Sounding the Alarm on Mutual Funds

On the other hand, if and when actively managed ETFs are introduced, it could be a different story. Actively managed ETFs could potentially offer everything that traditional funds offer, plus investors will be able to trade their ETFs continuously throughout the day. That additional feature could be very attractive. And if brokers start to offer commission-free trading on active ETFs, even just a few free trades per month, I think traditional funds will have a real fight on their hands.

What surprised you the most in 2006?

The lack of interest in the Bisys scandal. Admittedly, this isn't as big a deal as the late-trading scandals, but one could make a good argument that Bisys is a bigger deal than the market-timing scandals back in 2003. Funds that negotiated kickbacks from Bisys made a conscious decision to take money from shareholders -- there are no judgment calls here, as there were with some of the market-timing situations.

Also, the damage from the Bisys kickbacks can be easily quantified, yet I haven't seen a single fund company -- or more significantly a single board of directors -- try to make investors whole.

I thought fund scandals were supposed to be behind us, but then this one popped up. Is the system for catching illegal activities improving at all?

At least some fund boards of directors should have been able to detect the Bisys kickback scandal and nip it in the bud. By and large, fund directors are still not doing their job representing the financial interests of fund shareholders.