By 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
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