The Israel Securities Authority bent over backwards to encourage a shift from traditional portfolio management, to management via mutual funds. It called the shift, no less, "The end of the portfolio management era." Its goal was to induce clients of portfolio managers to build portfolios consisting of holdings in mutual funds, not in individual stocks or bonds.

The ISA made at least three regulatory moves to support the transition. One was the permission the ISA granted mutual funds to invest in other mutual funds. Thus, the little man can receive the service of a managed portfolio via a single fund.

The second was a permit granted to private brokers to invest their customer portfolios in their own mutual funds. This was a far-reaching move, since it fundamentally contradicts the consultancy law, which demands that advisers suggest the most appropriate investments to customers, not necessarily investments they manage themselves. The ISA essentially allowed the private brokers to prioritize their profit above the client's benefit.

Yet based on that very consultancy law, the ISA is investigating Bank Leumi after finding that the bank aggressively marketed its own funds to its own bank customers, thus managing to raise tremendous amounts of money for new mutuals in the space of a day. The ISA suspects the bank placed its own interests above those of the clients.

Yet the ISA is not asking private brokers the same question. These brokers have been exempted from explaining why they hawk only their own funds to customers. The ISA seems to have accepted their explanation that managing portfolios is the same thing as managing a portfolio of mutuals.

The ISA went further in its efforts to help the private brokers, by promoting legislation allowing refunds of management fees the mutuals collect to customers who buy into mutuals via their portfolios. The mutuals traditionally demand far higher management fees than portfolio managers do. Thus, investing in mutuals via portfolios should have cost the customer dearly. To prevent this, the ISA allows discount management fees in the case of the portfolios, discounts that would be prohibited under any other circumstances.

The three steps together pave the way for brokers to shift from managing regular investment portfolios to managing mutuals portfolios. For their customers, the implications are major.

Portfolio management has traditionally been a confidential affair to which only the broker and client are privy. As such, it has been wide open to abuse by brokers. Only particularly alert clients can nip manipulations in the bud.

Such manipulations were common in the 1992-1993 boom, when brokers abused client portfolios to buy and sell shares for their own personal gain, not the customer's. Or they would invest customer money in issues they were themselves promoting, for instance.

But the management of mutuals portfolios is an entirely open affair. It doesn't mean it cannot be abused, but manipulations become far more difficult to carry out. In general, when investments are motivated by something other than profit, the mutual fund's yields will suffer, and its manager's reputation will suffer commensurate harm.