The client was a 61-year-old truck driver. His wife was a homemaker. Like a lot of couples nearing retirement, they wanted their investments to generate some income interest payments, dividends and so on. They opened an account with Midland Walwyn
Capital Inc., an investment dealer that used to employ the slogan "Blue-chip thinking." (It was later purchased by the bluest-chip brokerage of them all, Merrill Lynch.)
They probably didn't realize how much damage a bad broker can do--even one that works for a good firm. Instead of pursuing a buy-and-hold strategy, the couple's investment adviser, Scott Alexander Clark, traded their account like crazy and put their money in investments that
were too risky for a couple entering their golden years. It was a great deal for him--he earned more than $20,000 in commissions from the account in a two-year span--but it was an unmitigated disaster for the truck driver and his wife. In the end, they lost more than $89,000.
The Investment Dealers Association of Canada, the industry body that regulates brokerage firms, fined Clark $13,000 and ordered him to cough up tens of thousands in ill-gotten commissions. (He no longer works in the investment business.) But on the one issue that matters
most--how to get investors their money back--the IDA was, and is, useless. It doesn't have the power to order an investment firm to pay restitution to a mistreated client.
That's one of the IDA's biggest flaws, and it's why some people think the organization does a lousy job of protecting investors. (Protecting the behinds of investment dealers is more like it.) But what really burns me is that they're setting up a brand-new organization,
supposedly to safeguard mutual fund investors--and it will have exactly the same problem. Starting next year, the Mutual Fund Dealers Association (MFDA) will be the watchdog for mutual fund salespeople (investment reps who are licensed to sell funds and maybe a few other products, but not stocks). But if you
get ripped off by a sleazy fund pedlar, don't call the MFDA in search of a refund. They won't help you.
An unethical mutual fund salesman can just as easily churn your account to maximize his own commissions as a stockbroker can. He is just as likely to put your money in a higher-cost fund because it pays him a bigger fee, or because the fund company will pay for him and his wife
to travel to Hawaii if he meets certain sales targets. So why not give the MFDA the power to force dealers to repay clients when their salespeople are caught breaking the rules? "It was felt that was better left to civil remedies," says Larry Waite, the MFDA's chief operating officer.
Better for the mutual fund dealers, maybe. But not better for investors. According to the IDA's Web site, a lawsuit against a stockbroker typically costs $37,500 and take two years before it even gets to trial. It's probably not any cheaper or faster to sue a mutual fund dealer.
So if you've been bilked out of $20,000, the best you can do is try to squeeze a settlement out of the firm.
Waite says the MFDA will eventually have an arbitration process to deal with smaller claims (it's probably a couple of years away). But the IDA has an arbitration process, too, and it's full of holes. The rules are different from province to province, you can't use it if your
claim is greater than $100,000, and the findings of the arbitrator are kept in gestapo-like secrecy. Arbitration is not the best solution.
By the way, the truck driver and his wife were eventually compensated by Merrill Lynch. But too frequently, brokers and mutual fund dealers refuse to give back a dime until somebody forces them to. Securities regulators need this power. If they're guilty, make 'em pay.