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Investors need to know their returns
The Gazette, Tuesday, December 26, 2006
Don MacDonald

You may remember the Beardstown Ladies investment club from the 1990s.

This group of small-town women in Illinois made a big splash with their folksy story of
beating the stock market even as they traded recipes at monthly meetings.

They claimed an astounding 10-year average return of 23.4 per cent to the end of 1993.

Their first book sold 800,000 copies and they were feted by the national media in the
United States. Sadly, the ladies turned out to be better at self-promotion than at
arithmetic.

An audit by a major accounting firm found the clubs performance calculations had
mistakenly included dues paid by members as investment gains.

The ladies’ actual returns averaged an unspectacular 9.1 per cent, far below the S&P 500
index’s performance of 14.9 per cent during the period.

The Beardstown Ladies are far from the only investors with an overly optimistic view of
their portfolio returns.

Research shows that most portfolios underperform the market by a wide margin.

But most investors have, at best, only a vague idea of how well their portfolio has
performed, and their guess tends to be too rosy.

Shockingly, most brokerage firms, banks and mutual-fund vendors don’t provide their
clients with annual portfolio performance data on their statements, even though this is
crucial information for retirement planning.

Could it be that the industry prefers to keep customers in the dark because it worries that
disappointing returns will lead to uncomfortable questions like: “Why am I paying all these fees and commissions for such crummy results?”

A group of 15 fee-only financial advisers, calling themselves the Investor Awareness
Project, are doing their bit to encourage Canadian market regulators to force financial
institutions to provide annual portfolio returns on monthly statements along with
appropriate benchmark data.

The group is led by Toronto adviser and author Warren MacKenzie, who has a website at
www.showmethereturn.com. The site includes a petition calling on the Ontario Securities
Commission to force firms to provide clients with personalized performance information
along with appropriate benchmarks. The site also offers a calculator that individuals can
use to calculate their own portfolio returns.

“One of the worst problems I see is that people just don’t know how well they’re doing,” MacKenzie said.

His firm Second Opinion Investor Services Inc. examines investor portfolios for a fee.

“If you don’t know what your returns are, you can be underperforming the market year
after year, costing you a huge amount of money.”

MacKenzie notes that performance numbers are at the heart of the investment process for
large institutional investors like pension funds.

Rich individual investors are also routinely provided with return data when they deal with
high-end portfolio management firms. It’s only average investors who are left in the dark.

Yet this information is critical because it’s the only way investors can know whether they
are on track to achieve their financial goals.

“You have to know how well you’re doing to know if you need to make changes,”
MacKenzie said.

A poorly performing portfolio can signal that an investor needs to save more, adjust the
asset mix, plan to work longer or find another investment adviser.

A spokesman for Quebec’s market regulator, the Autorite des marches financiers, said the
country’s securities commissions have formed a working group to make proposals on
improving disclosure to investors, including portfolio returns.

Those proposals are supposed to be made public in 2007 with changes expected in 2008.
Here’s hoping these regulators, who are supposed to be protecting investors, will speed up the process to correct this glaring deficiency.

In the meantime, investors shouldn’t be shy about asking their advisers to calculate their
annual return and provide benchmark return data.

If the adviser isn’t able to make the calculation, or refuses to, it’s time to re-evaluate the
relationship.

dmacdonald@thegazette.canwest.com

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