Mutual fund change caused fees to increase

Nearly three-quarters of a 91-year-old client's account at a full-service brokerage firm was invested in a bond mutual fund. The investment advisor convinced the client's son, who held Power of Attorney for the client, to switch the investment in the no-load bond fund to the back-end load version of the same fund. The mutual fund company paid the advisor and the brokerage firm a $30,500 commission for the switch.

The advisor did not explain that the back-end load version only allowed the client to withdraw 10% of her fund investment each year without incurring Deferred Sales Charges (DSCs). As a result, given her income needs, the client could withdraw only half of what she needed to live on from the bond fund without triggering excess fees. This, in turn, put a burden on the client's other investments which then needed to grow by 15% to 20% per year to provide for her needs without prematurely depleting the account. On the advisor's advice, the client's son also opened a margin account so the client could borrow funds to cover any shortfall in her income requirements. In effect, the client was forced to live on borrowed money to avoid paying DSC fees on withdrawals from the bond fund.

In less than one year, the client was charged more than $10,000 in interest on her margin account before her son decided to close the account. After moving the account to another firm, the client's son sold the remaining bond fund investment, costing his mother $17,000 in DSCs. It's a basic rule: investment advisors have an obligation to act in the best interest of a client. In this case, the change from a no-load mutual fund to a DSC version of the same fund was not in the client's best interest, and we believed it was recommended only to enrich the investment advisor and the firm. The firm accepted OBSI's recommendation that the client be reimbursed the DSCs as well as the margin interest that she incurred.

(2004)