For Larry Bates, a veteran of the world of investment banking, it represents a new direction, an opportunity to shine the spotlight on net return — or how much investors actually keep after all fees are paid.

Bates, who spent about three decades in fixed income market in both Canada and London, is the developer of wealthgame.ca (an information-heavy website that’s just gone live) and an author (The Wealth Game book is scheduled for release later this year.)

The T-Rex score, or an investor’s total return efficiency index, is one of the big breakthroughs in his work. “Your T-Rex Score represents the percentage of your total investment gain you actually get to keep,” said Bates, arguing investors need to be aware of the impact fees have on a portfolio’s overall return over different periods of time.

“It’s information they need. Understanding the full impact of fees over time will lead to better decisions,” added Bates whose work is also timely given that some retail investors will have recently received financial statements that are CRM2 compliant. CRM2 refers to the second round of changes under the new Client Relationship Model put in place by regulators.

And thanks to the website, calculating one’s T-Rex Score is relatively straightforward. Information is plugged into four boxes (amount invested, annual return, annual fees and time horizon) and the update button generates your score.

Aside from determining one’s T-Rex Score, the website also displays total return, net return after fees, what’s lost in fees, the investor’s gain and the portfolio’s total value at the end of the time period.

Understanding the full impact of fees over time will lead to better decisions

And the results can be surprising. “It’s not always intuitive,” suggested Bates adding T-Rex Scores change dramatically (for the worse) the longer the time period. “Paying annual fees of one per cent to two per cent can translate into losing 25 per cent to 50 per cent of your returns over time,” he said.

For instance, a $10,000 investment that generates 6.4 per cent a year with all the distributions reinvested; that has annual fees of 1.75 per cent and a 25 year time horizon, results in a T-Rex Score of 57 per cent — meaning that fees eat up 43 per cent of the return. (As for the numbers, the Financial Planning Standards Council advises its members to use a 6.4 per cent return; while the management expense ratio for many mutual funds is atypically 1.75 per cent or more.)

When those same parameters are extended for a 40-year period the T-Rex Score falls to 47 per cent. (Over a 10-year period the same parameters combine to produce a 67 per cent T-Rex Score.)

Put that result down to the impact of compounding and the so-called drag on total returns caused by higher fees. Visitors to the site can determine their T-Rex score under any scenario they wish. And Bates — who developed the T-Rex Score concept after a friend called to bemoan the investment return of a fund he had invested in — says research shows low-cost funds tend to beat high-cost funds.

While fund companies are obligated to add a disclaimer that past performance is no guarantee of future returns, studies done by Morningstar on U.S. funds, show that expense ratios are still “the most dependable predictor of performance.”

Bates argues both transparency (do investors know what they are paying?) and the long-term impact of the fees are two issues faced by investors. “The T-Rex Score, is an easy to use tool that tells an important story. Once you know your Score, you can judge whether or not you will get a fair share of your investment returns,” he said.

Financial Post
bcritchley@postmedia.com