When it comes to investment fees and transparency, investors should be paying closer attention to their annual investment reports, which now provide more in-depth information around performance and the true cost of investing.
Since July, 2017, all Canadian financial firms have been required to provide annual statements that highlight how well investments have performed in dollar amounts, as well as the dollar figure an investor has paid for financial advice.
It's important to note that these statements can vary from firm to firm in appearance, as well on when the firm decides to pop them in the mail.
Unlike your quarterly statement, these annual reports lay out all charges and compensation and are typically mailed out at year end, but some firms – such as TD Bank and Investors Group – do midyear reporting, so clients typically receive their annual statements after June.
For those who have received an annual statement in the mail – usually between mid-January and the end of February – it can be a bit overwhelming to understand what all these numbers mean.
The Globe and Mail sat down with Dave Carr-Pries, vice-president of client engagement for InvestorCOM Inc., who led the development of regulatory training for many of Canada's investment dealers, including the design of the new annual reports. Here's some key takeaways Mr. Carr-Pries suggests for investors when opening their annual reports:
There are two main parts included in the annual report: A breakdown of how your investments are performing, and a breakdown on how much you are paying for an investment. Both these sections will now provide you with information in dollar amounts.
What to look for in your performance report
1) The changes in value to your overall account, including:
- Money deposited into the account, as well as any funds withdrawn.
- What the market did. This is the change in value caused by how the markets performed and how much you made – or lost– as a result of being invested in the market.
- Closing value – the total amount in your account at the end of the year after all fees have been deducted.
2) A chart or graph to display a visual on how well your account is doing.
3) The rate of return on your investments.
Top questions that your performance reports will answer
- How am I doing? Am I up or am I down?
- Did the account value change because of my actions (deposits/withdrawals) or because of the markets (change in market value)?
- Am I on track to achieve my investment goals? The rates of return can be compared with target rates assumed in a financial plan?
Reminder that the value of your account and all rates of return are after all fees have been deducted.
What to look for in your investment fee report
The big question many have been anticipating is how much am I paying for the servicing of my account, including the financial advice I receive. Typically, these fees have been discussed in percentage terms when you opened your account or purchased a mutual fund. But now, that fee has to be reported in dollar terms.
1) You will now see the fees that you paid directly to your financial firm. Depending on the type of account you have – whether you are a fee-based client or a transaction-based client – the amounts and the categories they show will vary. For transactional clients, you will see how much you paid in account-related operating fees, such as your fixed annual administration fee. These will be separate from the total transaction-related fees you paid for trades.
2) For a fee-based account – you will now see the amount you pay in dollar terms instead of the percentage of assets you may have agreed upon with your adviser.
3) In many cases, there will also be a third section for fees that you did not pay directly but were received by your financial firm from other parties – such as mutual fund companies. These payments are known as trailing commissions.
While these payments aren't taken directly out of your account, it is important to understand the amount your firm – some of which is shared with your financial adviser – is being paid to sell these funds.
In the case of mutual funds in particular, there is still one piece missing from these reports to explain the full cost of investing. In addition to the trailing commissions which we now see, mutual funds have additional management expenses – referred to as a fund's management expense ratio or MER. These fees can be found on every fund facts sheet you receive when purchasing a fund.
Top questions that your investment fee report will answer:
1) Do you feel the total amount paid is reasonable based on the service and value you receive in managing your investments?
2) How do the fees compare with industry standards? Depending on your account type, fees are mostly well aligned across the country, and your adviser can talk to you about the ranges.
3) There are many factors that determine which account type and fee program best matches your personal circumstances and goals. Based on what you paid in fees, are you in the right type of account?
For a more detailed view on how to read an annual report, view this video from Clare O'Hara.