Don’t take the blame for fund scandals, advisor says

(December 17, 2004) Advisors should distance themselves from the recent mutual fund market timing investigations, says author and Toronto-based advisor John De Goey, since they were unaware of the practice.

The Ontario Securities Commission effectively wrapped up its fund probe on Thursday, announcing settlement agreements with AGF, AIC, CI and Investors Group worth $156.5 million. The money will be paid back to fund investors, the commission has promised. Only one other fund company, Franklin Templeton, is still under investigation.

“Advisors need to be absolutely clear that they were not in any way culpable and were every bit as oblivious to market timing and we only found out about it at the same time consumers did, through the media,” De Goey says.

De Goey wants to ensure that any negative publicity resulting from the probe “does not attach itself to advisors because we had nothing to do with it. Often advisors have been made to wear past problems. I simply refuse to wear this because I had nothing to do with it.”

Still, De Goey says he’s advising his clients to steer clear of the fund companies involved in the investigation. “Not because I think they are going to be doing this going forward, but because I believe there’s a need for accountability for past actions.”

Allan Johnson of Money Concepts in Prince George, B.C., thinks the settlement terms will act as a deterrent for companies that allowed some people the opportunity to gain financially at the expense of others. But he adds it will still take some time for the investing public to regain confidence in the world of investing and financial management.

As for the fines themselves, De Goey describes them as “ridiculously low,” considering the total profits realized by the market timers topped $300 million.

“So the thieves are better off, whether they are caught or not,” he says. “You can make a lot of money if you steal from long-term unitholders, and make somewhat less if you get caught. So I don’t see the bad guys being punished in a meaningful way.”

In the settlement agreements, the OSC noted that not all of the profits realized by market timing traders came from frequent trading transactions and did not necessarily equate to harm to fund investors.

And it could be argued that the fund companies’ fines are actually quite severe, considering any profits they made came in the form of trading fees. For instance, the total profit realized by AGF by market timing traders was $47.9 million. However, after subtracting trailer fees, AGF earned only $700,000 on those trades. AGF was fined $29.2 million.

“The silver lining here is that fund companies were forced to pay to damaged investors an amount equal to many times the amount that fund companies benefited,” says industry analyst Dan Hallett. “And investors haven’t suffered all that much, overall.”

“On a net basis, the market timing profits, less the restitution payments, amount to 0.18% of all foreign stock fund assets. So, it’s not huge but this is about principle. Investors are out of pocket on this deal. And that’s a little disappointing regardless of the amount.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com