Monday Morning: Fund industry unblemished no more

Meet Michael Phillips, your average mutual fund investor.

Every year for the past decade, Mr. Phillips, 52, has diligently stashed retirement money into mutual funds offered through his employers’ 401(k) plan.

The action is rote; he has never even thought about it. And truth be told, he still doesn’t.

As the fund industry’s reputation for integrity takes a hit with recent allegations of after-hours trading that hurt the holdings of people such as Mr. Phillips, most investors aren’t even paying attention to the latest hullabaloo.

The sad truth is that no one expected the fund industry to operate with much integrity in the first place.

“What can these fund guys be possibly doing?” Mr. Phillips asks.

“Everybody is shaky,” he says. “Look around, and you see Enron or the fact that we’re now paying $1.60 or $1.70 for a gallon of gasoline. The whole system is crooked.”

The mutual fund industry, it seems, is just another one of the crooks. While scandals and fraud have shaken corporate America to its core in recent years, they have largely centered on public companies and brokerage houses.

Now, however, the fund industry’s claim that it has existed scandal-free for decades is a thing of the past.

No more self-congratulatory pats on the back. No more tedious rounds of applause at industry conferences each time the words “untarnished” or “unblemished” are mentioned at the beginning or end of a speech.

Just as Camelot has vanished, so too has Fundelot. “You’ll never get back to that mythical state that the industry has never had a scandal,” Don Phillips, a managing director at Morningstar Inc. recently said (InvestmentNews, Sept. 15).

cold comfort

Of course, somebody should tell the industry that its reputation has been shot to hell.

“We’re going to do everything in our power to see to it that the fund industry is synonymous with integrity,” says John Collins, a spokesman for the Investment Company Institute in Washington, the fund industry’s main mouthpiece. “It would be a dreadful outcome if the companies that have never been involved in questionable activity were made to suffer as a result of a few.”

If the ICI is serious about protecting its reputation, it will take steps to distance itself from Bank of America Corp., Janus Capital Corp. and all others implicated in the scandal.

One way to do this would be to impose sanctions or kick those companies out of the ICI altogether. But don’t hold your breath for that to happen.

For starters, large fund companies pay big bucks for their ICI membership. Second, dozens of other fund companies may still be implicated in the scandal, the prospect of which would seriously erode the ICI’s membership base.

At this point, all the ICI seems willing to do to distance itself from the allegedly guilty is offer up Robert Gordon, who was recently canned as head of Charlotte, N.C.-based Bank of America’s mutual fund division following New York Attorney General Eliot Spitzer’s allegations. This spring, Mr. Gordon served as chairman of the ICI’s annual general membership meeting.

“When Robert Gordon stopped being an employee of Bank of America, he stopped having a membership on the Institute’s board of governors,” Mr. Collins says.

That is likely to come as cold comfort to many, especially since Mr. Gordon’s status with the ICI would have diminished had he left the industry for any other reason.

In the end, however, it really doesn’t matter. Few investors were ever even aware that the fund industry had something to lose when it put its own interests ahead of its 95 million investors.

When it comes to investing, “I am so on autopilot,” says Mr. Phillips, a studio manager at a radio station in New York. “I raise the flag of ignorance.”

Frederick P. Gabriel Jr. is a reporter in the Boston office of InvestmentNews.