Dear fund industry bigwigs,
I know you’re busy trying to put a bow on a solid performance year so that you can sell it hard in 2007, but I’d hate for the holidays to pass without sending a reminder that investors expect results. Performance is not a gift, it’s a promise you make to customers.
That doesn’t mean that you shouldn’t be giving patient, long-term customers a little something extra.
With that in mind, here is my holiday wish list, written on behalf of fund investors everywhere.
I’ve made my hopes public every few years for more than a decade now and have seen a lot of the fund reforms I once hoped for become reality. That’s a good start, but investors still deserve more and better.
In my conversations with executives, few of them argue that consumers don’t deserve better; they do use the excuse that “no one has asked.”
So I am asking, and hoping that knowledgeable investors send you letters like this one (or copies of this column) so that “no one asked” stops being a viable alibi.
This holiday season, I want the fund industry and its regulators to give me:
Management knows that investors are not well served owning several funds with similar styles and overlapping holdings; they also know which combinations of funds would create a false sense of diversification.
Now all they need to do is issue a warning whenever funds are one-quarter identical, a simple statement suggesting that one fund may not be a good fit with certain siblings.
The fee is supposedly for sales and marketing costs, but it primarily functions as a trailing commission for the adviser who brokered the initial purchase. It is even applied to some funds that have closed to new investors. It’s the “gift that keeps on taking.”
Advisers should get their due, but regulators should stop allowing funds to blur expense numbers. If it’s a regular expense paid out for owning the fund, don’t let it be separate from the core of the expense ratio.
In the mid-’90s, the industry created the “profile prospectus,” a summary that answered 11 critical questions. It covered the fund’s objective, what the fund can invest in, who it’s right for, costs and fees, past performance, the buying and selling process, and more.
Mandating a two-page, tear-away summary of these key points – at the front of the regular prospectus document – the industry would go a long way to helping shareholders get the basics.
Funds should take a page from sports rulebooks, detailing upfront any changes made from one year to the next and explaining why the amendment was necessary.
Think of this as including shareholders in a holiday sale. Funds often represent the biggest, most important assets a management company handles, yet they have higher cost structures than private accounts and pension funds run by the same firm.
Some investment firms charge fund shareholders more for stock-picking services than they charge a pension fund. That’s wrong.
Fund shareholders should not be treated like second-class citizens.
A few funds provide this, but most don’t. All that’s needed is a simple table showing how a fund will cut costs as assets grow, because funds should reduce costs as they gain economies of scale.
This chart would show any breakpoints available on individual accounts and would explain to shareholders how asset growth actually has some benefit to the consumer and not just the fund firm.
Moreover, consumers get a loud-and-clear message from any fund that has no plan to cut costs no matter how much assets grow.
Yours in the spirit of the season,
Chuck
P.S. – Look for your gift next week. Think “lumps of coal.”
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
