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Advisors Bailed Out Of Tainted Funds: Cerulli

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Financial advisors appear to have lost faith in mutual funds asset managers named in recent investigations, a new survey by Cerulli Associates Inc., Boston, finds. And they now appear to be paying close attention to managers ethical standards.

Among advisors polled for Cerullis “Advisor Satisfaction Metrics 2004″ study, 98% said an unblemished ethical reputation was extremely or somewhat important in choosing an asset manager.

Moreover, advisors have dropped tainted fund managers like so many hot potatoes, Cerulli found.

Such firms as Putnam Investments, AIM Investments and Massachusetts Financial Services Company have tumbled off the list of fund managers top-ranked by advisors. They were all the subject of mutual fund market-timing investigations last year by New York State Attorney General Eliot Spitzer or by the Securities and Exchange Commission.

In 2004, the top-ranked managers were American Funds, Franklin Templeton and Oppenheimer Funds, Cerulli found. All were unscathed by the scandals.

Cerulli believes, however, that high ethical standards may not really be as important to advisors as strong performance when selecting a fund.

Concern with ethical behavior was likely a reaction to the current market and regulatory environment, Cerulli says.

“Thats what they say because thats what they need to say” to reassure the investing public, says Kirby Horan, an analyst with Cerulli and author of the study.

When the same question was put another way, it seemed clear that advisors considered fund performance as the most important selection factor.

“When we asked them what factors were a deal breaker, No. 1 was poor-performing products,” says Horan.

Other factors advisors cited in choosing fund managers were a consistent style of investing, high product performance, a wide range of investment styles and high Morningstar ratings.

Cerulli also found some difference between national full service broker-dealers and independent broker-dealers.

Advisors in the NFS channel favored a consistent style of investing in choosing a manager, while IBDs said reputation was more important, Horan reports.

Because advisors tend to stick with companies they know, it can be difficult for fund managers to grow their share of market, Cerulli says.

“In general, advisors use funds from a few [often three] asset managers to fulfill all of their mutual fund needs, with many advisors devoting the majority of client assets to funds managed by this chosen few,” Cerulli finds. “Some advisors, particularly those in the independent channels or those who have adopted fee-based pricing, tend to take more time, seeking out best-of-breed funds and using a wide array of funds and asset managers. These advisors, however, are the exception, not the norm.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2005. Copyright 2005 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.


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