This article was first published in the Globe and Mail on February 8, 2025. It is being republished with permission.

by Tom Bradley

The investment industry isn’t known for its intellectual honesty. It’s a nice-to-have but not obligatory. The analytical rigour between cause and effect is, well, not very rigorous. Narrative is more important than numbers.

There are many examples of this. We’re told an economic release or pattern on a chart caused a stock to go up when it could have been a multitude of factors. Market forecasts are published with little chance of being right. High-volume trading is encouraged despite evidence that it leads to lower returns.

Client reporting, the focus of this column, is another example. Investment companies sell their services based on their ability to generate returns, but after you’ve signed up, they make it hard to determine just what those returns are.

Fortunately, you have a chance to be intellectually honest with yourself. You should have recently received a report from your investment firm that has the facts. It’s required by regulators and has an uninspiring name, something like Performance and Fees Report.

If you get poor regular reporting, don’t pay any attention to how you’re doing or what you’re paying, or both, it’s the most important document you’ll receive all year. It will help answer questions such as: Is my investment process working? Are my moves in and out of the market helping or hurting? And do the fees I’m paying match up with the service I’m getting?

Lost return

In good markets – like we’ve had – fees tend to be overlooked. I hear it often: “It’s not what I pay that matters; it’s returns.” Returns are the goal, but the statement ignores the fact that fees have a meaningful impact. After all, long-term returns aren’t 15 to 20 per cent a year, they’re 6 to 8, which means that paying an extra (unnecessary) fee of 1 per cent reduces your return by 12 to 15 per cent, or $5,000 every year on a $500,000 portfolio.

The report is a good start in determining what you’re paying, but it doesn’t provide the full picture. It only shows what you’re charged for service, administration, and advice – things such as account fees, trading commissions and trailer fees – but doesn’t include expenses embedded in any funds and products you hold, which may account for most of the total cost (especially if they have performance fees).

As an aside, improvement is on the way. The Canadian Securities Administrators, which regulate the investment industry, are in the process of instituting rules that will make disclosure more complete. The initiative is appropriately called Total Cost Reporting.

Until we get there, less-than-total cost reporting requires you to ask questions to complete the picture. And you shouldn’t hesitate to do so because the answers can be revealing. For instance, if you get a squirm or an “I don’t know,” or are told it doesn’t matter, then you know you’re paying a lot and need to dig deeper.

Fees do matter and are one of the few things you can control in investing.

Reality check

The good news is the performance data in the report is more complete. The returns are, after all, fees and not only reflect how your bonds, stocks and funds did, but how you did. Let me explain.

The numbers you’ll see are money-weighted rates of returns, which take into account the returns of your investments as well as any impact of flows in and out of the account. If you are a regular contributor, don’t trade much and stick to a plan, it’s likely that your MWRR will be the same as the return of your investments. No slippage.

For investors who aren’t those things, there can be a shortfall between the two. If an investor went all in at the top of the market or sold out near the bottom, an extreme but not uncommon occurrence, the gap will be significant.

In aggregate, individual investors experience some slippage (often referred to as the behaviour gap) due to frequent trading, performance chasing, and buying high, selling low.

When analyzing your performance, the longer-term numbers are the ones to concentrate on. They provide more data on how your moves have contributed to or detracted from returns and will help even out factors such as strong and weak markets, well- and poorly-timed trades, and cyclical trends.

Reviewing your annual fees and returns report, and asking questions of your adviser, are important in testing, and hopefully confirming, your personal investment narrative. Be honest with yourself, even if nobody around you is.