By

When mutual funds act on the urge to merge, make sure their objectives dont diverge, financial advisors are cautioning.

A key point in monitoring clients mutual fund holdings is to make sure the new funds remain true to their initial investment objectives, advisors say.

Fund mergers and liquidations continue an uptick that hit full tilt in 2000 when the total climbed to 1,098 from 720 in 1999, according to data provided by Lipper Inc., a Reuters company.

In 2001, the figure rose to 1,460 and year-to-date 2002, mergers and liquidations stand at 934, Lipper found. So far, the grand total for the four years is 4,212.

The number of funds in 2001 did grow but by a scant 152 funds, the smallest increase since 1981, according to the ICI 2002 Fact Book of the Investment Company Institute, Washington.

In this kind of environment, beware of “style drift,” says Therese Mieke, associate vice president, investments and a CFP with A.G. Edwards, Naperville, Ill.

In many cases, mergers are seamless, she continues, but advisors have to “make sure funds have the same objectives–that they are what they say they are.”

Advisors should also make sure a merger is not camouflaging poor performance, she adds. Sometimes, fund family performance averages do not include the performance of funds that have been merged out of existence, she adds.

It comes down to one basic question, “Why do we own this fund to begin with?” says Guy Cumbie of Cumbie Advisory Services, Fort Worth, Texas.

Cumbie, a certified financial planner and the chairman of the board of the Financial Planning Association, Atlanta, says once that question is answered, the planner needs to assess whether the reason the fund was originally purchased remains valid. If the clients situation has changed, the planner needs to determine whether that fund is still appropriate to meet a clients objectives, he adds.

It is important to confirm the funds objective, Cumbie says, because normally, there is a specific reason for owning a fund. A fund helps implement a particular part of a broader investment portfolio and if the objectives have changed, a planner needs to know that so the plan can continue to work effectively, Cumbie says.

There are 12 criteria that Karin Stifler, a certified financial planner with Financial Foundations, Hudson, Ohio, says she looks at when deciding which funds might be right for a client. Those criteria are also used if a fund is merged, she explains. Among the criteria she names are a funds track record and its management. “If you do your due diligence, you are ahead of the game,” Stifler says.

“The good news is that there is still an abundance of choices. We can afford this type of consolidation. In theory, there are lower management fees,” she says.

Richard Brown, CEO of JNBA Financial Advisors, Minneapolis, says in the case of merged funds, planners have to be careful of any change in fees. If, for example, a $25 fee per transaction is instituted and several transactions are done, then there can be substantial costs to the client, he says.

Brown also adds that while the market decline has been responsible for some funds merging, it is also having the opposite effect on other funds, a fact that planners may want to note.

One situation occurring in the market, he says, is that some funds are reopening because the total assets under management have dropped.

When a fund merges, it is not necessary to move a client out of it immediately, particularly if the client has been in it for a long time, says Theresa Rosen, a certified financial planner with Prudence Financial Inc., Sudbury, Mass.

Rather, an advisor should watch the fund and compare its performance to similar funds in its peer group, she says, adding that the fund must maintain its objectives and perform well.

A merged funds beta–the measure of volatility relative to the market–should also be monitored, she adds. A beta of 1 tracks market risk, with anything less than that having a less risky profile than the market risk for that kind of investment.

Fund mergers should be viewed as a positive way for the mutual fund industry to become more efficient, says John Tesoro, a partner in the Investment Management and Funds Practice of KPMG, LLP, New York. Given current market values, “organizations are right sizing right now.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.