The Securities and Exchange Commission has been on a lengthy campaign to replace the legalese in securities documents, such as prospectuses for initial public offerings, with plain English that the average investor can understand.
The SEC now needs to push for an overhaul of brokerage account statements. The statements at numerous brokerage firms are crying out for makeovers. “Monthly statements are nearly impossible to understand,” says Phil Aidikoff of the law firm Aidikoff & Uhl in Beverly Hills, Calif.
What You Need to Know
The account statements that appear in your mailbox every month can be difficult to read and often don’t clearly tell you what you need to know about your account and your investments: How much money have you made or lost this year? How does your performance compare to overall market? What’s the asset-class or sector breakdown of your portfolio?
Plus, statements vary greatly from brokerage to brokerage. If you have more than one account at a firm, this could add to your confusion.
With some exceptions, brokerage account statements don’t give you the information you need to follow your portfolio’s performance easily. While the industry says it is making improvements, for now, the easiest way to follow your portfolio may be using the free portfolio trackers available on the Internet from sites like Yahoo! Finance or MSN MoneyCentral.
Some Notable Flaws in Statements
Here are some noticeable flaws in brokerage account statements:
First and foremost, many brokerage account statements don’t tell you how much you’ve made on specific investments over an extended period.
On the summary of your account’s value, you might see what all of your stocks were worth when the last statement came and what they’re worth for the most recent reporting period. So you get to see what your portfolio was worth at the end of June and at the end of July. That’s helpful.
To track how a stock has done since you bought it, or even since the beginning of the year, you’ll need to dig up old statements and calculate the performance yourself.
What you really need to know is how your investments have done in terms of percentage gain or loss, which will let you compare the performance of your individual holdings with one another or to a broad stock-market index.
Looking at one Salomon Smith Barney statement, I know the investor lost money on his mutual funds in July – never a great thing. But to figure out the percentage loss, I had to do the math myself. Those mutual funds fell about 8.7 percent in July, while the S&P 500 was down about 2 percent.
Brokers Prefer Good News
Part of the problem may be that the brokers don’t want to draw your attention to any losses, which explicit performance data could do.
“I find that most brokers want to focus on the good news and don’t want to remind you of bad news,” says Mark Maddox, a lawyer with Maddox Koeller Hargett & Caruso in Indianapolis. “As long as they aren’t hitting you over the head with the information, they have a better chance of holding on to the account.”
Additionally, you may have a hard time figuring out from your statement’s portfolio details exactly whay you own.
Stocks are easy. Cisco is Cisco. Microsoft is Microsoft. Most people know those ticker symbols by heart and have a basic idea of how those stocks are doing.
But when your statement gets to mutual funds or things like unit investment trusts, you might feel like you need the Rosetta Stone to figure out what you own. Many statements won’t include the ticker symbols for your funds. Unit investment trusts don’t have ticker symbols, but the abbreviated descriptions you’ll find read as if a four-year-old had written them. “UTS ETF UCV GROWTH&INC #99 Q 1999 UNCOMMON VALUE-QTLY PMT,” reads the Salomon Smith Barney statement I saw. I know this is a unit investment trust, but that’s about all I know. I can’t even tell if the thing lost money last month.
On my own Scott & Stringfellow statement, the descriptions of the municipal bonds that I own are comical. “VA ST CAP APPREC-HIGHER EDL INST-SER A CAP APPREC.” You get the idea.
How about just telling me what percentage of the portfolio is in stocks, bonds and cash? A bare-bones asset-allocation table isn’t too much to ask for. Some firms, like Merrill Lynch, do include these asset-allocation breakdowns but enough do not.
A Remarkable Disparity
These statements aren’t pretty. And you shouldn’t expect to see sweeping changes anytime soon.
The SEC’s regulations dictate the basic information your broker has to send to you, such as what you bought and how much you paid for it. Its rules don’t tell the firms how that information has to be presented or the style or layout that must be used. The disparity in basic formatting is remarkable.
But people in the brokerage industry say they are trying. Many brokerage firms do try consistently to enhance or upgrade their statements.
Charles Schwab, for example, redesigned the statements for customers who have more than $250,000 with the firm and plans to revamp the rest of its statements. With the makeover, Schwab added pie charts to illustrate each customer’s asset-class breakdown. Customers who want detailed reports on their gains and losses, both realized and unrealized, can pay $20. (For some high-end clients, those reports are free.)
Industry Says It’s Doing Better
Margaret Draper, a spokeswoman for the Securities Industry Association, insists that brokerage firms are making their statements more presentable. “It becomes a competitive advantage to have a user-friendly statement,” Draper says. “I think firms are listening to their clients and doing their best to incorporate the information they want.”
Draper says you should expect to see clearer language on your statements and simple charts for asset-allocation breakdowns and portfolio summaries.
Some brokerage clients don’t want too much information, so the firms are working to find the right midpoint. Better to err on the side of giving you too much than too little.
Merrill Lynch’s statements for its all-in-one Cash Management Account are very detailed and incredibly useful. The statements have everything you would want and more. They give you an asset-allocation summary as well as breakdown of your stock holdings by sector. They also deliver extensive information on your realized gains and losses. You can also link multiple accounts in one statement package. Merrill will also provide an easy-to-understand guide for reading your monthly statement.
As other brokerage firms move to improve their statements, you can take a few steps to make your own statements easier to read.
If you’re completely confused, ask your broker or a customer service representative to walk you through your statement and explain every item. If you want more details on your profits and losses, you can request a special report from your firm, although you might have to pay for it.
Using software or a portfolio tracker on the Internet, you can plug in all your historical account data and start tracking your investments yourself. Or maybe your firm delivers more customized, clear-cut information over the Internet. Schwab customers, for example, can get a free analysis of their portfolio allocations over the Internet.