Fund companies receive a slap on the wrist, but what about the little guy?

They say there’s no free lunch in life. But for some Canadian investment advisors, there’s not only been free lunches, but free golf trips, free tickets to sports events and concerts by the likes of Madonna, Paul McCartney and Justin Bieber, and other pricey gifts.

Mutual fund companies laid those goodies on advisors to encourage them to recommend (read: sell) their mutual funds to their clients.

As I mentioned in my last column, that kind of lavish promotional spending has led to a belated crackdown by the Ontario Securities Commission. The OSC has handed out a total of $3.2 million in fines to three fund companies as part of settlements over the spending.

They are Mackenzie Financial, fined $900,0000, Scotiabank’s 1832 Asset Management, fined $800,000, and Sentry Investments, fined $1.5 million. The trio were also required to each pay $150,000 to cover the OSC’s investigation costs.

Clients left in the dark

While the focus in the settlements was on fund companies and advisors, let’s save a thought for the clients. When they purchased mutual funds from the companies in question, did their financial advisors disclose they’d been wined and dined and given assorted swag? We don’t know, but it seems unlikely.

What’s more plausible is the clients were told about the fund’s holdings, its successful track record and the managers’ promising investment strategy.

Unfortunately, according to an astonishing study I discussed in another recent column, most advisors just don’t make good investment recommendations to their clients, even before you throw in freebies from mutual fund companies.

We know this because the advisor’s personal portfolios reflect the same bad investing choices as those of the clients they advise, according to the study.

Many advisors have misguided beliefs

“They under-diversify, trade frequently and favour expensive, actively managed mutual funds with high past returns, despite evidence that these strategies often underperform,” says the paper, which looked at data from two large Canadian financial institutions, comprised of the trading and account records of more than 4,000 advisors and 500,000 clients.

In other words, many advisors are incompetent, dangerously so, when you consider this is their own and their clients’ retirement savings we’re talking about.

So yes, let’s have more enforcement to get conflicts of interest out of the industry. But let’s take it further.

How to protect investors better

We need tougher penalties for misconduct, as well as improved training and certification standards for investment advisors.

But most importantly, we must make it a legal obligation for investment firms to act in their clients’ best interests. That’s called a fiduciary standard, and I’ll talk more about it in the next Tony’s Take.