Telling it like it is

I received an e-mail last week from a frustrated reader. He maintains a sizeable
investment portfolio but can’t seem to get any meaningful information as
to how it is actually performing.

“I would like to find an investment advisor or company that will give me a
clear statement of performance on my investment portfolio each year — that
is, what is my percentage of gain/loss on the whole portfolio, taking into account
the additions, deductions, dividends, interest etc. Does this exist?” he asked.
“I am bombarded with individual statements and highly detailed reports all year
and yet the one number I really want is the one I cannot get.”

He is not the first person to bring this to my attention. The reality is that
there is no standardization of reporting in the financial services industry.
The people who handle your money are pretty well free to tell you whatever they
want, within certain limits.

One of the brokerage firms I use, RBC Dominion Securities, does provide an
annual report along the lines our reader is looking for. It shows the average
annual return on the portfolio for all time frames out to five years and since
inception, provides a cumulative performance chart, projects monthly income,
shows geographic and sector distributions, and more. But from what I have heard
from readers, that kind of in-depth analysis seems to be more the exception
than the rule. And there is one key element missing from the RBCDS report: benchmark

“The industry does not want people to know how they’re doing,” says Warren
MacKenzie, founder of Second Opinion Investor Services and author of The
Unbiased Advisor
(Harper Collins Canada). “If they did, clients would probably
object to the fees they’re paying.

“Think of it this way. Suppose you were going to Weight Watchers but
there were no scales and you were never weighed, so you would never know how
you were doing. How long would you keep paying money for service like that?”

Along with a small group of other independent financial advisors, MacKenzie
sponsors a website at
that promotes more transparency in financial reporting and encourages visitors
to sign a petition that urges the Ontario Securities Commission to take action
on the issue. The site also contains a basic rate of return calculator that
investors can use to get an idea of how their portfolios are doing.

A companion site at
provides investors with comparisons to a variety of indexes including the S&P/TSX
Composite Index, the S&P/TSX Capped Income Trust Index, the S&P 500
Index, and the MSCI EAFE Index as well as T-bills and bonds. The site allows
you to apportion the assets in your portfolio according to your personal mix
so as to arrive at a blended benchmark return.

There are proposals in the works that will marginally improve the situation
as it relates to mutual funds. A document currently being circulated for review
contains a series of measures that would require a higher standard of client
reporting by members of the Mutual Fund Dealers Association of Canada (MFDA).

In outlining the issues, the document states that some members of the MFDA
do not provide clients with adequate reports. As well, “the MFDA has noted
inconsistencies and potentially misleading information in performance reports
provided to clients.”

“Potentially misleading” are strong words. They suggest that in at least some
cases, investors are being led to believe that their portfolios are performing
better than is actually the case. The document goes on to say: “Some Members
have adopted policies and procedures whereby the Member does not properly supervise
performance reports… but simply disclaims responsibility for the content of
these reports.” That’s scary stuff when you consider that we could be talking
about the life savings of people.

The amendments, which were published on June 13, would require all MFDA members
“to provide annual reports to all clients that show either the holdings
in the account and funds invested and withdrawn from the account or provide
annualized percentage rates of returns on investments in the account.”

This is a small step forward but it is still woefully inadequate and falls
far short of what our reader is looking for or what RBC Dominion already provides.
For example, why the either/or? It seems to me that a year-end statement should
at a minimum include the book value and market value of all the holdings in
the account and (not or) annualized returns on each security. On top of that,
the report should show the total performance of the portfolio. Even better,
that would be matched against relevant benchmarks — a criticism MacKenzie levels
at virtually all financial reports.

“If you’re not beating the benchmarks, you might as well invest
in ETFs,” he points out.

Some companies are making an effort to provide investors with the insights
and information they need to make intelligent decisions. But too many are skimming
by, doing no more than the minimum required by regulation (and then sometimes

We need clear and comprehensive reporting standards for the entire financial
services industry. They are long overdue and Band-Aids like the MFDA plan don’t
measure up.

This article originally appeared in the Internet Wealth Builder,
a weekly e-mail newsletter that provides timely financial advice from some of
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