How Can Financial Institutions Be More Transparent?

Consider these questions when thinking about a particular investment portfolio. Is it possible that fund performance is not quite as important as we thought? How much are hidden fees and charges are affecting your bottom line? With all the information given by financial institutions, how can we really simplify our life and figure out how we are doing? How can we determine our financial velocity?

When in comes down to it, your fund performance, while important is not the most important. Your sales charges or management fees are also not that important. What is most important is your bottom line, which takes into account both performance and charges. In other words, rather than looking at income or expenses, lets look at profit. When you look at your account, you want to know what your personal rate of return is.

When looking at your personal rate of return it is critical to take into account the dates of your deposits and your current value. Luckily, when it comes to current value, the valuation of portfolios is fairly accurate due to the liquidity of stocks. This is not the same as car or home valuation. On the other hand, the time value of money should be taken into consideration.

If you deposit $500 during the year and your money at the end of the year is $1000, the day you deposit has a large impact on the personal rate of return. If you deposited the money near January 1st, your personal rate of return would be close to 100%. If you deposited your money around December 28th, your personal rate of return would be closer to 10000%!

With all this in mind, institutions like Charles Schwab and Fidelity have been including personal rate of return in their statements. I did an independent audit and found the following:

See the algorithm at sizustech.blogspot.com
This is what I found...

Case I

The following data represents deposits for the last quarter of 2013:

var currentNetWorth = createTransaction("12/31/2013", 4073.99);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);

The financial institution showed a 2013 rate of return as 3.6%. My calculation showed 13.60%.

Case II

The following data represents deposits for the first and second third of 2014:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("12/31/2013", 4073.99);
paymentArray[1] = createTransaction("1/13/2014", 450.00);
paymentArray[2] = createTransaction("1/27/2014", 450.00);
paymentArray[3] = createTransaction("2/10/2014", 450.00);
paymentArray[4] = createTransaction("2/20/2014", 450.00);
paymentArray[5] = createTransaction("2/28/2014", 376.82);
paymentArray[6] = createTransaction("3/07/2014", 450.00);
paymentArray[7] = createTransaction("3/21/2014", 450.00);
paymentArray[8] = createTransaction("4/04/2014", 450.00);
paymentArray[9] = createTransaction("4/17/2014", 456.08);
paymentArray[10] = createTransaction("5/02/2014", 456.75);
paymentArray[11] = createTransaction("5/16/2014", 456.75);
paymentArray[12] = createTransaction("5/30/2014", 456.75);
paymentArray[13] = createTransaction("6/13/2014", 456.75);
paymentArray[14] = createTransaction("6/27/2014", 456.75);
paymentArray[15] = createTransaction("7/11/2014", 456.75);
paymentArray[16] = createTransaction("7/25/2014", 456.75);
paymentArray[17] = createTransaction("8/08/2014", 456.75);

The financial institution showed a YTD rate of return as 3.2%. My calculation showed 6.19%.

Notice that to calculate YTD, you need to take into consideration the value of the portfolio at the end of the previous year.

Case III

The following data represents the combined deposits:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);
paymentArray[8] = createTransaction("1/13/2014", 450.00);
paymentArray[9] = createTransaction("1/27/2014", 450.00);
paymentArray[10] = createTransaction("2/10/2014", 450.00);
paymentArray[11] = createTransaction("2/20/2014", 450.00);
paymentArray[12] = createTransaction("2/28/2014", 376.82);
paymentArray[13] = createTransaction("3/07/2014", 450.00);
paymentArray[14] = createTransaction("3/21/2014", 450.00);
paymentArray[15] = createTransaction("4/04/2014", 450.00);
paymentArray[16] = createTransaction("4/17/2014", 456.08);
paymentArray[17] = createTransaction("5/02/2014", 456.75);
paymentArray[18] = createTransaction("5/16/2014", 456.75);
paymentArray[19] = createTransaction("5/30/2014", 456.75);
paymentArray[20] = createTransaction("6/13/2014", 456.75);
paymentArray[21] = createTransaction("6/27/2014", 456.75);
paymentArray[22] = createTransaction("7/11/2014", 456.75);
paymentArray[23] = createTransaction("7/25/2014", 456.75);
paymentArray[24] = createTransaction("8/08/2014", 456.75);

The financial institution showed a lifetime rate of return as 6.2%. My calculation showed 6.96%.

As a sanity check, if the 2013 rate of return was 3.6% and the YTD rate of return was 3.2%, how could the lifetime rate of return be 6.2%?

Know your personal rate of return. This will help you weed through the fund performance charts, the sales charges, the hidden fees, reported returns, etc.

This post was reposted from http://finlit.biz/uncategorized/how-can-financial-institutions-be-more-transparent/, originally written on August 15th, 2014.