Reasonable (and Unreasonable) Rates of Return

September 16th, 2015

The Financial Planning Standards Council recently promulgated Projection Assumption Guidelines. The Guidelines help financial planners set appropriate assumptions when developing financial plans for clients. The most interesting guidelines are those for investment rates of return.

Using a variety of sources, for example the assumptions used in the valuation of the Canada and Quebec Pension Plans, they produce the following recommendations for before expenses, investment rates of return.

Investment Risk Profile Rate of Return

Conservative 4.45%
Balanced 5.05%
Aggressive 5.65%

I recently read a book about Bernie Madoff. He defrauded thousands of investors and charitable trusts of thousands of millions of dollars by promising investors rates of return of 12 to 20%.

An article appeared in the Globe and Mail in July describing the biggest fraud in Canadian history. More than 2,400 investors lost up to $400 million. These investors were promised a 34% rate of return on a “low risk” investment that involved selling gold for refining.

My original objective was to write an article warning my clients that if the FPSC thinks that an appropriate rate of return on an aggressive portfolio is 5.65%, anything promising multiples of that rate of return is unlikely, illegal or, at the very best extremely risky. If you accept promises of rates of return like 12, 20 or 34% you are allowing your greed to overwhelm your common sense.

My initial research turns up potential lapses on the part of regulators and abuse of the rules of exempt investments. My research continues. What I am hoping to find is this. What is (are) the question(s) that these 1,200 investors should have asked those, presumably very aggressive sales people that would have warned them that all was not well.

By the way, Bernie Madoff was sentenced to 150 years in prison. Sorenson and Brost, the men behind Strategic Metals Corp. in Calgary were sentenced to 12(!!) years in prison and banned from the investment business for 20(!!) years.

The search for the right questions to ask continues.