FRANCE - Mutual funds must re-gain the trust of clients after the market timing and late trading scandals, the head of the second largest mutual fund company in the US has demanded.

The comments came as the online financial planning systems promoted by the major mutual fund firms – including Vanguard - were strongly attacked by a leading US academic.

Jack Brennan, chairman and chief executive of the Vanguard Group, which has 750 billion dollars in assets under management, told delegates at the Fund Forum in Monaco: "The mutual funds business has taken a blow to its reputation, make no mistake about it.

“In my 22 years in the business I would never have expected the mutual funds industry to have gone through such a brutal period as it has in the past 10 months."

Brennan said he was confident that the industry and regulators would make sure that what had happened would never happen again.

He said the key to recovery was to regain and retain the trust of clients: "Success is not measured by assets under management but by a more intangible asset, the trust clients have in you.

"Clearly some firms forgot that and they are paying a huge price for it."

Meanwhile Zvi Bodie, professor of finance at Boston University School of Management, said that the systems offered by groups like Fidelity and Vanguard offered the wrong choices to people setting up defined contribution pension plans.

"At the moment none of the online financial planning systems that are available free to the public offer a risk-free option," he told delegates.

Bodie said that the online financial planning systems use models that "contradicted" the theory put forward by Nobel prize-winners Paul Samuelson and Thomas Merton in 1969 that there is no necessary connection between the length of a person's investment time horizon and their tolerance for risk.

"The models put in to online systems tell people that if they have a long term horizon they should allocate a lot of their portfolio to equities. Yet stocks are not safe even in the long run, no matter how long the long run is."

He said that to protect themselves against long-term equity risk, people would have to buy put-options. He estimated that in the long term a put option could cost up to 40% of a portfolio.

"If it were true that stocks were less risky in the long term, investment companies should be offering the protection of put options for free. But they're not."

Bodie said that the least risky alternatives were default-free, inflation-protected, "worry-free" investments, and that defined contribution plans currently did not offer to people with long-term horizons.

"DC plans as they are currently used are unsustainable. As defined benefit plans die out, the end-user is going to demand worry-free pension products."

He said that the gap in the US market offered an opportunity to European asset managers: “Maybe a European company will soon penetrate the US market with a worry-free product. That's my prediction.”