A class-action lawsuit against mutual fund companies over market timing activity could stir the pot of investor angst at an inopportune time for advisors.
The class, which is seeking certification this week, alleges the companies lapsed on their fiduciary duties to less sophisticated investors by allowing more experienced players to time purchases and sales to reap profits during a period between 1998 and 2003. Several fund companies settled with regulators at mid-decade, but the class claims the restitution was not sufficient.
For advisors, the action comes at the worst of times.
Many clients have only just regained trust in financial professionals, and the resurrection of an issue considered long-dead now dogs them at a time when the ghosts of Madoff and Jones are still fresh in investor’s memories.
In such an environment, the suit and resulting national press attention are bound to get investors wondering if they had holdings in the suspect funds, whether or not that advisor is a true fiduciary, and just what their advisor does to earn the money he or she is paid by the client.
What’s an advisor to do?
Pre-empt the conversation by bringing up the subject during a scheduled annual meeting or in a topic-specific conversation, says John Kelleway, regional vice-president for Ontario and the Atlantic provinces at Dundee Wealth.
“Tackle it right upfront by having a clear, transparent message about how you’re paid,” he says. “Instead of worrying about an after-the-fact conversation, advisors should have a one page document that explains fees.”
That one-pager should be followed by a second brief document that outlines what the advisor does for the money.
“They should have a message to explain why they’re worth that,” he says. “And if they can’t answer those questions, I’d go so far as to say they shouldn’t be in the business.”
Kelleway notes compensation issues are coming up as investors ask more questions about how DSC charges work. Such concerns have prompted many advisors to explore fee-based options, and while it’s certainly easier for fee advisors, or those working on a percentage of assets basis, to articulate their payment arrangements, he notes that even those using imbedded compensation “should be able to pull that out and explain how they’re getting paid.”
Advisors must also reiterate to clients that the market timing and late trading issues were dealt with by regulators between 2003, when they were first unearthed, and 2005 when the last settlements were completed.
Regulators established a hard close at 4 p.m. to prevent certain fund buyers from being given preferential prices; and firms were required to keep an eye on round-tripping of purchases and sales by buyers who were looking to reap spreads.
Kelleway notes questions about compensation are also emerging as ancillary concerns during suitability complaints and that clients sometimes ask for fees to be reversed. He says it’s a difficult to get clients to understand such reversals aren’t practical in instances where fees are imbedded.
Other advisors note they might be spared a lot of questions by the amount of time that’s passed since the market timing scandals were settled.
An advisor in Calgary points out most clients don’t remember what they had in their portfolios in 2003, and many don’t know what they currently hold, because they’re not actively involved in fund selections.
Kelleway says that, as a dealer, his firm has its eyes on churning of accounts and is working to keep pace with regulators’ interests in preventing such infractions. His firm has engaged its advisors to develop internal policies that work on a practical level, while satisfying the needs of the MFDA and IIROC.
“Advisors more and more are saying this is a hard business to be in, because firms are taking a hard line on risk management. And of course the regulators are hard on it too,” he says. “So it’s a lot of paperwork to manage client relationships.”
For a refresher on the market timing scandal, please click here.
(12/03/09)