Special Releases

Providing greater transparency

The “Client Relationship Model” is designed to provide investors with greater transparency on the costs and performance of their investments.

With phase two of this initiative, called “CRM2,” a new annual performance report was introduced at most Canadian investment firms in 2017.

The new annual performance report uses a different way to calculate your rate of return compared to the traditional “time-weighted rate of return” used by most of the financial industry.

It’s called a “money-weighted rate of return,” and it takes into account your contributions and withdrawals throughout the year to give you more insight into your personal rate of return.

The following video explains the difference between these two ways to calculate your rate of return – and why both are helpful.

View transcript & Disclaimer

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We'd like to talk to you about some changes coming on how your investment returns are reported. You'll be getting a new annual performance report in January 2017. It's a more personal way to see how your investments are doing. This new report is part of an industry-wide initiative called Phase 2 of the Client Relationship Model, or CRM2. It's a long title that comes down to greater transparency for investors.

One difference you will see in the new report is a personal rate of return. The personal rate of return will take into account of the contributions and withdrawals you make to your investment account. So it measures your personal performance. And that means the rate of return on this new report will be specific to you.

Your existing account statement shows how your portfolio is performing using a standard formula that most of the financial industry has used for years. It's called the time weighted rate of return. It is a useful measure in that it allows you to compare the performance of your investments to other investments over a period of time, and is not affected by personal contributions or withdrawals to your account.

The new report uses a different return calculation called a money weighted rate of return. Unlike the time-weighted rate of return, it includes the effect that the timing and amount of your contributions and withdrawals have on your investment returns, giving you a more personalized view of your investment portfolio.

It's important to note that time-weighted and money-weighted rates of return are both valid measures of investment performance. Time-weighted is most helpful when comparing different investment alternatives. Money-weighted provides a snapshot of an individual's return, reflecting their actual investment experience.

So let's dig a little deeper into how the two ways of calculating returns work. Let's say that you invest $100,000 in the portfolio on January 1. That's your only investment for the year. By December 31, your $100,000 has grown by 6% to $106,000. So your time-weighted rate of return for the year is a gain of $6,000 divided by your investment, $100,000, or 6%. Since you didn't touch your portfolio since your initial $100,000 investment, 6% is also your money-weighted rate of return. There is no difference between money-weighted rate of return and time-weighted rate of return in this case.

Now let's look at a second situation where you still invest your $100,000 at the start of the year, but you also invest an additional $100,000 at midyear. At the end of the year, your portfolio is now worth $209,921. Because your time-weighted return doesn't factor in your second contribution of $100,000, it is still 6%.

But here's something interesting. You had $100,000 in the account during the first half of the year plus the gains that were building up. So just before you made your second contribution, your portfolio was worth $102,000. When you added $100,000 to that, your total holdings were worth $202,000. So after your contribution, you had $202,000 invested in your account.

In the money-weighted calculation, the second half of the year would carry more weight because there is more money being affected by the portfolio's performance in the second half of the year. As it happens, over the second half, the portfolio had a stronger performance. It was up by an additional 3.9%. This difference is taken into account in the money-weighted rate of return calculation. So your money-weighted rate of return is 6.63%.

So let's sum up. There are two primary and valid measures of investment performance. In January 2017, you'll be receiving a new annual report that will show your personal rate of return using a money-weighted rate of return calculation. It will show the performance of your investments and the impact of your cash flow decisions. Thanks for watching.

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This video is provided by RBC Wealth Management for informational purposes only. The comments contained in this video are general in nature, and do not constitute legal, investment, trust, estate, accounting or tax advice. RBC Dominion Securities Inc.*, Royal Trust Corporation of Canada, The Royal Trust Company, RBC PH&N Investment Counsel Inc., RBC Wealth Management Financial Services Inc. are affiliated corporate entities and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canadian Investor Protection Fund. Please visit www.rbc.com/legal/ for further information on the entities that are member companies of RBC Wealth Management. ®/TM Trademark(s) of Royal Bank of Canada. Used under license. © 2021 Royal Bank of Canada. All rights reserved.

Insights into giving and inheriting wealth across generations

Within a generation, over $400 billion is expected to be passed down to inheritors in Canada. How are Canadian families preparing for one of the largest transfers of wealth in history? And will inheritors be ready?

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In the coming years an estimated four trillion dollars in wealth will transfer across Generations in Canada the UK and the US.

But are we ready? Our study found both inheritors and benefactors are unprepared.

In fact only 26% of benefactors surveyed have a full wealth transfer strategy in place.

And just 35% of inheritors say they are prepared to receive wealth.

So while many people are making initial arrangements like writing wills, one and three have done nothing at all to prepare.

What we found was a direct correlation between preparedness and confidence.

For those with a full wealth transfer plan 58% are confident the next generation will sustain their wealth.

For those with no preparations only 33% are confident their wealth will endure.

When it comes to building financial confidence it pays to start early.

Those starting with financial education before age 18 are the most confident.

However, our study found education typically does not begin until age 27 and it tends to be informal and led by family members, despite the fact that almost four of five respondents found Financial education led by professionals to be effective.

So, how can you preserve and protect your legacy? Important steps can be taken to ensure a confident transition of wealth including preparing yourself, your heirs, and your financial affairs.

Before you transfer wealth transfer your knowledge and supplement it with professional financial education.

Your legacy is about more than wealth the steps you take today will lay the foundation for a legacy that lasts

RBC Wealth management - Grow more than wealth]

[rbcwealthmanagement.com/wealthtransfer - Download the full report]

[Wealth Transfer Report 2017]

[Lasting legacy - insights into giving and inheriting wealth across generations]

“It’s up to the givers of wealth to proactively prepare the next generation to manage that wealth.”

View transcript

Wealth Transfer Report 2017 - How prepared are we in Canada? Tony Maiorino Vice President and Head RBC Wealth Planning Services

Based on our estimates over 400 billion in wealth is set to pass from one Canadian generation to the next.

Canadians really need to take this opportunity to evaluate their current state of preparation for both transferring wealth as well as educating the next generation on money and financial matters.

[Only 22% have a full wealth transfer strategy]

From our research less than 1/4 of Canadians have a full wealth transfer strategy in place and one in three have done nothing so far to prepare.

While some preliminary steps have been taken with 52% of Canadians indicating they have prepared a will important steps remain particularly given the aging population in Canada.

This lack of preparation has Canadians worried about their legacies in the next generation.

Almost 60% of Canadians are not confident their children will preserve or grow the wealth they inherit.

Canadians need to take further action to adequately prepare for the significant wealth transfer that will occur in the upcoming years.

A solid grounding and financial fundamentals help set the stage for a successful transfer of wealth across generations.

This includes first transferring knowledge as well as opening up communications between both the givers and receivers of wealth.

It's up to the givers of wealth to proactively prepare the next generation to manage wealth to ensure that the family legacy can endure.

[Leave a legacy that lasts. RBC Wealth Management - Grow more than wealth]

[rbcwealthmanagement.com/wealthtransfer - Download the full report]