Advisors To Funds: Straighten Out, Cut Fees
Financial advisors are telling the $7.5 trillion mutual fund industry that winning back the confidence of investors means owning up to past mistakes and doing something about high fees.
Clients are concerned but much of that anxiety was registered between November 2003 and January 2004 when news of problems in the industry was breaking daily, says Ed Fulbright, a certified public accountant and financial advisor with Fulbright & Fulbright, Durham, N.C.
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Companies might not have been “as up and up as they [clients] want them to be,” he continues. Consequently, Fulbright says he is partial to index-type funds.
“If you get a fund with higher expenses, your money is not working quite as hard and you are not taking quite the same risk,” he adds.
The good news, Fulbright continues, is that “clients understand what a mutual fund is supposed to do. There may be a few bad apples, but the industry is in pretty good shape.” Mutual funds are still an important investment option for clients, he says, because most dont have the assets to buy 100 shares of 50 different issues, but with a mutual fund, they can do it for a lot less risk.
But even if consumers need to continue to invest for the future, the mutual fund industrys transgressions “necessitate real change,” he adds.
“In those funds with blemishes, they need to throw out the bad people that have been identified. There were sheer abuses or people being extremely greedy. In some cases, the people they report to may have to go to make it seem worthwhile again,” says Fulbright.
Phillip Cook, a certified financial planner with Cook and Associates, Torrance, Calif., says his clients have been relatively quiet on the recent problems mutual funds have experienced. Even though they are aware of what is going on, they still view it as an important way to invest, he continues.
For those clients who do raise questions, Cook says he tries to make the analogy that “the safest airline to get on is one that just had an accident. Everyone is really on their toes and aware of the problems.”
Which clients are more likely to ask questions? Cook says they are the ones who are more involved in their investments, or as he puts it, “the not quite the do-it-yourselfers.”
Cook says the problems that have surfaced should never have happened. “It is really, really disappointing that they treated some shareholders better than others.”
If they had been thinking long term, Cook continues, they wouldnt have done something like this because sooner or later, such problems are found out. But people dont always think in the long term, he adds.
So, how should damage be repaired? “For a very, very long period of time, mutual funds must be shareholder oriented.” And, part of that orientation has to involve lower fees, he says. One of the precepts of asset management is that as assets under management increase, expenses should come down, Cook says.