More former clients of banned mutual fund salesman claim they got bad advice
Clients allege Sy Mytting encouraged them to borrow inordinate amounts of money to buy mutual funds, with adverse results
Last Saturday, I expressed chagrin at the relatively light penalties that regulators handed former mutual fund salesman Sy Mytting for encouraging five clients to borrow inordinate amounts of money to invest in mutual funds.
For his sins, the Investment Industry Regulatory Organization of Canada banned Mytting from the securities industry for five years and ordered him to pay $ 70,000 in fines and costs. In my view, this is not nearly enough considering the financial and emotional distress he caused these clients.
But I am more concerned that neither IIROC nor Mytting’s firm, Berkshire Securities Inc. ( which has since been acquired by Manulife Securities Inc.), advised Mytting’s other clients that they, too, might have been victimized by his aggressive leveraging strategies.
Since last October, when I wrote about Berkshire’s admitted failure to properly supervise Mytting, 14 additional clients have contacted me with concerns that they, too, have suffered at his hands.
Some of these complaints date back to the late 1990s, when Mytting was working at now- defunct Vantage Securities Inc. and recommending risky and illiquid exempt securities products. Clients are still dealing with the financial fallout from those recommendations.
But many other clients are complaining that, at Mytting’s urging, they, too, borrowed large amounts of money to buy mutual funds, with disastrous results.
They say that neither Berkshire nor Robert Pollock, the Berkshire adviser who took over Mytting’s book of business, told them that Mytting’s recommendations may not have been appropriate for them, considering their age and financial circumstances.
These clients understandably feel left out in the cold. Berkshire compensated the five clients who were the subject of the IIROC disciplinary decision, but these other clients are still twisting in the wind, unclear as to what happened to them and what recourse they might have.
The plight of these clients has not been lost on Warren Funt, IIROC’S vice- president of Western Canada. “In light of the Mytting case, we are reconsidering the way we approach these sorts of cases in future,” he said in an interview Friday.
Ironically, Pollock — who took over Mytting’s book of business — served as branch manager of Berkshire’s Abbotsford office for most of the time Mytting worked there, and was therefore responsible for supervising him.
There is, however, no evidence that he was responsible for Berkshire’s failure to supervise Mytting. When the firm settled with IIROC and agreed to pay $ 130,000 in fines and costs, no individuals were mentioned. This suggests that it was an institutional, rather than individual, failing.
It’s clear, however, that as events unfolded, Pollock inherited a very lucrative portfolio. This no doubt put him in a tricky situation. While he is required to look after the best interests of his clients, it was not necessarily in his interest, or his firm’s interest, to say anything to clients that might compromise their commission income. This, I suggest, is a situation that IIROC should never have allowed.
I tried to discuss the matter with Pollock, but he declined comment. Manulife, which is in the unenviable position of having to address Berkshire’s shortcomings, also refused to discuss the matter.
“IIROC has now completed its review of this matter and has reached a settlement with Mr. Mytting,” Jana Miller, Manulife’s director of public relations, stated in an email Friday.
“As such, we consider this matter to be concluded and will not be providing further comment. As always, if individual clients have any questions or concerns, they are encouraged to contact us. Please have them contact Rob Pollock directly at 604- 746- 4844.”
Which takes us back to where we started. While borrowing for investment purposes makes sense in some instances, Mytting took the practice to irrational lengths.
According to his settlement agreement with IIROC, Mytting told clients that “leveraging money to invest was the only way to save enough money for retirement and that anybody who didn’t leverage would never be successful investing.”
Based on this belief, he “generally advised clients and prospective clients to invest as much money in equity mutual funds as they could access. This included borrowing as much money as a financial institution would loan them and investing that money in equity mutual funds.”
He recommended they apply for investment loans through AGF Trust Company and B2B Trust Company, which loaned money on the security of the funds themselves. As the value of the funds increased, he encouraged them to borrow more money and use the proceeds to purchase more funds.
Of course, mutual funds — like all equity investments — are subject to the usual market machinations, so unless the client has the financial means and psychological fortitude to hang in during rough weather, they will often bail out when the market is at a low point.
That’s what happened here. When the 2008 financial meltdown rolled around, Mytting’s clients found themselves with huge debt loads and dwindling asset values ( exacerbated by fund management fees that often amount to 2.5 per cent a year).
Clients who pledged their funds as security for their loans found themselves in a downward spiral. As the fund values decreased, they were required to provide more security, or liquidate their funds at what was clearly an inopportune time.
When they went to liquidate their funds, they were dealt another nasty blow in the form of deferred sales charges, which are a kind of early redemption fee.
The funds that Mytting recommended were subject to a charge of 5.5 per cent if liquidated within two years of purchase, five per cent if sold during the third year, and steadily declining rates to 1.5 per cent by the seventh year. Talk about salt in the wounds.
All this raises the question: What would prompt a securities advisor to expose his or her clients to such risk?
Speaking generally, Ross Birney, a chartered accountant and financial advisor at Raymond James Ltd. in Vancouver, says money may be a big motivation.
“The salesperson often receives a referral fee on the financing transaction, a fivepercent commission up front on the sale of the mutual funds [ if sold on a deferred sales charge basis], and then a trailer fee of half a per cent for as long as the client holds the fund. The client ends up being beaten up from a fee perspective.…
“This is an area where I feel the investing public needs to be better informed. I believe the average investor would be outraged to learn that, when they invested their $ 200,000 at the end of a half- hour meeting, their salesperson made a $ 10,000 commission instantly.”
Birney also had critical words for funds sold on a deferred sales charge basis:
“I can think of absolutely no circumstance where a client is better off by purchasing a mutual fund on a DSC basis. Given that almost every mutual fund in Canada can be sold on a ‘ front- end zero’ basis, there is no reason not to do so. The only one who gains any benefit is the salesperson.”