to become informed and to take the initiative to pursue any questions.

As technology opens up the seamy side, cybersecurity threats are an emerging risk. The regulators try to protect investors from unfair, improper or outright fraudulent advisory practices.

How advisers cope with fraud to preserve client confidence will be another chapter in the story, as they prepare for more stock market turbulence.

A future report will analyze whether the foregoing reports measure the client’s or the adviser’s performance.

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