ADVISOR INSIGHTS
November 2016
Part 2 of 3
Answering Your Clients’ Questions
about the Performance of their
Investments
Early in 2017, investors will begin receiving new information about the fees that they pay and the
performance of their investments under a regulatory initiative known as the Client Relationship
Model – Phase 2, or CRM2.
This issue of Advisor Insights provides some straightforward answers to questions that your clients
might ask as they aim to understand the new information that they receive about the performance of
their investments under CRM2.
An Opportunity to Strengthen Your Relationships with Clients
This is part of a special three-part series of Advisor Insights. The series focuses on helping
advisors have better conversations with clients about their investments as the final stages of
CRM2 are implemented.
The other two bulletins in the series are:
•• Advisor Insights: An Opportunity to Strengthen Your Relationships with Clients, which
provides some guiding principles to help frame your conversations with clients, along with
basic information to tell clients about their investments.
•• Advisor Insights: Answering Your Clients’ Questions
about Services and Fees.
These materials have been prepared to help the industry
achieve the goals of CRM2 – to improve the investor
experience and to enhance investors’ knowledge and
confidence to make better decisions about their investments.
For more information, visit IFIC.CA > Members.
Beginning early in 2017, you can find our CRM2 tools at our new
Advisor Centre, located at IFIC.CA > Advisors.
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Answers to Clients’ Questions
How well did my investments perform?
This year, we are providing new detailed
information to you about how well your
investments performed after costs have been
deducted. To locate this information on your
statement, look for the term “Personal Rate of
Return”. Some firms will use the more technical
term: “Money-Weighted Rate of Return”.
Your personal rate of return is unique to you
because it is based on:
•• The timing of when you deposited money
into and withdrew money out of your
account,
•• Dividends and interest that you earned
within the account, and
•• Changes in the market value of the
securities held within your account.
A “target rate of return”
is a goal that some
investors set, often with
the help of a financial
advisor. For example, an
investor might set a goal
of saving ‘x’ dollars by
a certain year in order
to retire comfortably. To
achieve that goal, based
on the investor’s current
and planned savings, the
investor will aim to earn a
certain rate of return – the
target rate – each year.
Since each investor has
a different combination
of deposits and
withdrawals, each
investor may have a
different personal rate
of return.
You may wish to
compare your personal
rate of return to your
target rate of return to
see whether you are
on track to meet your
investment goals.
What if I don’t meet my target rate of return
each year?
If you don’t meet your target rate of return in
a particular year, there is no reason to panic
but it is important to ask questions so that you
have all the facts and can consider whether
you need to adjust your investments. It could
be that markets have had a bad year overall.
Many investments are long-term, so as long as
you are meeting your target on average over
the years, you are on a path that is leading you
toward your goal.
Shouldn’t I use a benchmark to figure out
whether my investments are performing well?
The answer to this is: yes… and no.
“No” mainly because benchmarks are not
relevant comparisons to your personal rate of
return. A benchmark evaluates the performance
of a fund over a time period, and does not
take into account the timing of your personal
deposits or withdrawals.
“Yes” because
benchmarks may be
helpful for other purposes.
For example, they can
help you understand how
well a fund has performed
compared to a similar
group of securities or
index over the same time
period.
A “benchmark “ is
information that helps
you compare the relative
performance of a fund.
Students compare
their marks to the class
average to understand
how well they did.
In the same way, an
“investment benchmark”
helps you understand
how well your fund
performed compared
to groups of similar
investments.
2
What benchmark should I use and how can it help me understand how
well my investments have done?
There are many different benchmarks and it is important to use the right
one. You would not compare your math mark to the class average on an
English test. In the same way, you should not compare your equity fund to a
benchmark for bond funds.
Market indexes (such as the S&P/TSX Composite Index) are often used as
benchmarks. Market indexes provide good historic information but aren’t
perfect comparisons to your investment for many reasons. For example:
1. A market index does not reflect the costs of managing and operating a
mutual fund. To compare your mutual fund to a benchmark, subtract the
fund costs from the benchmark.
2. A market index measures performance over a specific time period. If you
held the mutual fund over a different time period, it will not be a perfect match.
3. Benchmarks use a “time-weighted” formula to calculate performance. The
new performance report that you have received uses a “money-weighted”
formula to calculate your personal return. [Plain language explanations of
these terms are provided in the box to the right.]
Some funds do not use benchmarks. A fund that uses a benchmark will list
it in its Management Report of Fund Performance, which you can find on
the fund company’s website.
Why do the performance numbers in Fund Facts not match the
performance on my new performance report?
The performance numbers in Fund Facts use a “time-weighted” formula
(see description to the right) to calculate the rate of return for the fund.
These numbers can be used to compare the returns of different investment
funds over the same timeframe.
The performance information in your new report is calculated using a
“money-weighted” formula (see description to the right). It tells you how
well your investments have performed, taking into account the timing of
your deposits and withdrawals.
Prepared by
The “time-weighted”
formula calculates the
rate of return for money
that is placed in a fund
and left in the same
investment until the end
of a time period (such as
one year). This method
is not influenced by
the timing and size of
deposits and withdrawals
of investors. It is used
to compare the returns
of different investment
funds over the same
timeframe.
The “money-weighted”
formula is impacted
by the timing of your
deposits and withdrawals
in and out of your
account, as well as
dividends and interest
that you earned within
the account, and changes
in the market value of
the securities held within
your account. Since each
investor has a different
combination of deposits
and withdrawals, each
investor could have a
different personal rate of
return.
Connect with us
IFIC.CA
@IFIC
The Investment Funds Institute of Canada
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