For a number of years we at Polson Bourbonniere have been providing our clients with rates of return on their investment accounts. Utilizing an industry standard methodology used for years by money managers known as “Time-Weighted Rate of Return”, we’ve been able to compare returns with appropriate benchmarks. This has been an excellent way for an investor to gauge how their money manager(s) and portfolios have been performing for various time periods such as 1, 3, 5 and 10 years.
Starting with investors’ December 31, 2016 year-end statements a “personalized” rate of return will now be included as part of an initiative mandated by regulators known as CRM2. The purpose of this initiative is well thought out – make both fees and performance transparent to all investors. We applaud the objective.
As part of CRM2, a personalized rate of return will now be calculated by a method known as “Money-Weighted Rate of Return”, This new mandated methodology will take any deposits and withdrawals made by an investor into account in calculating a personalized rate of return. The underlying logic is essentially to answer the questions that most investors raise: how much did I invest, how much have I withdrawn (if any), what is the value of my account now, and what return did I earn?
As with any “change” in other areas of life in general, investors may find the new method of calculating returns somewhat confusing. Most investors are not mathematicians, but may notice differences in their returns than previously reported – in some cases better, in other instances, weaker.
There are pros and cons to the new mandated Money-Weighted Rate, just as there are with the method currently being used. To assist investors in understanding how their rates of return will now be calculated – and shown in their year-end statement – we are attaching a link here to an excellent piece from Dynamic Funds, recently produced at our request: