CRM2 TOOL: PERFORMANCE BENCHMARKS AND HOW TO USE THEM. Note: Attachments currently in translation to French

Transcription

1 CRM2 TOOL: PERFORMANCE BENCHMARKS AND HOW TO USE THEM Note: Attachments currently in translation to French Model Text for Relationship Disclosure, Relationship Disclosure Addendum, Quick Facts The attached texts on pages 3 and 4 were prepared to help IIAC Members meet requirements to provide information on performance benchmarks to clients as part of relationship disclosures (RDs), or for firms that have already provided RDs to clients, as an RD addendum, in order to meet the Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) requirement to provide this benchmark information to clients by July 15, 2014 (see attached regulatory references). The text can also be used for staff or call centre information sheets, for clients, with media and for other purposes. Note that the CSA s and thus IIROC s required performance reporting methodology requires a moneyweighted rate of return calculation. This is inconsistent with the time-weighted rate-of-return method that is used by funds, indexes, etc. and some member firms. Due to the complexity of these terms and related concepts, the specific methodology is not spelled out here. It is a matter we will be discussing with provincial securities commission investor education staff in the coming months. Explanation: Two versions of the performance benchmark text are provided. The first is short and meets the basic CSA/IIROC requirements. The second is longer and incorporates more detail; it also refers to the fact that the performance calculation method the regulators are requiring will not allow a good comparison with performance benchmarks. Both versions note in yellow-highlighted italics a number of areas where your firm must choose wording depending on your firm s practices and intentions. Tailor whichever one you use (or both depending on your needs/intended uses) according to your business model, client profile and other factors. Tips: 1. This document was prepared in consultation with the IIAC CRM2 Communications Working Group, shared with the IIAC s CRM2 Implementation Working Group, and believed to be complete and accurate. Consult your advisors to make sure the attached model texts are appropriate for your firm s business model and clients. 2. Test what you draft on a number of people of differing financial knowledge levels and with varying commands of the English language. 3. Members of the IIAC CRM2 Implementation Working Group believe that investors would benefit from consistent simple wording (use of common one-syllable words, shorter sentences, and so on). In the attached texts, we have tried to balance accuracy, readability and investor-friendly messages. For those unfamiliar with how to check readability, MS Word has a little-known feature you can use

2 i. Select File > Options > > Proofreading > Show readability statistics. ii. Select Review > Spelling and Grammar (or you can highlight to select the text you want to test). iii. Once the document has been spellchecked, you will see a text box similar to the one below. If you selected a portion of text only, you will see a dialogue box with the message Word finished checking the selection. Do you want to continue checking the document? ; click No and a dialogue box like the one below will appear. Three well-known readability standards appear in the red box below; the text measured is taken from the attached NI Companion Policy excerpt, from Benchmarks and Investment Performance Reporting to the end of the extract. 1. Passive Sentences: You will want the lowest possible score. One third or 33% of the text s sentences are passive. That is, Benchmarks need to be explained [by you] to clients in terms they will understand is in the passive tense. If you write using active verbs, for example, Explain benchmarks to clients in terms they will understand, you will eliminate passive sentences. 2. Flesch Reading Ease: You want this measure to be as high as close to 100 as possible (see table below for what the score means). Score Notes easily understood by an average 11-year-old student easily understood by 13- to 15- year-old students best understood by university graduates 3. Flesch-Kincaid Grade Level: Try to have this score as low as possible. The number corresponds with a grade level or years of school, so 14.6 indicates text expected to be understandable by a university student

3 Version 1: Meets Basic Requirements Relationship Disclosure Addendum: Performance Benchmarks and How to Use Them You may assess the performance of your investments by comparing them to an investment performance benchmark. Benchmarks show the performance over time of a select group of securities. There are many different benchmarks. When choosing a benchmark, pick one that reflects your investments. For example, the S&P/TSX Composite Index follows the share prices of the largest companies listed on the Toronto Stock Exchange. This index would be a good benchmark for assessing performance of a Canadian equity fund that invests only in large Canadian companies. It would be a poor benchmark if your investments are diversified in other products, sectors or geographic areas. We (choose between): provide the following benchmarks in our account reporting (listed them here with descriptions) and do not provide benchmark comparisons in our account reporting. Please speak to your investment advisor if you have questions about the performance of your portfolio or what benchmark(s) might be appropriate for you. Note: Readability statistics, excluding We (choose between paragraph - 3 -

4 Version 2: Provides Additional Investor Education regarding Why a Client s Rate of Return May Differ from a Benchmark Relationship Disclosure Addendum: Performance Benchmarks and How to Use Them You can judge how your investments are doing by comparing the rate of return on the securities you hold to an investment performance benchmark. Your rate of return is affected by, among other things, changes in the value of your securities, dividends and the interest you earn, as well as when you make deposits and withdrawals. To compare your rate of return with a benchmark, find a benchmark made up of securities like the ones you have in your account. For example, the S&P/TSX Composite is a benchmark for a broad group of Canadian stocks that trade on the Toronto Stock Exchange. It s a good yardstick for assessing performance of a Canadian equity mutual fund with investments in Canadian corporations. It would not be a good benchmark if you hold foreign investments, bonds, shares of smaller companies, or ones limited to only one part of the economy. Instead, you would have to find a foreign equity, bond, small cap or industry sector benchmark. If you have an account made up half of stocks and half of bonds, compare your rate or return to the average of a stock and a bond index. Note: Keep in mind that benchmarks should be used as a guide only. Benchmarks do not factor in commissions or other costs to invest and often don t include lowearning assets that you hold to cash in fast for emergencies. This means benchmark returns will seem higher than what you would earn on your account if you held the same securities as the index. Benchmark rates of return are calculated using a specified method. For the best comparison, be sure this is how the rate of return on your account is calculated. Remember that benchmarks are based on how a sample portfolio performs and that other factors, such as tax considerations, will affect your returns. We provide the following benchmarks in your account statement (list and describe them) OR We are making changes to meet new regulatory requirements about how to report the rate of return on your account. We will provide benchmarks with your account statement and/or annual investment performance report in the future. OR We do not/will not provide benchmarks in your account statement and/or annual investment performance report. This is because securities regulators require investment dealers to use a rate-of-return calculation which differs from the specified method that must be used, for example, for benchmarks and mutual funds. Please speak to your investment advisor if you have questions about the performance of your portfolio or what benchmark(s) might be appropriate for you

5 Note: Readability statistics, excluding text in the three alternatives starting We provide - 5 -

6 PERFORMANCE BENCHMARK EXTRACTS FROM IIROC AND NI RULES EXTRACT FROM PROPOSED IIROC RULE (2)(j) (c) Adding the following paragraph (2)(j): (j) a general explanation of how investment performance benchmarks might be used to assess the performance of a client s investments and any options for benchmark information that might be made available to the client by the Dealer Member. EXTRACT FROM CSA NI RE BENCHMARKS The following NI paragraph comes into force on July 15, 2014: (m) a general explanation of how investment performance benchmarks might be used to assess the performance of a client s investments and any options for benchmark information that might be made available to clients by the registered firm; Companion Policy Benchmarks Paragraph 14.2(2)(m) requires registered firms to provide clients with a general explanation of how investment performance benchmarks might be used to assess the performance of a client s investments and any options available to the client to obtain information about benchmarks from the registered firm. Other than this general discussion, there is no requirement for registered firms to provide benchmark information to clients. Nonetheless, we encourage firms to do so as a best practice. Guidance on the provision of benchmarks is set out in this Companion Policy at the end of the discussion of the content of investment performance reports under section Benchmarks and investment performance reporting The use of benchmarks for investment performance reporting is optional. There is no requirement to provide benchmarks to clients in any of the reports required under NI However, we encourage registrants to use benchmarks that are relevant to a client s investments as a useful way for a client to assess the performance of their portfolio. Benchmarks need to be explained to clients in terms they will understand, including factors that should be considered by the client when comparing their investment returns to benchmark returns. For example, a registrant could discuss the differences between the composition of a client s portfolio that reflects the investment strategy they have agreed upon and the composition of an index benchmark, so that a comparison between them is fair and not misleading. A discussion of the impact of operating charges and transaction charges as well as other expenses related to the client s investments would also be helpful to clients, since benchmarks generally do not factor in the costs of investing. If a registered firm chooses to present benchmark information, the firm should ensure that it is not misleading. We expect registrants to use benchmarks that are discussed with clients to ensure they understand the purpose of comparing the performance of their portfolio to the chosen benchmarks and determine if their information needs will be met reasonably reflective of the composition of the client s portfolio so as to ensure that a relevant comparison of performance is presented relevant in terms of the investing time horizon of the client based on widely recognized and available indices that are credible and not manufactured by the registrant or any of its affiliates using proprietary data broad-based securities market indices which can be linked to the major asset classes into which the client s portfolio is divided. The determination of a major asset class should be based on the firm s own policies and procedures and the client s portfolio composition. An asset class for benchmarking purposes may be based on the type of security and geographical region. We do not expect an asset class to be determined by industry sector presented for the same reporting periods as the client s annualized total percentage returns clearly named applied consistently from one reporting period to the next for comparability reasons, unless there has been a change to the pre-determined asset classes. In this case, the change in the benchmark(s) presented should be discussed with the client and included in the explanatory notes, along with the reasons for the change - 6 -

7 Examples of acceptable benchmarks would include, but are not limited to, the S&P/TSX Composite index for Canadian equities, the S&P 500 index for U.S. equities, and the MSCI EAFE index as a measure of the equity markets outside of North America