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Fund dealers make a variety of errors that can produce incorrect performance reporting for clients, a review by the Mutual Fund Dealers Association of Canada (MFDA) has found.

The self-regulatory organization examined account-level performance data — collected for the first time as part of MFDA’s ongoing Client Research Project — and focused on accounts that displayed unusual returns (both positive and negative).

The analysis found a variety of reasons for aberrant returns, including firms using incorrect values for investments, improperly accounting for cash flows, using incorrect dates and not including all investments in the calculations.

The report noted that the issues uncovered in the review tended to be account- or investment-specific, and don’t indicate widespread issues with performance reporting in the industry.

Additionally, the report noted that returns calculated with the money-weighted methodology can produce unusual (but not inaccurate) results, given that both the size and timing of cash flows impact reported returns.

Under the methodology, “gains or losses can be particularly magnified for transactions that happen near the end of the year, especially where the late-year transactions are very large relative to the size of the account,” the report said. “As a result, there can be unusual returns even when there are no errors in the calculation.”

Both dealers and reps should be aware of the possibility of unusual return reporting, the report said, “and should be prepared to discuss the rate of return with clients.”

The MFDA said firms should regularly review their own performance reporting to catch the kinds of issues uncovered in its review. And if clients have been given incorrect reports, dealers should provide affected investors with restated performance reports.

“Members are reminded to carefully review and test their annual performance reporting, as inaccurate reporting can impact investment decisions,” the report said.

The MFDA said it will continue to review performance reporting in its compliance reviews.