How often are you spending way more than you need to, just to try to earn decent market returns from your investments? The answer is, way more often than you think! It’s still all too easy for financial providers to game the system by hiding their excessive fees and lackluster returns from view.

Whose Incentives Are We Serving?

I’ve talked about this before, but I think I’ve been too “Canadian polite” about it. About 2 years ago, I released “A Cautionary Tale” about Canada’s big banks. In it, I shared a CBC news investigation into the unsavory ways Canada’s beloved banks have been, sell, sell, selling you whatever financial products will profit them the most, not the ones that would serve you the best.

So, now that the cat is out of the bag, everything’s better … Right? Wrong! After a bit of regulatory hand-wringing … I’m sorry to say, everything soon went back to business as usual.

The truth is, our entire industry is based on business incentives that are all wrong for serving YOUR best interests. The system is essentially set up to bamboozle investors with hidden costs and performance reports that seem designed to deceive.

CRM2: A Good Idea, Left Undone

Remember the Client Relationship Model 2, or CRM2, which went into effect in 2017? It required financial service providers to submit detailed annual cost and performance reports to investors. CRM2 was supposed to make it easier for you to see what you were receiving for what you were spending on financial services.

Well, guess what? It’s not working. Somehow, the regulators fell short on this vital mission, and decided it wasn’t necessary to require the industry to make full cost disclosures. Here’s what happened instead: CRM2 does require your financial provider to show you their service costs. But they do NOT have to report Management Expense Ratios – or MERs – for the funds in which you’ve invested.

Murky MERs

Leaving MERs unreported is a huge deal, since they can easily cost you far more than the disclosed fees. Plus, your service provider may share in a portion of those MERs. For one, your service provider may also be the product manufacturer. They’ll market these wares as “special in-house investment services.” But for whom are they “special”? (Hint: Not you.) Or, they may receive financial incentive for pointing you to one product over another. And, by the way, they’re NOT required to recommend the one that costs you the least, even if all else is equal between them.

To make matters worse, MERs reduce your returns by taking the costs out of the fund’s share price, so you’re paying them mostly sight unseen. They’re disclosed in the fine print of a fund’s prospectus, but seriously, many people never find this information.

Weighty Return Concerns

On top of these costly cover-ups, the performance data you’re seeing is often deceiving as well. How do they do it? First, your performance is reported to you as something called money-weighted returns. Then, those returns are compared to bogus benchmarks. Bottom line? It’s like looking in one of those carnival fun-house mirrors to figure out what shape you’re in.

Money-weighted returns basically tell you by how much your portfolio has shrunk or grown, after figuring in the flow of your deposits and withdrawals. Say, for example, you were hoping to double your nest egg within 5 years by diligently saving and investing. Instead, you didn’t add in as much cash as you’d hoped to, plus you ended up taking out $100,000 to pay off your mortgage. Your money-weighted return reflects all this, and shows you if you’re falling behind on the personal rate of return you were shooting for.

That can be good to know, but it tells you nothing about how well your investments have performed compared to broad market benchmarks. For that, you need time-weighted returns. These represent the industry-standard methodology for assessing how your investments performed compared to the equivalent of a basic, low-cost market index fund.

Unfortunately, CRM2 does not require your provider to report time-weighted returns – even though they are industry-standard methodology, and the only kind that tells you how well your recommended picks are performing compared to standard benchmarks. Worse, your provider gets to choose which benchmarks to show you. This can help them further hide any underperformance under the guise of a non-standard, narrowly defined, supposed benchmark.

Let’s Be Clear

I could go on and on … believe me! At PWL Capital, our clients receive both money- and time-weighted returns using standard benchmarks, to complete the picture for them. But bottom line, you cannot count on most of the financial industry to protect you from bad financial advice. To help you protect yourself, please subscribe to my YouTube channel or connect with me on LinkedIn. You can also follow the posts and videos the rest of my PWL colleagues regularly produce. Together, we’re working hard to keep it real for you, your family, and other investors across Canada.