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Investor alert: Your most important investment statement ever is on its way

The most important investment statement you've ever received should be on its way to you now.

Please open it and pay close attention to two new and vitally important pieces of information. One is an accounting in dollar terms of how much you're paying for investment advice and services, and the other is a personalized report on how your portfolio has performed. This data will give you more power than you've ever had to assess the job your adviser is doing for you.

Prepare to be rocked by what you see. Very few people have ever been shown the amount of money they pay their advisory firms expressed in dollars as opposed to a percentage, and many will not have a good picture of how their portfolio has performed over time. This edition of the Portfolio Strategy column is all about giving you context to evaluate the new information being presented.

Securities regulators introduced rules requiring upgraded fee- and investment-return disclosures in July, and most investment firms are putting them into force for statements being sent out this month. Consider these points to help make sense of what you see:

Some investment firms are laggards

The word on Bay Street is that some firms may not start complying with the new regulatory requirements in January and instead will fall in line in subsequent months. Some firms have developed new account statements that integrate the new information, while others are reporting the new numbers separately or appending them to their current account statement format.

On returns, it looks like some firms will only report returns for the past year, while others will go back as many as three or five years. The gold standard of providing returns back to the day you started your account will not be universal. If you don't see returns from inception, mention to your adviser that you'd like to see this data added in the future.

Brace for sticker shock

In fee-based accounts, a 1.25-per-cent annual charge on a $250,000 portfolio is pretty reasonable by current standards. But if you view this fee in dollar terms you get $3,125 over a year (the fee would actually be paid monthly in most cases from cash in your account). The dollar amount speaks louder than the percentage for sure. This is even truer for high-net-worth accounts – a 1-per-cent fee on a $1-million portfolio amounts to $10,000.

Mutual fund investors may know that their advisers are paid through trailing commissions that are part of the fees taken off the top of mutual-fund returns. But seeing these trailing commissions in dollars and cents may still be jarring. Generally, trailers work out to 1 per cent for equity funds and 0.5 per cent for bond funds.

The advice charge in a fee-based account should be very close to all-inclusive. There should absolutely not be any trailing commissions (that's called double dipping and it's against the rules) if you own mutual funds in your fee-based account, and a set number of trades should be covered.

If you're in a commission-based account, look at the total cost of trading stocks and remember that most online brokerages charge a flat $10 or so a trade these days.

Understand the importance of cost

Keeping costs low is one the few ways investors can reliably help their returns. You never know what the markets or your own investments will bring.

With low costs, you can at least be sure that more of your gross returns are going to you rather than to the investment industry.

Understand that value is more important than cost

It's a foregone conclusion that some people will see how much they're paying and immediately think about finding a cheaper adviser or becoming a do-it-yourself investor. Without a doubt, DIY investing is less expensive than having an adviser.

A quick example: My Freedom 0.12 portfolio is built using three exchange-traded funds with a weighted aggregate management-expense ratio of 0.12 per cent (the ticker symbols are VSB, ZCN and XAW).

Brokerage commissions to buy these ETFs range from as little as zero at some online brokers to $10 or so at most.

Bear in mind that you're not getting any advice at all when you run a portfolio like this yourself. No help deciding how much to put in stocks and how much in bonds, no help choosing between tax-free savings accounts and registered retirement-savings plans, no help minimizing taxes or meeting your goals for retirement or saving for your children's postsecondary education.

Good advisers earn their fees by providing services such as these in addition to managing investments. If your adviser is merely an investment sales person, then consider the fees you pay unearned.

Find out how your fees compare

Globe Unlimited subscribers can use our investment-fee-disclosure tool to see how their fees compare with other investors with similar size portfolios.

When I recently reviewed the results gathered by this online tool, the surprise was how much high-net-worth investors with portfolios in the $1-million to $2-million range were paying.

Close to 30 per cent indicated they were paying 1.25 per cent to 2 per cent, when 0.75 per cent to 1.25 per cent would be more typical.

Find out how your returns compare

Measure your portfolio against an appropriate mix of stock and bond market benchmarks such as the FTSE TMX Canada Universe bond index and total return versions of the S&P/TSX composite, S&P 500 and MSCI Europe Australasia Far East (EAFE) indexes. You'll find access to this data for both the short- and long-term on the website of the portfolio management firm PWL Capital.

Do not compare your entire portfolio to the S&P/TSX composite's 21-per-cent total return in 2016 (dividends plus share-price gains). A balanced portfolio will have made considerably less, and that's a good thing. The bigger your return in any one year, the more potential there is for a similarly big decline in the future. Diversified portfolios chop off the highest highs, and the lowest lows.

