Former Bay Street executive leads push to require firms to account for inflation in investment reports

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While the average Canadian is fixated on the price of gasoline and groceries, inflation may be quietly killing their investment returns.

Compounded across many years, even modest inflation can deal a powerful blow to a standard investment portfolio. And investors commonly underappreciate the threat.

But a legend of the Canadian investment banking industry is trying to change that.

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

“I think they will find this very hard to argue against,” he said in an interview. “It’s a matter of transparency and reporting integrity. 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 factored in.

A real return, on the other hand, accounts for the hit to purchasing power from rising consumer prices.

These figures, Mr. Fell argues, would give investors a clearer picture of how much they have gained from a given investment.

And since Statistics Canada calculates inflation on a monthly basis, the investment industry would already have access to the data it needs to make the switch to real returns. It would be very little trouble and no extra cost, Mr. Fell said.

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

He points to the battle 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 took effect in 2016, required financial companies to disclose how much clients paid for financial advice.

But the reforms left out one major component of mutual-fund fees. The cost of advice is there, but many investors still don’t see how much they pay in fund-management fees, which amount to billions of dollars paid by Canadians each year.

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

So, it’s hard to imagine the industry warmly receiving his proposal, or the regulators enthusiastically pushing for its consideration.

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

And yet, Mr. Fell said, the need exists for more formal reporting of inflation-adjusted performance.

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

The inflationary extremes of the 1970s provide a stark illustration. In 1979, the S&P 500 index posted a total return of 18.5 per cent – a blockbuster year until you consider that inflation was 13.3 per cent.

That took the index’s real return down to a lacklustre 5.2 per cent.

More recently, investors in Canada and the United States piled into savings instruments promising 5-per-cent nominal rates of return. But the rate of inflation in Canada averaged 6.8 per cent in 2022, more than wiping out the return on things such as 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-per-cent inflation really eats away at purchasing power.”

He worries, however, that reporting after-inflation returns may confuse average investors, many of whom still fail to understand the basic investment fees they’re paying.

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

“The impact of inflation on investing is sort of forgotten about,” he said. “The only way I can think of turning that around is to highlight it in investors’ statements.”