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.

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.

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

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

A Report on investment perfomance

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

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.

What does the market value tell you?

The market value tells you how much your investments are actually worth as of the date of the report. For example, if you had 100 units of a stock at a share price of $2 on the date of the report, the market value of the shares would be $200.

Your firm uses a standard formula to calculate the change in your investments’ market value over the past year and since you opened your account. You can also find the market value of your investments in your monthly or quarterly account statements.

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.

What’s the difference between time-weighting and money-weighting?

Suppose two investors each decided to invest in the same fund. The first investor invests $500, while the second investor invests $2,500, and at the end of the first year, the fund that they invested in gained 8 per cent.

At the start of the second year, the first investor deposits $2,500 into the fund and the second investor deposits $500, but this time it loses 5 per cent by the end of the year.

The time-weighted rate of return for both of these investors at the end of the second year is 2.6%. This is because the time-weighted rate of return only looks at the fund’s performance, and does not consider the impact of money deposited or withdrawn.

The money-weighted rate of return varies for each investor: the first investor, who invested less money when the fund performed well and more money when it performed poorly, saw a money-weighted rate of return of -3.2%, while the second investor saw a money-weighted rate of return of 0.7%.

Investor A

Deposits

Year 1: $500

Year 2: $2,500

2.6%

Investor B

Deposits

Year 1: $2,500

Year 2: $500

2.6%

Deposits

Year 1: $2,500

Year 2: $500

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.

How do fees affect your account?

Let’s say you invested $5,000 a year into an account that earned 5 per cent each year. Each year, you paid your firm a fee for the services it provided to you, such as maintaining the account and providing you with advice.

If the fees you paid totaled 2.5 per cent each year, after 25 years your account balance would be $175,059.

In the same example, if the fees you paid totaled 1.5 per cent each year, your account balance would be $201,556. Even a small difference in the fees that you pay for your account can have a significant impact on your account’s performance over time.

$5,000

Balance

Total value after 25 years:

$250,567

with 5% annual growth

Fees paid:

% of total value lost to fees:

$250,567

No Fees
1.5% Fees
2.5% Fees

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.

Types of fees and charges

No matter what type of investment you buy or advice you receive, you will be charged fees. There are many different types of fees and ways that you can be charged.

Operating Charges

Operating charges include fees such as administration fees, safekeeping fees, management fees, transfer fees, account closing fees and any other fees associated with maintaining and using your account that you pay to your firm.

Some firms offer fee-based accounts, where its charges are combined into a single amount, typically based on the size of your account (for example, 1 per cent of your total account value). Firms are not required to break down all of the smaller charges that are rolled into a single amount for fee-based accounts.

Transaction charges

Transactions charges include fees such as trading commissions, switch or change fees, performance fees, short-term trading fees and sales charges or redemption fees that you pay to your firm.

Payments from third-parties

Third-party fees can include referral fees, success fees (fees paid on the completion of a transaction) or finder's fees that your firm receives for having you as a client or investing your money into a certain fund.

Trailing commissions

Trailing commissions (or trailer fees) are paid each year to your firm by the fund that you invested in, as long as the fund structure provides for such payments. The fund sets the rate of the commission, which is paid to your firm for as long as you hold the fund. Not every fund pays trailing commissions, but most funds that are sold outside of fee-based accounts or discount brokerage accounts do.

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.”

What is a management expense ratio?

A management expense ratio, or MER, is a combination of a mutual fund's management fee and its operating expenses. They are paid by the fund and are expressed as an annual percentage of the total value of the fund. This means the effect of the MER is already factored into the market value reported in your account statements.

The management fee paid to the fund management company includes the cost to oversee the fund, hire a portfolio manager and other companies to assist in the fund’s administration. Operating expenses can include bookkeeping and administrative fees, marketing costs, filing and legal expenses, as well as taxes.

MERs can range from less than 1 per cent to more than 3 per cent. While investors don’t pay these expenses directly, they are affected by MERs because these expenses reduce the fund’s returns.

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

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.
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.
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.

How are your investments doing?

Answering this question isn’t easy

Fortunately, that’s changing with

two new annual reports

A Report on investment perfomance

B Report on charges and other compensation

A Account performance

B Charges and fees

Making decisions about your money

Take action