Your adviser doesn't pocket your whole fee

Your adviser's fees are shared in some way with his or her employer. The investment-industry consulting firm PriceMetrix says that between 40 per cent and 50 per cent of fee revenue typically goes to the adviser.

Talk it over

If you see anything in new information about fees and/or returns that troubles you, schedule a meeting with your adviser. Be upfront about what your concerns are – paying too much, not getting value for the fee, poor returns. Come to the meeting with an idea of what you want from your adviser – more service, a different portfolio approach or a discussion about a fee cut.

Remember what's not there – product fees

The new disclosure rules cover only fees paid to advisers and investment dealers. This is especially relevant to funds – mutual funds, exchange-traded funds and wrap accounts, which are ready-made portfolios based on fund products. If a mutual fund focusing on the Canadian stock market had a management expense ratio of 2.25 per cent, you would see an accounting of 1 percentage point for the trailing commission. The other 1.25 points would not be included in your fee report.

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Are you a do-it-yourself investor?

The cost of investment advice will be displayed as never before when people start getting their 2016 account statements.

But do-it-yourself investors have reason to peruse their 2016 statements closely as well. New disclosure rules for the investing industry will require investment firms to show not just fees paid to advisers, but also a range of costs that may affect DIY investors. The whole point of DIY investing is to save money on fees by managing your own portfolio and not having an adviser. The new disclosure rules offer an opportunity to verify just how much you're paying in fees as a DIY investor. Here are three fees to pay particular attention to:

1. Account fees: Investors with smaller balances, or who rarely trade, may find they're being charged a quarterly fee by their broker. This fee is typically $25 a quarter, which is significant in smaller accounts. With a $20,000 portfolio, a $100 fee amounts to having your returns reduced by 0.5 of a percentage point. Some online brokers still charge administration fees for registered accounts, and they can range as high as $125 per year.

2. Mutual fund fees: Cheaper exchange-traded funds are an ideal portfolio-building tool for DIY investors, but mutual funds still have a serious presence in DIY investor accounts. Series D mutual funds have minimal trailing commissions, which are paid to the seller of a mutual fund out of the general fees that fund companies take off the top of their returns (net returns are what investors typically see). Unless you have Series D funds, you're paying a much larger trailing commission that could amount to 1 per cent of your holding in an equity fund and 0.5 per cent for bond funds.

3. Trading commissions: One way to measure your success as a DIY investor is to evaluate the commissions you paid to trade stocks, bonds and options against your results. What percentage of your account value are you paying in commissions? If you're paying 1 per cent to 2 per cent or more, that puts your fee load in line with what investors working with advisers pay. Trades cost a flat $10 or so at most brokers. With a $100,000 account, 15 trades a year are like a fee of roughly 0.15 per cent. That's quite reasonable.

There are two additional points for all investors to note about the new disclosure requirements. First, they do not include the fees charged by the products they own. For instance, the management expense ratios for exchange-traded funds are not included. Second, account statements must now show personalized returns and not just the usual quarterly changes in portfolio value. Mind both your fees and your returns to fully assess yourself as a DIY investor.

To download a printable Excel sheet of this checklist, click here.

TOPICYESNO
I hear from my adviser at least once a year (form e-mails don't count)
I can call or e-mail my adviser and get a response in 24 hours or so
My adviser conducts herself or himself as a provider of advice, not a seller of products
My adviser has asked me questions about life, goals and aspirations
My adviser makes me feel like I'm a valued client
My adviser has gone through some sort of financial planning process with me
My spouse's views and goals are addressed
My adviser is like a coach, offering support and trying to get me to improve my financial habits
My adviser covers matters beyond investments like debt, home ownership, taxes, estate planning
My adviser built my portfolio with the goal of meeting my financial goals more than meeting a target return
I have a clear understanding of what I have in my portfolio, and why
My adviser has talked me out out of panic selling in a down market
My adviser has explained the cost of owning the investment products I own, and how it compares
My adviser considers all options for my portfolio and doesn't hustle in-house products
My adviser understands my tolerance for losing money because he or she has asked me about this in detail
My adviser has helped me understand that not everything in my portfolio will make money at the same time
My adviser is a simplifier - I come out of out interactions with greater clarity rather than a bunch of terms I have to look up online
My adviser owns it when things don't go according to plan and makes adjustments

Scoring: Count up your Yes answers

14 and up: Solid value
11 to 13: Not bad
8 to 10: Just OK
5 to 7:Weak
4 or less: See ya

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