Tuesday, September 14, 1999

Killoran pushes disclosure form
Idea ignored by buyers and sellers of mutual funds

Jonathan Chevreau
Financial Post

If you want to get mutual fund executives in Canada to roll their eyes in exasperation, just mention Joe Killoran.

Mr. Killoran published the feisty tell-all Frugal Bugle newsletter for three years until he closed it in November, 1995. Since then, he has been continuing a lonely, 10-year crusade to educate Canadian mutual fund investors.

Despite his attempts to become the Ralph Nader of Canadian investment funds, Mr. Killoran has been ignored, pilloried, had his ideas stolen and, in his own words, been "forever employment blackballed" by the financial services industry for his single-minded mission to be what he terms a "truth sayer" on behalf of the public.

Meanwhile, as the bull market continues its merry way, the consumer/investors he wants to assist seem oblivious to the need for better transparency education.

Last February, he launched a Web site to raise awareness: www.investorism.com. It too was ignored by the press, with the exception of Bruce Cohen, who wrote a column about it in the National Post. It has had about 2,200 hits since -- that is about one hit for every 3,500 mutual fund investors in this country.

The central document is Mr. Killoran's one-pager, an interactive point-of-sale -- or, as he prefers, "point-of-being-sold" --disclosure form.

At one point, he persuaded the Investment Funds Institute of Canada to show at least some of the document on its site at www.mutfunds.com. IFIC declined to comment on Mr. Killoran and his document.

As a former stock broker, Mr. Killoran's world view seems to be one of financial barracudas swooping down on helpless financially uneducated consumers. He proudly acknowledges that he was the person who, in 1995, blew the whistle on Dino DeLellis, one of the more aggressive inhabitants of financial planning world, to the Ontario Securities Commission.

He went public to make the point "there is no code of ethics among financial market registrants that requires them to report their fellow colleagues who are not practicing up to acceptable standards." That is the case with the Canadian Medical Association, he says.

Adorning the top of the Frugal Bugle one-pager is the general "buyer beware" counsel: Don't trust any advice until you autopsy the profile of the practitioner behind it.

The top of the form shows whether the advisor is a commissioned sales person or a fee-based advisor. The customer would -- should this nirvana of disclosure ever come into daily use -- instantly know how much business his advisor had and his/her gross annual commissions.

The status of front-load fees or deferred sales charges are clearly articulated, including a concise statement of whether the DSC assessment is on the original value or market value of the fund units purchased. It's also clearly stated whether an annual "free" 10% withdrawal is permitted.

Management expense ratios (MERs), annual trailer fees, performance bonuses, wrap fees and other goodies are also clearly spelled out.

Also shown is whether the funds sold are "proprietary" or at arm's length to the dealer.

(There are a growing number of in-house funds sold that pay better than external funds. A situation that could call into question how objective advice to buy such a fund would be).

So far, apart from the University of Western Ontario Academic Pension Plan, a grand total of one financial planner has adopted the disclosure statement. Hans Merkelbach of Vancouver uses it as part of his Web site (www.strategicsector.com).

"The checklist is an endorsement of the type of quality business I transact with clients," Mr. Merkelbach says.

"In other words, [it's] something to be proud of. Currently, it is the only disclosure document available to mutual fund consumers. All other disclosures, especially from the fund industry, mutual fund selling organizations, stockbrokers don't compare."

But Mr. Merkelbach points out that the use of the checklist depends on the type of mutual fund sales person using it.

Will it be an integral part of the sale? Will it be totally filled out ? Will the customer get a copy of the document or will it wind up in the seller's filing cabinet? If used correctly to solidify the relationship between seller and client, "then it is an awesome document. If it is partly filled-out or filled-out without the client present it becomes just another piece of paper."

The culprits avoiding this type of disclosure are the fund industry and its sellers, Mr. Merkelbach says.

"It's been so easy to collect the DSC fees. Just put a prospectus in the mail: No explanation required. How many mutual fund consumers truly know what they are paying in sales-fees and how they're deducted? I bet less than 10% know the facts." A similar percentage likely don't understand MERs, he says.

Clearly it's hardly in the interests of either the mutual fund manufacturers or their dealers to be quite so upfront as Mr. Killoran would prefer.

But even if it's not widely adopted, there's nothing to prevent individual consumers from using such documents as "checklists" in order to get straight answers from their advisors, should they deem it important.

Glorianne Stromberg, the former OSC commissioner, suggested in her January, 1999, report, "Investment Funds in Canada and Consumer Protection," that such a checklist could be "a useful tool for consumer/investors."

But she saw it more as a type of self-help worksheet rather than a form required to be provided by an intermediary.

Ms. Stromberg said her legal background tells her that Mr. Killoran's approach might "backfire" on consumers were it to be mandated by regulators or the industry itself.

"His idea is that the customer acknowledges having been told various things, which is all well and good, but it's just a form when you open an account. People get a bunch of forms shoved in front of them to sign or initial and unfortunately most people do it without reading them. So down the road, when Aunt Martha realizes she has been locked in to a DSC of the Northern China Venture Fund, there it is. The form shows she acknowledged the risk, the DSC and all these other things. What do you think her chances are of being able to sustain an action against her advisor for unsuitable investments?"

Seen this way, you'd think financial advisors would want to flock to such disclosure forms, if only to avert future liability cases.

If and when this bull market reverses course, you can bet that advisors and consumers alike will be looking to protect themselves.

More than a year ago, the OSC said the number of complaints from investors more than quintuples in a bear market.

Mr. Killoran expects a financial debacle sooner rather than later and therefore sees even more urgency for consumer/investors to be fully aware of the risks versus rewards they are bearing.

"Uneducated and unknowing GIC-refugee fund investors don't know how rude their financial [reawakening] is going to be when the stock market suffers its coming 30% to 50% over-exuberance haircut," he says.

Hey, Joe, it's a still a bull market. Nobody cares. Yet.

Jonathan Chevreau can be reached by e-mail at jchevreau@nationalpost.com