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It’s up to advisors to spell out what is in an investor’s financial statement and do it on a regular basis.Matejay

The second phase of the client relationship model, known in the industry as CRM2, was meant to provide transparency around fees that appear on an investor’s annual statement.

But the regulatory change, which includes showing performance in dollar amounts as well as the dollar figure an investor has paid for financial advice, hasn’t made reading financial statements any easier.

In fact, a recently conducted Pollara survey shows fewer investors are finding their statements easy to understand, despite the CRM2 change that took effect in July of 2017. The poll, conducted on behalf of industry group Investment Funds Institute of Canada, shows 72 per cent of investors surveyed say their investment reports are easy to understand, down from 82 per cent surveyed a year earlier. The number of investors who said their statements provide all the necessary information they required fell 8 per cent year-over-year to 74 per cent.

“As much as CRM2 brought in changes, the fact is that a lot of what we do is still Greek to the client,” says Simon Tanner, principal financial advisor at Vancouver-based Dynamic Planning Partners.

Mr. Tanner and others in the industry say it’s up to advisors to spell out what is in an investor’s financial statement and do it on a regular basis.

“The more we can review with clients, the more understanding they are going to have,” Mr. Tanner says. “We need to educate our clients as much as we need to advise them.”

Here are five things an advisor should discuss with his or her clients to help them understand their statements better.

1) Risk

Any review of financial statements should start with a review of a client’s risk profile, Mr. Tanner says. It’s how he starts every client meeting, to ensure they understand their asset allocation and to help explain their performance against various benchmarks.

“The toughest thing with risk profile is that, during growth periods, clients can become more risk tolerant,” Mr. Tanner says. “The more that we are reviewing risk tolerance with a client and their threshold, the more comfortable they are and the more understanding they have. … The more we can hammer home the risk profile, the better.”

2) Asset allocation

The discussion of risk profile leads to a review of the client’s asset allocation, including geographic mix and how much of their portfolio is in equities, fixed income and cash.

Advisors need to discuss whether the mix is still suitable for the client’s stated risk tolerance, says Chuck Grace, a member of the finance faculty at University of Western Ontario Richard Ivey School of Business in London, Ont.

For instance, he says if equities are growing faster than fixed income, the mix will tilt to equities in a high-risk portfolio over time. “If you’re a conservative investor, if you don’t rebalance that over time, you’re taking on more risk and don’t even know it,” Mr. Grace says.

He recommends that advisors update their clients on what the fund managers are doing and their investing thesis.

They should also review the various products in the portfolio, including whether the particular investments chosen are still appropriate. For instance, has there been a change in the management of a fund that has caused a change in mandate, or is a particular company in the portfolio still a strong performer?

“Most clients wouldn’t have access to that information, so it’s a fantastic place for advisors to demonstrate their value,” Mr. Grace says.

3) Performance

While some clients like to see the year-to-date or one-year performance, Mr. Tanner prefers to focus on three- to five-year performance with his investors who are investing for the long term.

“Clients either love or hate year-to-date numbers,” Mr. Tanner says, given that a good or bad month can skew the performance by a few percentage points up or down

“The reality is that the three- to five-year numbers are better at showing if a client is meeting their long-term goals,” Mr. Tanner says.

Mr. Grace says the discussion should include returns, as well as whether the client is saving enough to achieve his or her goals. For instance, a client might point out they made 5 per cent, based on their risk tolerance and asset allocation, when the market returned 10 per cent.

“If the markets aren’t giving you enough return, you might have to save more,” Mr. Grace says.

He also recommends that advisors not use the markets as a benchmark when discussing performance and instead focus on the return clients need to meet their long-term investment goals. “You need to look at things you can control – the advisor and the client. No one controls the market,” he says.

4) Book value and market value

Mr. Tanner always makes a point to review book value, market value and net invested, and how they each differ.

He explains that net invested is what the client put in, minus what they’ve taken out; book value is the net invested, plus reinvested income in the portfolio; and the market value is the book value, plus growth of the equities or bonds in the portfolio.

“I still do it with 15-year clients and find they still appreciate it,” he says.

5) Fees

Fees are a hot-button issue in the industry today and the more open and transparent an advisor is, the more investors will understand and be comfortable with their portfolio and its ongoing performance.

Mr. Grace recommends advisors discuss all fees being paid, not just to them, but also to fund managers as well as any other fees that may be included.

“Make sure it’s a holistic conversation about all of the fees,” Mr. Grace says. “[Investors] tend to take the entirety of the MER [management expense ratio] and equate it to the value of advice, and that’s not necessarily fair. There are other people participating.”

Mr. Tanner says he discusses fees at every opportunity, where appropriate.

“There are two ways to deal with fees in our industry: We can bury our heads and hope they never come up, or we can deal with them head on and discuss them and show value through our fees,” Mr. Tanner says.

“I find, the more I talk to a client about fees, the less they’re looking at the back of the statement, looking for the hidden fees … Have the conversation from meeting one to meeting 101 because then there’s not going to be any confusion.”

His rule of thumb is to talk with investors about what they have, why they have it and what they pay for it.

“The more we can hammer home these key things … the better off we are,” he says.