Former Bay Street executives push to require companies to account for inflation in investment reports – The Globe and Mail Achi-News

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While Canadians are on average stable on the price of gasoline and groceries, inflation may be quietly killing their investment returns.

When compounded over several years, even moderate inflation can be a powerful blow to a standard investment portfolio. And investors often don’t appreciate the threat.

But a legend of Canada’s investment banking industry is trying to change that.

Tony Fell, former chief executive officer of RBC Dominion Securities, is campaigning to require the Canadian financial industry to account for inflation in the way it reports investment returns.

“I think this will be very difficult for them to argue against,” he said in an interview. “It’s a matter of transparency and integrity of reporting. But that doesn’t mean it will happen. “

Mr. Fell made his case in a recent letter to the Ontario Securities Commission, arguing that Canadian investors are being misled. He has not yet received a response from the regulator.

Canadians with an investment account receive a statement at least once a year detailing how their investments have performed. For the most part, rates of return are calculated on a nominal basis, meaning they have no inflation component built in.

Real earnings, on the other hand, account for the blow to purchasing power from rising consumer prices.

These figures, Mr Fell argues, give investors a clearer picture of how much they have earned from a particular investment.

And since Statistics Canada calculates inflation monthly, the investment industry would already have access to the data it needs to convert to real returns. That would be very little trouble and no additional cost, said Mr. Fell.

Still, he said he expects the investment industry to resist his proposal. “The mutual fund lobby is so strong, and nobody wants to rock the boat too much.”

It highlights the struggle to inform Canadians of the investment fees they pay. For 30 years, investor advocates have been pushing for improvements to disclosure.

One major set of regulatory changes, which came into effect in 2016, required financial firms to disclose how much clients paid for financial advice.

But the reforms left out one major element of mutual fund fees. The cost of advice is there, but many investors don’t see how much they’re still paying in fund management fees, which equates to billions of dollars paid by Canadians every year.

Total cost reporting, which should close the fee disclosure gap, is expected to come into effect in 2026. “It’s outrageous,” Mr. Fell. “That should have been done years ago.”

Therefore, it is difficult to imagine the industry accepting his proposal warmly, or the regulators pushing enthusiastically to consider it.

The OSC said it agreed that retail investors need to be aware of the effects of inflation, which is where investment advisers come in. “Professional advice requires an assessment of risk tolerance and risk appetite for an adviser to know their client, including the cost of living impact on achieving their financial objectives,” OSC spokesman Andy McNair-West said in an e-mail mail.

Yet, says Mr Fell, more formal reporting of inflation-adjusted performance is needed.

Inflation is often overlooked by the industry and investors alike. It can be seen in the celebration of stock indices at nominal all-time highs, which wouldn’t look so great if inflation were included.

The inflationary extremes of the 1970s provide a clear picture. In 1979, the S&P 500 index showed a total return of 18.5 percent – ​​a successful year until you consider that inflation was 13.3 percent.

That took the index’s real return down to a lackluster 5.2 percent.

More recently, investors in Canada and the United States piled into savings instruments promising nominal rates of return of 5 percent. But Canada’s average inflation rate of 6.8 percent in 2022 more than wiped out the returns on things like guaranteed investment certificates, in most cases.

“A lot of people don’t connect those dots,” said Dan Hallett, head of research at HighView Financial Group. “Over 10 years, even 2 percent inflation really reduces purchasing power.”

He worries, however, that reporting returns after inflation could confuse ordinary investors, many of whom still don’t understand the underlying investment fees they’re paying.

All the more reason to get Canadian investors to think more about inflation, argues Mr. Fell.

“The impact of inflation on investing is being forgotten,” he said. “The only way I can think of to turn that around is to highlight it in investor disclosures.”

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