The time is right for mutual fund firms to show their ethics

There's one more reason for the fund industry here to get out in front of the U.S. scandals. In a word, it's fees. New York Attorney-General Eliot Spitzer, the man behind the crackdown on the U.S. industry, has a list of allegations against fund companies that includes inflated fees. Mr. Spitzer thinks U.S. fund fees are excessive? Keep him away from the Canadian fund industry or he'll have a stroke.

The Globe and Mail
November 6, 2003

The time is right for mutual fund firms to show their ethics
Rob Carrick

Canadian mutual fund companies have a chance to really enhance their image amid the scandal in the U.S. fund industry.

All they have to do is stand up right now and disavow the cynical and exploitative practices that some of their U.S. counterparts have used.

We're not talking about anything too elaborate here, just some fund company executives saying: "Nope, no market timing or late trading in our organization. We serve our unitholders, we don't serve them up on a platter."

Market timing and late trading are tricks that insider-ish cliques of fund company employees and their associates use to make quick profits that aren't available to rank-and-file investors.

The mutual fund industry has always been a bit like the Roman god Janus. There's the face that strives to be seen as a trusted steward of the common folk's money, and an uglier face that first and foremost is in the business of selling a product. It's this second face that's being exposed in the U.S. fund scandal.

You can just imagine how this will play with investors. After Enron, WorldCom and sundry other scandals involving leading North American corporations and brokerage houses, there's not likely to be much understanding shown to the fund industry.

This is why the time is right for Canadian fund companies to clearly tell their unitholders that they come first.

Put the message in a mailing to clients. Buy some ads. Call a news conference. Just do something to show clients that they're not dairy cattle.

The assumption here is that market timing and late trading aren't going on in any large way at Canadian fund companies.

There are no indications that they are, but we'll know for sure after the Ontario Securities Commission looks into the situation.

Want a handy definition of a public relations disaster? It's a Canadian fund company that gets caught out by the OSC for abusive fund trading practices.

If you're a fund company that isn't doing this stuff, say so now. Fund companies that conduct an internal investigation and find problems should immediately come clean. Better to make a clean breast of it than to be outted by regulators.

The U.S. fund scandal comes at a rotten time for the industry in Canada. Despite an upturn in the stock markets this year, fund sales have only just shown signs of throwing off a slump lasting more than 1½ years.

A very small number of investors may be put off funds because of what's going on in the United States, but the masses will stay loyal because mutual funds are the smartest investing choice for most.

That may change if the fund scandal comes to Canada.

No, investors aren't going to cash out their holdings en masse. Where would they go if they did? Most don't want any part of stocks, and interest rates are too low to jump into guaranteed investment certificates.

Some investors would leave, however. Others would stop contributing new money to funds. Younger investors would turn away. And so might older investors if rates rise, or if they get more comfortable with fund alternatives such as exchange-traded funds or even stocks.

Fund companies in Canada have watched their assets fall to $409-billion from $432-billion three years ago. Anyone who sees the industry regaining its former glory in the wake of a trading scandal is on drugs.

There's one more reason for the fund industry here to get out in front of the U.S. scandals. In a word, it's fees.

New York Attorney-General Eliot Spitzer, the man behind the crackdown on the U.S. industry, has a list of allegations against fund companies that includes inflated fees. Mr. Spitzer thinks U.S. fund fees are excessive? Keep him away from the Canadian fund industry or he'll have a stroke.

Fund fees here include more elements than they do in the United States, so a straight comparison is somewhat unfair. There's also the question of whether regulators or lawmakers should even have a say over fund fees.

Then again, what a lively debate it would be if a fund trading scandal here in Canada segued into an inquisition about fees. If you sell funds for a living, that's your basic nightmare.

But enough dwelling on the worst case. Today, fund companies in this country have an opportunity to face down the U.S. scandal and all related gossip about the situation in Canada.

How about it, guys? Show us your ethics.

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