Your planner won't send you this book

Jonathan Chevreau
Financial Post

October 14, 2000

Boom, Bust & Echo was a major Canadian bestseller, in part because the financial industry got behind the book. Stockbrokers and mutual fund salesmen bought the book in quantities because of its upbeat demographic message that Baby Boomers would be counting on stocks and equity funds to finance their retirement.

Now, one of the authors, writer and journalist Daniel Stoffman, has published a book that will more likely provoke and anger Canada's mutual fund industry.

Without the demographic and economic perspective of BB&E co-author David Foot, Stoffman's The Money Machine (Macfarlane Walter & Ross, Toronto, 2000) is unlikely to rival the earlier book in sales success.

In fact, The Money Machine break little new ground not already covered by newspapers in the past few years. The unpopular but not novel message for the fund industry is chiefly that high investment management fees incurred for "active" portfolio management can hurt long-term performance and may not do any better than low-cost "index" approaches.

Journalists and other writers have been pointing this out for years, which is probably why most fund executives Stoffman talked about don't think much of the media's coverage of their industry.

Nor will they relish statements like the following, prominently displayed in the book's press release: "Fund companies ... see themselves not as financial institutions but as manufacturers of products. These products are marketed to consumers, just like soft drinks or automobiles or razor blades. The most successful companies aren't those that provide the best returns on clients' investments, they're the ones that most effectively market their products."

That's roughly what Glorianne Stromberg said in two critical industry reports she wrote for the Ontario Securities Commission. Stromberg gets several mentions, including her "approving" quotation of the description by unnamed critics of trailer fees as "bribes."

If anyone is persona non grata with the fund industry, it is self-appointed consumer advocate Joe Killoran. While ignored by fund executives and journalists, Killoran's obsessive campaign against Trimark and campaign for point-of-sale disclosure documents gets half a dozen pages in Stoffman's book. In words that will chill Canadian fund executives, Stoffman concludes "Killoran is right: it needs reform. Outlawing trailer fees and the DSC [deferred sales charge] would be a good first step."

Stoffman credits Killoran with popularizing the term "shill" to describe high-profile seminar speakers used by fund sales people to prospect for clients. The names of several well-known "shills" appear in the book. In fact, half the fun is to check the book's index for entries on industry executives, fund managers, authors and pundits.

The rise and fall of celebrity fund managers like Frank Mersch, Veronika Hirsch and Wayne Deans are chronicled yet again and stories well reported in the papers, such as the Altamira takeover battle, are rehashed. Stoffman also re-examines the challenges faced by low-fee fundco's like Scudder, which he says overestimated "the size of the well-informed investor population."

Apart from fund manufacturers, Stoffman tweaks the distribution side. He says dealers who think they're important to the industry will get a rude shock when they discover they are "no more important to the investment industry than a delivery-truck driver is to the newspaper industry."

Stoffman accuses the fund industry of doing "a fine job of keeping Canadians ignorant of its workings.... Most investors are unaware of the fees they pay to own mutual funds ... not many understand that mutual fund companies can thrive even when they deliver mediocre performances."

And when funds do outperform the indexes, Stoffman suggests it may be because of sheer dumb luck. He devotes a few pages to a demonstration used by indexing advocate Ted Cadsby, CEO of CIBC Securities Inc. Cadsby has a routine at CIBC seminars where he hands out pennies to an audience, which they are asked to flip about a dozen times. Through pure luck, one in 800 will have all heads or tails -- illustrating fund manager "outperformance." Is there any difference, the question is posed, "between a successful money manager, even one who's had 11 good years in a row, and a coin-flipper who flips heads 11 times in a row?"

Stoffman doesn't let the industry's support players off the hook either. He criticizes fund guide books and rating systems as being of limited value because of their emphasis on past performance.

From his earlier books (Stoffman and Foot also wrote Boom, Bust & Echo 2000), Stoffman is well aware of demographic trends and keys in on the likely response of affluent Canadian Baby Boomers as they approach retirement. He suggests that as they spend more time managing their financial affairs, boomers will become more discerning and "more reluctant to pay the sometimes exorbitant fees charged by the fund companies" (to use the phrase from the book's dust jacket).

Even more distasteful -- if you're a fund executive, that is -- is Stoffman's characterization of graduating (gravitating is his actual description) from funds to individual stocks.

"This can be viewed as part of the process of growing up," Stoffman writes, noting that investing habits tend to evolve from bank deposits to GICs to savings bonds to mutual funds and on to individual stocks. But he concedes that funds do offer small investors diversification and the mitigation of risk that implies.

So what does the Investment Funds Institute of Canada think of this latest literary slaughter of its sacred cows?

IFIC spokesperson Caroline Bretsen said no one at the association had heard of the book and executives were not available for comment.