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Landmark decision against misleading manipulation of information

Landmark decision against misleading manipulation of information

November 20, 2014

It is unethical for financial sales representatives to mislead clients with the irrelevant past performance returns on mutual funds.

Last week the Supreme Court of Canada made a landmark decision against the unethical manipulation of information. This is still unethical but now it is also illegal. Here is one example of how a salesperson may gain a sales commission by presenting information to an investor that may be misleading. You are shown the poor past performance of your mutual funds where the obvious conclusion is to make a change to improve returns. Then you see a list of funds that have performed much better over the same time period. The recommendation is to sell your funds and purchase those from the “better performance” list. If this action is motivated so a salesperson can make a sale and be paid a commission, then the entire mutual fund analysis is misleading. This is an extremely strong statement and respectfully does not speak well of any person in the financial services industry who follows such a practice. We will support this with evidence.  You be the judge and come to your own conclusion.

The entire argument for using past mutual fund returns to predict future returns is incorrect. That is why a regulatory requirement specifies any mutual fund advertising must include a disclaimer about past performance not being used to estimate future returns.

The easiest way to see compelling evidence that proves past performance does not have any prediction of future performance is to go online to Standard & Poor’s Indices Versus Active (SPIVA).

Standard and Poor’s information clearly shows the mutual fund managers’ success cannot be predicted and that their performance is poor when compared with the markets in which they invest. The evidence is credible, definitive and persistent over time. The Standard and Poor’s results based on thousands and thousands of managers around the world is also supported by academic research. Their returns cannot be predicted. Last week the Supreme Court together with seven judges unanimously ruled that businesses must act in good faith. As one Toronto lawyer said “If you are going to lie, it’s going to cost you.” Supreme Court Justice Thomas Cromwell wrote the following in the court decision. “It is a simple requirement not to lie or mislead the party about one’s contractual performance.” The court decision upgrades centuries old common law. The new standard helps us catch up to other countries that are ahead of Canada with respect to demanding fair treatment from those with whom we are doing business. The rules have changed and this will benefit investors. My interpretation of the landmark ruling is that there is a shift towards Canadians wanting fair and honest information on all matters affecting them. The area of investing includes everything from disclosure of hidden investment fees that are automatically charged to investors’ accounts, to the requirement of a simple investment statement showing how their investments have performed. Armed with a new standard of fairness, investors have a much stronger position to take legal action on an individual or class action basis. In my argument I referred to financial salespeople. There are thousands of intelligent, hardworking and ethical investment advisors and financial planners. These professionals will use historical information to their clients’ benefit. One example is illustrating the volatility when investing in stocks. If a financial salesperson is using the past performance of mutual funds to promote an unjustified mutual fund purchase for the sole purpose of earning a sales commission, then that is unethical. Shame on that individual.

It is my opinion that as a result of last week’s Supreme Court decision, unethical behavior in the financial services business is now illegal and will be dealt with harshly by the courts.