The second phase of the client relationship model (CRM2) requires account performance to be calculated using a dollar-weighted rate of return (DWRR) metric.

However well intended, I anticipate that this choice by securities regulators will result in some confusion for clients. The DWRR has some oddities of which you need to be aware when discussing the performance of investments with your clients.

Performance is advertised as time-weighted return; a calculation of the product or portfolio manager's returns. DWRR, on the other hand, incorporates a client's cash flow - size, direction and timing - to provide a personalized portfolio return figure.

Because of the use of DWRR, CRM2 performance reports will preclude all sorts of comparisons. For example, clients usually have multiple accounts with their main financial advisor, but often have more than one advisor.

To the extent that cash flow patterns are materially different across accounts, performance comparisons will be meaningless.

Consider a client with an RRSP and a TFSA. Each account is invested in an identical balanced portfolio beginning with $10,000 invested on Dec. 31, 2015.

The RRSP has no activity through 2016 and holds the initial $10,000 through the end of 2016. The RRSP account's DWRR was 6.5% for calendar 2016.

However, $5,000 was withdrawn from the TFSA on Feb. 29, 2016, a low point during the year. The TFSA's DWRR was 2.4% for 2016. The RRSP and TFSA held identical investments (although different amounts) through the year; with identical product (i.e., time-weighted) returns.

But, in the TFSA, money leaves the portfolio at a low point - leaving fewer dollars invested to enjoy the rebound - resulting in a lower DWRR. Thus, comparing these accounts' DWRR meaningfully is impossible.

Similarly, comparisons of account DWRRs with widely followed benchmarks - such as the S&P/TSX composite index, S&P 500 composite index, etc., or a blend thereof - will be pointless.

That's why regulators made benchmarking optional. (Note that comparisons aren't as problematic when interim cash flows are relatively small compared with beginning and ending values.)

Moreover, the DWRR may not make much sense to clients. Most people can understand that beginning the year with $100,000 and ending the year with $120,000 equates to a 20% rate of return. But DWRR doesn't allow for the same intuitive observation, making that metric challenging to interpret.

Finally, here's an example I designed to expose the odd problem of multiple DWRR solutions for the same account, which can occur if cash flows are proportionately large and erratic. Let's begin with a $1,000 deposit in a hypothetical medical marijuana stock.

The stock triples in value and the client withdraws $3,180 at the end of Year 1, then makes a deposit of $3,369.20 in Year 2. But then the stock tanks, so the client is left with a value of $1,189.32 at the end of Year 3.

In this example, DWRR of 2%, 6% and 10% are all mathematically correct. This makes no sense; hence, the problem. Fortunately, this is rare, but it can happen in clients' smaller, speculative accounts.

It's for all of these reasons that many people in the investment industry advocated using time-weighted return metrics.

In any event, keeping these DWRR quirks in mind can be helpful when providing performance reviews and tackling clients' questions.

Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.

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