I went to a seminar yesterday sponsored by the law firm, Borden Ladner Gervais (BLG). It was about setting up an "Independent Review Committee" (IRC) for a mutual fund company. Going forward, each company must have a committee of independent people (at least three) to review any conflicts of interest that the fund manager might have with the unitholders. While everyone has conflicts, as BLG pointed out, this issue is particularly relevant to the banks and financial conglomerates like Power Corp and Manulife. If their mutual funds are going to be able to buy their own stock(s) or stock issued by their brokerage arms (as they should), there needs to be some oversight.
I've known about the IRC legislation for a while and was not looking forward to recruiting the committee and putting the process in place. So the BLG seminar was a kick in the butt to get me started. As I sat and listened, I found myself getting increasingly discouraged. It was nothing BLG did. They delivered the material capably and kept it under two hours. My mood change came from two things that nagged at me.
First, there is a ton of administration around this process and the costs are not insignificant to the unitholder. And yet, for the clients of firms like Steadyhand (independent providers), the benefits are virtually non-existent. The IRC's for these firms will have very little to do.
The other thing that depressed me was being reminded how heavily the mutual fund industry is now regulated compared to all the other investment packages that are being sold as alternatives. Billions of dollars are flowing into a variety of structured products including principal-protected notes and other (highly creative) closed-end funds. Indeed, when I read my copy of the Investment Executive every month, I always discover a few new twists or flavours. (Note: I'm repeating myself I know, but we must remember that these packages all do the same thing in the end - they invest in stocks and bonds.) The oversight of these products and the disclosure requirements do not hold a candle to mutual funds and yet they are more complicated and have considerably more scope for abuse.
I'm not arguing that there are no abuses in the mutual fund arena, because there are. We need proper oversight for sure. But we may now be tipping to the wrong side of the balance between cost and benefit. For the alternative products, we are nowhere near the balance point.