A recent settlement involving two mutual fund advisors illustrates why Canada’s investment industry needs to be held to a higher standard of conduct.
The case involved a pair of clients who were over 90 years old when their Investors Group advisors sold them deferred sales charge (DSC) mutual funds with seven-year redemption schedules.
The investments were for hundreds of thousands of dollars, money the elderly clients had come into when they sold their homes and moved into retirement residences. Both clients were dead within two years, leaving their estates to pony up huge fees when the DSC mutual funds were liquidated.
The case shows not only why DSC mutual funds should be banned, but just how ugly advisor behaviour can be. It’s why the industry needs to be held to what’s known as a fiduciary standard of conduct in its dealings with clients.
When you buy a DSC mutual fund, you don’t pay an initial fee, but, if you redeem your investment during the first five or seven years, you pay a sales charge. Typically, it starts at 6% of your investment in the first year and declines each year to zero in the fifth to seventh year, depending on the fund.
Mutual fund companies like DSCs because they keep investors locked into their funds. Of more interest to advisors is the hefty 5% upfront commission they earn, plus ongoing trailer fees.
In the Investors Group cases, one advisor—unnamed in the settlement agreement—raked in $18,043.44 on the sale of a DSC mutual fund to his 95-year-old client. The other pocketed $12,920 on the sale of funds to his 92-year-old client.
Investors Group ended up reimbursing the DSC charges to the clients’ estates. One of the advisors forfeited his commission and was fired by Investors after a series of other unsuitable DSC trades were turned up in a review. There’s no mention of disciplinary action against the other advisor whose book of business didn’t show other examples of abuse.
In its settlement with the Mutual Fund Dealers Association of Canada, Investors Group agreed to pay a $150,000 fine plus $15,000 in costs. In 2017, the company stopped selling DSC funds.
Elsewhere, DSC fund sales go on thanks to the Ontario government. Late last year, Ontario Finance Minister Vic Fedeli rejected a long-debated ban on DSC funds by provincial securities regulators.
That’s bad, but what’s worse is that Canada still clings to a standard of conduct that requires advisors to recommend investments that are merely “suitable” for their clients.
That’s a lower standard than the one to which we at PWL Capital voluntarily adhere. It’s known as a fiduciary standard and it requires advisors to act in the best interests of their clients.
Enforced adherence to a fiduciary standard would help prevent disgraceful episodes like those in the Investors Group case by raising the bar for the entire industry.
When it comes to your life savings, you deserve and should expect the highest degree of ethical behavior among those you have entrusted to advise you.