This article was first published in the Globe and Mail on January 27, 2024. It is being republished with permission.

by Tom Bradley

I’ve been advocating for better client reporting for more than 15 years. To me, talk about financial literacy and investment education rings hollow if investors can’t determine with confidence how they’re doing and what they’re paying – that is, after-fee returns and total cost.

The industry has made progress in providing this basic information, thanks mostly to the efforts of securities regulators and noisy investor advocates, but we have further to go.

A growing number of investors see return and fee numbers on their regular account statement (perversely, discount brokers do a better job of providing this information than more expensive, full-service advisers). For the rest, this basic information is revealed only once a year in an unappealing document entitled something like “Annual Report of Investment Returns and Fees” (the words “compensation” and “charges” may also be in the title).

For these investors, the annual report is the most important investment document they’ll read all year. For clients of advisers, it can anchor the next review meeting, triggering a discussion about returns and fees. For do-it-yourselfers (DIY), it’s a starting point for assessing how their approach is working. Do their returns stack up against index or actively managed funds with a similar mandate (such as equity or balanced).

Fees

Years ago, I saw Vanguard refer to investment fees as “lost return.” It’s an apt description. Fees are one of the few controllable factors in investing and have an undeniable impact on long-term returns.

The rebuttal to this view – the only thing that matters are after-fee returns – is absolutely true, but doesn’t go far enough. The chance of getting good after-fee returns goes down commensurately as fees go up.

Fees are the area where disclosure needs the most improvement. That’s because not everything is included. Regulators are working on this but in the meantime, the annual document only shows charges for administration, trading and advice. It doesn’t include fees imbedded in ETFs, mutual funds and managed products, which can be significant.

I hear it often, “My adviser charges me 1 per cent.” Technically, that’s correct. The adviser’s firm is charging 1 per cent annually for advice and service, but the total cost could be as much as double that if the portfolio is invested in products that charge an additional fee. (My guy charges me 2 per cent?)

Sadly, the only way to know if you’re being charged these fees is to ask.

If you have an adviser, ask them to calculate the total fee. If they dodge the question or say they can’t do it, it’s likely you’re paying too much. Ask again.

Investment returns

Performance reporting is better than fee reporting. You might need to fight through pages of a wordy document to get to the numbers, but at least the returns reported are after all fees (including those not shown in the fee section).

Your eyes will naturally gravitate to the one-year and three-year numbers, especially after the wild ride we’ve had since the start of COVID-19, but the longer-term returns are a better match with your long-term goals. They include all types of markets and are less affected by current events.

At the risk of getting too technical, the numbers in the report are money-weighted rates of return (MWRR), which take into consideration two things: how your holdings did in the period (funds and stocks), and the timing of any contributions or withdrawals. MWRR is a more accurate portrayal of your investing experience than non-personalized measures. If you need further explanation, your adviser should know this cold.

You’re the chief executive of your portfolio

The wealth management industry has vigorously pushed back on any and all client-friendly initiatives. Many firms seem intent on keeping clients in the dark. Investors need to advocate for themselves in this regard, and the performance and fee report is a good place to start. Make sure you understand it.

If you have an adviser, let them know that you’re bringing your annual report to the next meeting and want an explanation of the returns and a full accounting of the fees, including those not listed in the report.

If you’re a DIY investor, use the data in the report to determine if you’re on the right track. Don’t be like most DIYers I meet who say they’re doing well but don’t have the numbers to back it up. There’s really no excuse for not knowing.