Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Firms Use After-Tax Returns for Marketing

While the SEC works on developing a rule relating to how the industry should help investors understand after-tax returns, fund companies are beginning to publish the returns as part of their marketing strategies, industry executives say.

"The firms that are best able to provide investors with relevant information when they need it are going to demonstrate themselves to be the best service providers," said Kirk Botula, vice president of marketing for Confluence Technologies of Pittsburgh, Pa., a firm that compiles and distributes daily fund prices. "I think it's a huge marketing issue. Providing this information reflects a pattern of behavior."

Earlier this month, Fidelity of Boston joined the growing list of companies providing after-tax returns online. Fidelity's site publishes pre- and post-liquidation data from Morningstar of Chicago and is updated daily with one-, three- and five- year data, according to a Fidelity spokesperson.

Fidelity is providing the data as an added service to investors, said Sarah Libbey, senior vice president of product management.

But fund companies publicizing after-tax returns might also be getting a jump on meeting anticipated new regulatory requirements, Botula said.

The demand for a regulatory measure is coming from two directions. Rep. Paul E. Gillmor of Ohio introduced the Mutual Fund Tax Awareness Act last year. The legislation, if passed, would require fund companies to publish the after-tax returns on their funds. The SEC also issued a statement late last year on the need to provide investors with a better understanding of the effect taxes have on fund performance.

The SEC will propose a rule on the matter within the next two months, according to Susan Nash, senior assistant director with the SEC.

Before a rule proposal can be issued, the SEC needs to consider what kind of number will best reflect the after-tax performance for a typical investor, Nash said. The organization is considering pre- and post liquidation numbers as well as what kind of tax bracket the number will be based on, she said. But fund companies should prepare now for when a decision is finally rendered, said Botula of Confluence Technologies.

"If I were a fund company, I would like to take action now so I can take the proper course of action when a decision is made," he said. "It serves every clients' best interests to supply all of the information."

Since Vanguard of Malvern, Pa. became the first fund company to offer performance figures for 47 of its funds in October, Confluence began receiving requests for after-tax numbers, Botula said.

As a result, Confluence updated its software in January to calculate after-tax numbers and began making that information available to customers, Botula said.

Nearly 75 percent of investors have their money in tax-deferred accounts like 401(k)s and IRAs, so the after-tax returns are not relevant to most investors, according to Art Lutshaunig, managing director for Loomis Sayles & Company of Boston. But, the numbers are extremely important to those affected by distributions and fund companies are increasingly using after-tax returns as a marketing tool, he said.

"It's a great marketing issue and I think you are going to see more firms reporting their after-tax returns," he said.

While some fund companies are reporting either the pre- or post- liquidation tax returns of their funds, others are simply providing a tax efficiency calculator investors can use to determine themselves the impact of taxes on their fund investments. USAA of San Antonio, Texas and Charles Schwab of San Francisco offer tax-efficiency calculators.

Tax calculators are useful because they allow individual investors to enter their personal information and the resulting figure is a more accurate representation of that person's tax liability, according to Botsula. But, tax calculators are only effective if investors understand their tax situations. And, they do not meet the industry need for a mechanism to measure after-tax returns for the average investor, he said.