Thursday, July 13, 2006
Clients deserve to know annual rate of return

ROB CARRICK

A Toronto financial consultant is leading a campaign to have investment companies fix a ridiculous deficiency in the way they show clients how much money they're making or losing.

To understand the point being raised by Warren MacKenzie of Second Opinion Investor Services, grab any account statement you've received from brokerages, financial planning firms or fund companies. Then, try to find your annualized rate of return.

In most cases, maybe almost all, you won't be able to find any such information. Some statements will show you the total percentage difference between the current price of an investment and the book value (purchase price plus any distributions in the case of mutual funds), while others highlight the change in value over the previous quarter, year or whatever.

This information is trivia, however. Only with an average annual rate of return can investors truly see if their results are sufficient to meet their financial planning objectives. "Of all the things that are important in investing, knowing where you're going has got to be right up there," Mr. MacKenzie said.

To that end, Mr. MacKenzie has created a website, Showmethereturn.ca, where investors can sign a petition asking the Ontario Securities Commission to require that brokerage firms and banks provide an annual rate of return to clients.

The OSC has toyed with this idea already. In a set of investor-friendly financial industry reform proposals issued a couple of years ago under the title of the Fair Dealing Model, the regulator suggested that performance reporting should be done on an annual basis and that returns be disclosed for the current year as well as from inception. It also recommended that, where possible, a client's returns be compared with relevant benchmarks.

The Fair Dealing Model proposals were handed over to a national group of regulators and industry types who are trying to turn them into workable rules.

Mr. MacKenzie said the recommendations for improved reporting of investment returns are still in the mix, but he's concerned that they may yet be squelched by an investment industry that clearly won't provide this level of disclosure without a push.

"I think that unless the public gets on to this, the performance reporting issue will be kind of shelved," he said.

Mr. MacKenzie specializes in providing second opinions about existing investment plans, and he works on a fee-only basis that involves a flat fee based on the work involved. For the petition and Showmethereturn.ca website, he has enlisted the support of other fee-only advisers who are collectively known as the Investor Awareness Project.

The fact that these advisers work on a fee-only basis is not incidental. Fee-only advisers don't receive compensation tied to the sale or management of investments, which means they're not hypersensitive to the idea of investors having the means to compare their returns against the costs they incur.

Mr. MacKenzie believes that financial companies don't already provide annual returns because of the potential for this information to cause clients to take their business elsewhere. Financial companies have a different take, of course.

According to Mr. MacKenzie, one investment firm said in submissions to the OSC on the Fair Dealing Model that providing annualized returns would promote short-term thinking by clients that would lead them to make rash decisions. Better, one supposes, to keep them ignorant and complacent.

Another objection raised by the investment industry has to do with limitations in their computer systems that can make such calculations difficult. As well, there is no definitive way to calculate annualized rates of return.

Mr. MacKenzie says providing annual returns isn't that complex a matter at all, and to prove it he's provided a calculator on his website that will provide an annualized rate of return.

Just type in a start and end date, the amount of money you started and ended with and any contributions or withdrawals you made over the period.

Where there is some difficulty for financial companies is in providing annualized return data going back far into the past. For that reason, Mr. MacKenzie said he'd be satisfied if companies offered this data from here on in.

The top argument for providing annual rate of return information has to do with basic financial planning. Along with your age, goals, risk tolerance, a key variable in any plan is the rate of return you expect to generate. If your actual results lag your expected return, you'll need to look at any one of several remedies that include contributing more.

By this reasoning, it's ridiculous that annualized performance reporting isn't already provided by financial firms. "I can't think of anything more important than knowing how you're doing and being able to take corrective action if you're off track," Mr. MacKenzie said.

rcarrick@globeandmail.com