Lies, damn lies, and mutual funds.
In truth, many observers strongly suspect Canadian mutual fund companies are equally likely to engage in market timing. The only difference is that Canada doesn’t have Eliot Spitzer to hold companies accountable for their conduct. Some even point out that market timing in mutual funds is not illegal. Of course, that doesn’t make it ethical. Mutual fund firms likely put up with the practice because it is a profitable way of skirting the rules. Since the overall cost to a unitholder would likely only be a few basis points (a basis point is 1/100th of a per cent), the transgression seems relatively innocuous.
Corporate governance and the moral code companies adhere to are not readily quantifiable when there are literally hundreds of thousands of people who are out a dime or less as a result of company practices. There are a number of related matters that might also be called into question on the advisory side. For instance, earlier this year, I attended a party thrown by a major mutual fund company where fewer than 400 advisors were admitted to a small club to hear a major Canadian recording artist perform. Rumour had it that the food, rental of the venue and payment of the artist led to a total bill of over $100,000.
Now you have an idea why MERs continue to climb in Canada in spite of lofty rhetoric to the contrary. The cause is indirect, but real nonetheless. Fund companies might charge 1 per cent whether they throw these sorts of parties or not. One could argue that if these sorts of soft costs (which include more golf shirts than you can count) were foregone, MERs could be appreciably lower while maintaining corporate profitability. How did this little shindig serve the interests of unitholders, anyway?
Improved disclosure is one solution that is bandied about by the people who would prescribe a pair of aspirin where major surgery is clearly in order. Most consumers never read a prospectus, no matter how firmly their advisor recommends it. Furthermore, most of the handful that do take the time to read a prospectus wouldn’t understand what they read once they were through, anyway. One solution is to move to single sheet point-ofsale disclosure documents such as those found on www.investorism.com. Some people, such as myself (and Edward Jones, it appears) think it would be far more useful if the inherent bias associated with embedded compensation could be removed entirely. That’s one of the options put forward by the Ontario Securities Commission’s "Fair Dealing Model."
One of the best practices that has not yet been established is the mandatory presence of independent boards to oversee all manner of corporate decision-making. These would be Boards for the mutual funds themselves—working for and paid by the unitholder—to ensure suitable business conduct. Fund companies remain maddeningly unresponsive to the problems-both real and perceived. In fairness, some companies are trying to address these issues, but the approach has been rather piecemeal to date. The biggest problem is that consistently high levels of disclosure and corporate conduct have not been made mandatory.
Of course, these are only the big issues. Other problems include: co-op advertising money, sales trips and conferences, the total lack of oversight on matters of financial planning, the lack of meaningful professional standards for people holding themselves out as financial advisors, churning and conflicts of interest involving proprietary products.
In light of all this, how can any sensible person suggest that the Canadian mutual fund industry “ain’t broke?” Why not call your local political representatives and ask them to fix it? After all, the industry isn’t even decent enough to admit it has a problem—and there is a federal election coming up this spring.