New investment reports

New reports on investments need more info

March 3, 2017

If you have investments like mutual funds or individual shares, then you have had a month or so to review your new “CRM2” reports that were added to the regular year-end statement you received in January.

These new reports are the Investment Performance Report and the Annual Fees and Compensation Report.

The goal is to give consumers of investment products better information to use to value the advice and services they are receiving from their investment providers, and educate them as to performance and fees.

Since the investment industry has spent many millions of dollars putting these reports together to comply with new regulations, we should pay attention to them. The reports can be very helpful, but there are a few things missing, which we will point out here today.

In the fee report, for example, you are shown amounts that you paid (administration, transaction or investment management fees), plus amounts paid to your investment dealer from third parties (primarily mutual fund trailer commission fees and commissions on new issues).

What you won’t see is how much of these amounts are paid to your advisor, and how much is withheld by the investment dealer. This split can vary greatly from firm to firm. Your advisor also has costs of doing business, which must be paid out of his or her share.

On the reports, you will also not see any of the internal costs of those third-party products, like mutual funds or ETFs. This can result in a total cost that is quite a bit higher than shown.

If the reports result in a discussion with your advisor, these are good questions to ask. I love questions about fees, as our accounts generally show all costs, as we generally pay the third party costs from our one transparent fee paid by our clients.

The other new document, the Investment Performance Report, is overdue. It requires investment firms to show you your rate of return calculated in two different ways, and over one year, three years, five years, 10 years and since your account was opened.

However, this report will be much more useful over time because the performance calculation on the new report uses January 1, 2016 as the starting date. So, although there is a column labelled “Since Inception”, that inception date is January 1, 2016, regardless of when you actually opened your account.

Over the next few years, the report will be populated with longer term returns, providing more value.

The new report also shows both Time Weighted (TW) and Money Weighted (MW) rates of return. TW is what you are used to. This adjusts for your deposits and withdrawals, to let you know how your investments performed, in a way that can be compared to benchmarks.

MW can be described as your personal rate of return, which could be higher or lower based on the timing of money in and money out. If you were lucky enough to make a deposit just before a market rally, your MW might be higher than your TW. In my case, my 2016 TW was 19.47% but, since I made a large deposit early in January, 2016 just before the market drop, my MW was only 18.87%.

Time weighted is the best way to compare money managers, while money weighted is a better way to measure your actual progress toward your personal goals.

Next column, we will give you some income tax tips and traps.

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.Please consult legal, tax, insurance and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.