2021 Investment Rate of Return: Quicken vs. Fidelity

Dennis Mahoney

What are some of the factors that would cause the Fidelity and Quicken rates of return to differ? I have a number of Fidelity accounts and the rates of return on the Fidelity website agree with the Quicken values (Investment Account Performance - Last Year) in some instances but not all. Here are some examples for Quicken (Fidelity): 27.27% (27.27%); 26.64% (26.40%); 3.24% (2.18%); 16.92% (13.06%); 3.77% (4.68%).

Jim_Harman

Are you referring to the Investment Performance Performance report, or some other measure in Quicken?

Tom Young

"Rates of return" posted by financial institutions (FIs) typically assume that all distributions are reinvested and that no "new money" is deposited and no money is taken out.  Unless your pattern of activity exactly mimics those assumptions then any IRR that you calculate is going to differ from what the FI has posted.  Is that the case here?

Bob_L

 The quicken securities tab  setting "no security - includes cash" can also affect results.

ggold91364

The DEFINITION of Rate of Return is the issue. Quicken explains the formula it uses to compute RoI, which is the correct method of computing what is called the "effective rate of return". (See the end of this post.)

So, suppose you put funds in a bank and your account is stated to earn at an annual rate of interest R that is compounded daily. And let's assume you deposit funds on different dates and make no withdrawals (just to keep this simple). Then because the account compounds DAILY the compound interest formula is used by taking the bank's annual rate and dividing it by 365 to come up with the daily rate (excluding Leap Year). Then each deposit earns its interest for the number of days it was in the account. If you made only one deposit at the opening of the account and let the interest earned remain in the account, you would find that the total amount in the account at the end of one year would correspond to the stated annual compounded rate of return promised by the Bank. Not so incidentally, if you borrow money from a bank, you will be provided with the NOMINAL INTEREST RATE and the EFFECTIVE or COMPOUNDED INTEREST RATE (which is larger due to the time value of money).

Now let's turn this around and say we start with X dollars in an account at day 1 and the account earns Z dollars paid each month at the end of the month. At the end of the year the account value will be larger by the amount of earnings. The QUESTION is WHAT'S THE EFFECTIVE ANNUAL RATE OF RETURN EARNED?

in this case you know the dates and amounts of each transaction as well as the starting value and ending value of the account at the end of the year. The UNKNOWN is the Effective Rate of Return. If you assume the rate of return was compounded DAILY you use the same formula used to compute the compounded interest, but in this case you have to solve for the unknown rate of return.

That's exactly what Quicken advertises it does with its RoI formula. However, as I've noted in my other note above, there appears to be an implementation error when Quicken does this computation (at least on some investments) and I am trying to resolve that with Quicken support.

But you also asked what other reasons your Fidelity rate or return might differ. Most brokerages do NOT compute the Effective Rate of Return when they provide the account's annual rate of return. A common practice is to take the year-end value of the account and divide it by the value at the beginning of the year. This ratio will be a number greater than 1 if the account made money and it will be less than 1 if the account lost money.

Let's assume the account made money and that ratio comes out 1.0678. Subtract 1 and the Rate of return is .0678 or 6.78%. You probably now see that your stated return depends on the DEFINITION of the return used by the account-holding institution so ask them what is their definition and THEN MAKE SURE THEY ARE COMPUTING IT CORRECTLY.

Here's a link to compute the EFFECTIVE ANNUAL RATE OF RETURN.
https://www.calculatorsoup.com/calculators/financial/effective-annual-rate-calculator.php#:~:text=Effective%20Annual%20Rate%20Formula%20i%20%3D%20%28%201,formula%3A%20i%20%3D%20e%20r%20%E2%88%92%201%20

Note that one must include the dates of each transaction, which Quicken can do and Fidelity can do as well.

NotACPA

Note that, in a Retirement type account, Fidelity records the Cost Basis of reinvested dividends as $0 ... while the same security in a taxable account gets an accurate cost basis.

I hold my former employer's stock in both account types, which is how I discovered this.

A $0 cost basis is guaranteed to screw up performance calculations.

Dennis Mahoney

Thank you to all of you for your comments and suggestions. Some of you mentioned the calculation procedure and I did check: Fidelity calculates performance on a monthly basis whereas I think xirr and Quicken use daily compounding. I tried to address all the comments each of you made. I think the best course of action is to ask Fidelity how they do their calculation. I'll add a comment if I find out any differences.

Answers to your questions:
for Jim Harmon:
Yes, it is the Investment Performance report. The parameters I used in the question were time period last year and subtotal by account. Showing or hiding the cash flow detail does not change the calculation.

for Tom Young:
The account with perfect match (27.27%) had no activity over the year i.e. the only change in account balance was due to share price change over the year. The almost perfect match (26.64 versus 26.40%) had a cash contribution on Feb 19. There was interest on cash of about $0.20 for the year and multiple buys and sells. Maybe the small difference is related to when Fidelity credited the cash from stock sales to the account. The account with the largest difference (16.92 vs. 13.06%) had cash contributions over the year as well as stock purchases (but no sales) and dividends so you are correct that my pattern of activity is different from what you suggest the FI assumptions are. The Quicken value of 16.92% agrees with the Excel value for xirr of 16.93%. In two other accounts there was a lot of activity but close agreement (1.83 vs 1.85% and 14.13 vs 14.11%) so I'm not sure this is the reason.

for Bob_L: I don't know where this setting is; I am using the latest H&B.

for ggold91634:
1. Thank you for the detailed response. I believe Fidelity uses a more detailed calculation than value (on Dec 31)/(value on Jan 1) but it does not match the Quicken or xirr calculation (this for the account with 16.92 vs 13.06%) so I will investigate.
2. Obviously all of us are interested in any problems with Quicken calculations and I hope they are resolved but in this case where the Quicken value agrees with Excel I don't think that is the issue.

for NotACPA:
I've seen the cost basis of $0 for retirement accounts as well but I don't think this is the issue if the calculation is a subtotal for the account. If the cost basis is not $0 for a reinvested dividend in a non-retirement account what do you think it should be? I did take a look at a brokerage account I have with my son and a transaction on Dec 13 (reinv-long, reinv-short, div) from a mutual fund was not shown at all in the Quicken report (subtotal by security with cash flow detail). It seems like it should have been since a transaction date for cash or shares coming in should matter. I did try changing the date and it didn't affect the fund performance. The Quicken result of 3.24% for the account was higher than the Fidelity result of 2.18%.

Bob_L

The setting for "no security includes cash" is on the securities tab of the Customize report dialog(the gear icon at the top of the opened report). To then see that option you need to choose the radio button for including selected securities instead of all securities.