INVESTMENT PERFORMANCE and the COST OF ADVICE

INVESTMENT PERFORMANCE and the COST OF ADVICE

How are your investments doing?

Answering this question isn’t easy

  • Slide 1
  • Slide 2
  • Slide 3
An envelope of money going into an unknown source

The account statements that you receive from the firm that you invest with have typically shown the current market value of your investments and the price that you originally paid for them, leaving it up to you to do the math on whether you’re making or losing money on each of the investments in your account.

Next
Confusion over investment statemenets

While it’s great to know how your investments are changing over time, it’s not always easy to understand how these changes reflect overall performance of your account. And without a clear overview of your account’s performance as a whole, it can be difficult to see how your investments are working together to help you achieve your financial goals.

Next
Hand taking money from a slice of a pie graph

On top of that, your account’s performance is affected by the fees that you pay to your firm for the services it provides. Typical account statements don’t break down those fees or make it easy to see what you’ve paid for your firm’s advice and services, which means it can be hard to compare the amount you’ve paid with the account performance that you’ve received.

Back

Fortunately, that’s changing with

two new annual reports

that provide better and clearer information about your account performance and fees:

Report on investment performance

A Report on investment perfomance

A report that reviews how much you’ve made or lost in your account over specific periods of time.

Report on charges and other compensation

B Report on charges and other compensation

A report that details the charges and fees that you have paid to your firm.

These new reports work together to tell you more about what you’ve paid to your firm over the past year and the performance of your account during that time. These are important for evaluating whether the products you’re investing in and advice you’re receiving are helping you achieve your financial goals, or if it’s time to make a change.

You may have already heard about these new reports in the news or from your firm. They’re part of an initiative called Client Relationship Model Phase 2, or CRM2, which is a set of new rules designed to ensure investors receive clearer information about their investments from the investment industry.

Under these new rules, all firms are required to provide these reports to investors, giving them even more information to help them make informed decisions about their investments.

Two people running towards the finish line with one person holding a flag and a house to the right

A Account performance

If you’re investing with a goal in mind – whether it’s saving for your family, your retirement or your future – chances are you want to know if your investments are on track to help you achieve it.

Understanding how your investments are doing and knowing when it’s appropriate to make changes in order to meet your goals are important steps of investing.

You'll see information about how your account has performed over the past three, five and 10 years.

The new annual performance report looks at the overall performance of your account, giving you an overview of how changes in the value of the investments within your account have affected the total value of your account over the past year.

Over time, you’ll also begin to see this report include information about how your account has performed over the past three, five and 10 years (if your account is open that long). Your firm will begin to track the performance of any newly-opened accounts starting on the date that you open it, while most pre-existing accounts will be assigned an “inception” date that reflects the information that the firm has.

With this new report, you will see how the value of your account has changed (expressed in dollars) and its performance (expressed as a percentage) during the reporting periods. Your firm is required to tell you the opening market value of your account in dollars, as well as the market value of deposits and withdrawals made to and from your account over the past year and since its inception date.

Plant growing with a percent icon in a speech bubble to the right side
Your personal rate of return is unique to you and is calculated using a “money-weighted” formula.

The report will also tell you the total percentage return for your account, which is otherwise known as your personal rate of return. This reflects how your account performed in the past year and since its inception date. Over time, this report will also include information about your account’s performance over the past three, five and 10 years (if it’s open that long).

Your personal rate of return is calculated using a “money-weighted” formula, which reflects any deposits or withdrawals you made to or from your account, the income you earned (such as dividends or interest), and changes in the market value of the investments that you’re holding in the account.

This is different from a “time-weighted” calculation of your account’s performance, which only shows the rate of return for money that is invested and left in the same investment until the end of a certain time period (such as one year). A time-weighted rate of return doesn’t reflect any deposits or withdrawals you make into or out of your account, meaning that it doesn’t consider how your account’s performance is affected by its cash-flows.

By seeing how the deposits and withdrawals to and from your account have affected the dollars and cents of its overall value, you can get a better sense of how your contributions and investment performance are moving you toward your financial goals.

Area graph with fees speech bubble to the right

B Charges and fees

The fees that you pay to your firm for the advice and services it provides you also have an impact on the overall performance of your account.

When you pay a fee, you’re paying for the various services that your firm provides, which can be different depending on your firm or the type of account that you have. This includes things like providing advice or a review of your financial goals, determining your risk profile, assisting you with building your financial plan, trading securities on your behalf and providing you with statements about your account.

Not only do you reduce your account’s performance by paying fees, you also miss out on the compounding power that the extra money would have made.

However, fees can add up considerably over time, and even a fraction of a percentage can have a significant impact on the long-term value of your account. Not only do you reduce your account’s performance by paying fees, you also miss out on the compounding power that the extra money would have made.

The new report on charges and fees breaks down the fees that you’ve paid over the past year to maintain your account and make trades. It also shows incentives that are paid to your firm by others, such as trailing commissions or referral fees. This report will be sent along with your account performance report so that you can consider the value of the advice and services that your firm has provided.

With this new report, your firm is required to itemize the cost of everything from embedded trailer-fees to redemption fees, commissions, switching fees and RRSP administration fees, as well as provide you with a dollar figure of the total amount that you paid in fees over the past year.

Keep in mind that the report on charges and fees is not a breakdown of your advisor’s personal compensation, but rather the compensation that has been paid to the firm.

The report on fees is also not a report on the cost of the investment products that you own, but rather the cost of the advice provided to you by your firm. Fees that are charged within an investment fund, such as management fees, are not included as operating charges in your report.

If the manufacturer of a mutual fund (or similar product) that you’re holding in your account is taking a fee directly out of the fund’s earnings, you’ll find that listed in the Fund Facts (or other disclosure documents) that the manufacturer provides, under the product’s “management expense ratio.”

To find out more about the fees that are applied to the actual investments that you own, you should speak to your firm or check the product’s disclosure documents, such as Fund Facts for mutual funds. Reading the product disclosure alongside the new report on charges and fees should give you a comprehensive look at the total cost of your investments.

A sign post in between two different graphs depicting investment options

Making decisions about your money

When taken together, these new annual reports can help you make sense of the fees that you’re paying to the firm investing your money and the performance that you’ve received over time.

These are important factors when it comes to making decisions about your money. Knowing how you’re progressing toward your financial goals, and when it may be time to adjust your plan in order to meet them, is part of being an informed investor.

Knowing how you’re progressing toward your financial goals, and when it’s time to adjust your plan in order to meet them, is part of being an informed investor.

While these new reports are designed to increase the transparency around your account’s overall performance, there are many other factors that you should consider and be aware of when it comes to making decisions about your money. It’s important to ask questions and know where to look for help with understanding your investments.

Take the time to review these new reports and understand what they’re telling you about your money.

Take action

  1. When you receive your next annual statement, make sure that you take the time to review these new reports and understand what they’re telling you about your money.
  2. Talk to your firm if you have questions or concerns about your account’s performance over the past year, or if you want to know more about how the fees you’re paying relate to the advice and services that your firm has provided.
  3. Visit GetSmarterAboutMoney.ca to learn more about investing, including information on working with an advisor, monitoring the performance of the products that you’ve invested in, and diversifying your portfolio.

This message is brought to you by the Investor Office of the Ontario Securities Commission. The Investor Office sets the strategic direction and leads the Ontario Securities Commission’s efforts in investor engagement, education, outreach and research. The Office also brings the investor perspective to policy-making and operations. Learn more at InvestorOffice.ca.