Dear Advisors,
The Investment Industry Establishment (IIE) are masterful marketers, with lots of cash flow to support ongoing research into how to influence Advisors to trust their fund managers and keep their Clients fully invested through thick and thin. The reason is pretty obvious-it works to the IIE’s benefit to gather and keep assets because this keeps the management fees flowing…and they are very good at it. We’re starting to see marketing featuring fabulous 2009 1 year returns…and just wait until we get to March 1st 2010 and they start pumping out the propaganda on their 1 year returns. Perhaps we need to be more discerning and take a closer look at how that same fund did in 2008…and how much stress that caused Clients and Advisors.
Fund companies have managed to keep most Advisors onside for a couple reasons I can see: 1) MFDA Advisors don’t know they have an alternative (they DO), and 2) because fund companies pay out the DSC commissions and collect trailer fees from clients and distribute them to advisors. The regular recurring compensation of trailer fees has become an increasingly important part of successful Advisors’ business models, so Advisors have become somewhat beholden to the fund industry to collect and distribute these stable revenues. As a Fee-Based Advisor, I was in this position until I left the mutual fund business in late 2008. Is it any wonder that Advisors resist any public criticism of mutual funds despite their obvious flaws? It appears to be about mutual self-interest.
Please note that I’m not a) criticizing the collection and payment of trailer fees to Advisors per se (i.e. as long as the Advisor earns their fees) and b) I’m not saying that mutual funds are not an appropriate investment vehicle for some people.
What I am saying is a) Clients have a right to know how much they’re paying to the people they’ve entrusted to nurture their nest egg, b) mutual funds are not necessarily the best investment vehicle for everyone, and c) there are more cost-effective alternatives to mutual funds that can and should be a part of the product shelf available to Advisors.
Like it or not, the rest of the industrialized world is way ahead of Canada re: Fee Transparency, and our regulatory tide is moving toward bringing Canada up to international standards. This will bring the value that both Advisors and fund managers provide to investors under even more intense scrutiny. Advisors cannot – and should not try to – change this tidal force, but rather focus on making certain that they broaden the scope of their advice and services and learn how to communicate it effectively to existing and potential clients. It’s not about the fee that’s paid, it’s about the value of what Clients receive for what they pay. “Price is only an issue when your value is in question.”
Cheers,
Andrew H. Ruhland, CFP, CSA
Client Centered Advisors