Advisors Are Seeking To Reassure Their Mutual Fund Clients

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Reactions of financial planning experts to the recent mutual fund scandals range from an outraged sense of betrayal to confidence that investors will keep putting a good part of their cash into funds.

But they wont necessarily be staying with funds whose stock-trading practices have been questioned by the Securities and Exchange Commission and state regulators, these experts say.

They point out, for instance, that Putnam Investments LLC, a unit of Marsh & McLennan Companies Inc., New York, lost a total of $32 billion in assets under management in November, after the SEC accused the company of fraud in illegal market-timed securities trading.

Overall, however, investors will keep putting their money into mutual funds, says Chris Brown, director of research at Financial Research Corp., Boston.

“I still see mutual funds as the ideal or primary investment choice of the great middle class.” says Brown.

Tom White, president of Treasure Coast Financial Companies, a financial holding company in Stuart, Fla., thinks the scandal wont have a lasting effect.

The irregular trading activities with which some funds have been charged largely stemmed from the recently ended stock market slump, he says.

“Weve been in such an awful market, I think these guys [fund investment managers] were trying to get their returns up. I think they started [market timing] with good intentions, but it went awry.”

White says he tells clients that any funds that “made mistakes” probably are going to rectify them.

His greatest concern is that investors will redeem funds on such a large scale that it will affect returns for all fund investors.

Redemptions become a problem if funds “have to dump shares just to come up with the necessary cash” to pay investors fleeing their fund, he notes.

Whites advisors have been telling clients the worst thing they could do in the face of the fraud scandal is to sell their shares.

“The underlying stock values have nothing to do with trading irregularities,” White points out to customers.

He thinks financial advisors need to remind wary clients of their original investment objectives and not make a hasty decision to sell, which could hurt them in the long run.

“Are people losing confidence in funds?” White asks. “Thats dictated by how we advise clients. How advisors and financial planners deal with it is how clients are going to move.”

Frank Dunaway III, a planner with Compensation Benefits Systems Inc., Carthage, Mo., is not so upbeat. He sees the charges against some fund managers as a sign of greed.

“How much money is enough? If you had a couple of million dollars rolling in each year, how much can you consume? It is vulgar what they did, and they hurt the client first and foremost,” Dunaway says.

He is highly critical of the SEC, the agency that oversees the fund industry, as one of the “foxes guarding the henhouse.”

As for funds themselves, he says, “9 out of 10 cant repeat their good performance 3 years in a row and now are [accused of] allowing insider trading for all intents and purposes. These are guys who had access to all the information and still wanted to cheat.”

Dunaway accuses the fund industry of being “commission-driven, not value-driven,” and says the scandals have “made me look long and hard at the asset management world and either remove investment money or individual clients. Clients have had it, and now the good guys have to prove theyre good guys.”

He criticizes “a handful of people in high places who have tarnished the entire industry. Hopefully, my relationship with the client is such that theyre confident dealing with me.”

He says he will continue to help clients build a portfolio befitting their risk tolerance.

“80% of us are small guys and have to be very careful of our relationship with our clients,” Dunaway points out.

As an alternative to the big funds, Dunaway says he is looking at passively managed funds such as those available through Dimensional Fund Advisors, Santa Monica, Calif., which he notes is affiliated with a number of academicians.

Advisors for Thrivent Financial for Lutherans, Minneapolis, have seen a “generalized anxiety” over the mutual fund scandals, although not about Thrivent funds specifically, a spokesman says.

The companys Thrivent Investment Management unit is the investment advisor for AAL Mutual Funds and the Lutheran Brotherhood Family of Funds.

In response to clients concerns, Thrivent recently sent a letter to its customers and members emphasizing that the company uses a fair-value pricing mechanism to protect against market-timing trades in international funds. Market timing is at the center of an SEC investigation into charges that some fund managers profited from inside knowledge of future stock prices.

“Whenever these types of allegations surface, we believe damage is done to all financial services providers, as trust is such an important aspect of investing,” Thrivent said in a letter to customers and members.

The letter, signed by Pamela J. Moret, senior vice president of Thrivent Investment Management, emphasizes that Thrivent does not permit after-hours trading.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 12, 2003. Copyright 2003 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.