This article was first published in the National Post on January 30, 2021. It is being republished with permission.

Note: This article references an ‘Annual Report of Investment Returns and Fees’. Steadyhand clients do not receive such a report. Rather, we clearly show our clients their returns and all fees on a quarterly basis on their account statement.

by Tom Bradley

Any time now, you’ll be receiving the most important document of the year from your investment firm. It has a boring title, and the format won’t entice you to read it, but it’s a must read. I’m talking about a report with a name like Annual Report of Investment Returns and Fees (the words “compensation” and “charges” may also be in there).

The report is as close as the investment industry gets to being transparent. It contains an accounting of the fees you’ve paid your dealer (although not all your fees, more on that later) and shows your returns stretching back at least five years.

Some Canadian investors already get this information in their monthly or quarterly statements, but a vast majority only see these figures in this report.

How have you done?

The good news is, with each additional year, the returns in the Annual Report become more meaningful. Firms must show returns going back to Jan. 1, 2016, which means you’ll see a 5-year number for the first time (some firms go back further, but most do the minimum in this regard). One five-year period is still not long-term, but it’s getting there.

The number you see will be after fees and is a money-weighted rate of return, which means it’s impacted by two things: how your holdings did in the period and the timing of your contributions, withdrawals, and asset mix shifts. This can be confusing, but ultimately is a very good measure of your actual performance. It’s your advisor’s job to help you understand it.

Exciting but less important

As I wrote in my last column, the one-year return will be interesting given how wild the markets were in 2020, but your focus should be on the longest period. The last five years were characterized mostly by good markets, with two big, brief interruptions — the fourth quarter of 2018 and last year’s March meltdown.

For comparison purposes, the bond market averaged 4% over the last five years, the Canadian stock market came in at 9% (including dividends), and the World Index led the way at 10%. A typical balanced portfolio (60% stocks; 40% fixed income) was in the range of 5% to 7% per year.

Lost return

Years ago, Vanguard began referring to investment fees as “lost return” to reinforce their importance. It’s an area where the investment industry gets away with murder. Until laws were enacted to require it, most Canadian investment firms didn’t show their clients what they were paying, or at least made it exceedingly hard to find.

Unfortunately, the fees shown in your annual report are still incomplete. You’ll learn what you paid your investment dealer for administration, transactions and advice, but you won’t see the fees that are embedded in the ETFs, mutual funds and other managed products you hold. These can be significant but are not shown in the Annual Report.

I hear it often — “My guy charges me 1%.” Or 1.25%. This statement is technically correct. The guy’s firm is charging you one per cent annually, but your total cost could be as much as double that if you’re invested in products that charge an additional 1% or more.

I also hear it said that fees don’t matter, it’s returns that count. Certainly, the latter is true, but fees have a significant impact on returns. If you’re paying more, make sure of two things. First, that you’re getting additional service and expertise. And second, that it’s actually leading to higher returns over time.

Questions to ask

If you have an advisor, let him know that you’re bringing your Annual Report to the next meeting. You want him to walk you through it and explain the numbers, as well as provide an accounting of the other fees and charges not listed in the report. If he tells you the Annual Report isn’t important, then redouble your efforts.

I say that because you need to be your own advocate in the areas of returns and fees. The wealth management industry is pathetic when it comes to transparency. Any client-friendly initiatives in the last few decades have been driven by securities regulators, not firms’ desire to improve client service.

The Annual Report is a good place to start your advocacy work. Ask lots of questions. Don’t be bashful. Remember, your advisor or portfolio manager reports to you. You’re the CEO of your portfolio.