How is the AER defined?

The Annual Equivalent Rate (AER) reflects the interest rate on a savings account or investment when interest is compounded annually. It provides a standardized way to compare savings or investment products that may offer different compounding intervals—such as daily, monthly, or quarterly. AER accounts for the effect of compounding, which can significantly impact the overall yield of an investment over time.

By defining AER this way, it makes it easier for investors to understand the true annual return they can expect on their investments, regardless of how frequently interest is compounded. This is especially important when comparing products with different compounding terms, ensuring that investors can make informed decisions based on an apples-to-apples comparison of rates.

Understanding AER is crucial for wealth management as it allows clients to assess their investment options more effectively and understand the potential growth of their savings or investments over time.