Only Honesty Can Rebuild Investor Trust
March 3, 2003
MIAMI - "Millions of Americans put their faith and trust in us to see them through retirement, and we let them down," Donald A. McMullen Jr. said here in his keynote National Investment Company Service Association, or NICSA, Annual Operations Conference address.
"While we don't control the markets, we don't want to be blind just because we are the messenger," McMullen, senior executive vice president at Wachovia Corp., told the 630 shareholder communications and operations executives at the NICSA meeting, themed, "Building Trust Amid Turbulence."
The fund industry, along with the rest of Wall Street, was all too happy to collect the assets that burgeoned during the bull run, doing little more than providing microscopic pie charts on diversification in investor hand-outs, McMullen said.
"No one wants to turn off the music at a loud party, but we didn't provide perspective in the bull market," he said. Even today, many Americans expect unrealistic returns from their equity investments, McMullen said, noting a September 2002 survey by the Securities Industry Association, where the 1,500 investors polled expected to receive an average return of 13%-- this at a time when many sectors have declined 50%, even 60%, in value over the ongoing life of this bear market. Furthermore, another SIA survey shows that whereas 60% of investors used to rate their fund companies very highly, only 45% do today, McMullen said.
The investment management industry collectively did an inadequate job of educating a public that turns to mutual funds, most typically as their entree to the equity markets, to fulfill "lifetime achievements" that extend beyond supporting oneself in one's aging years, McMullen said.
McMullen, who is also president of Capital Management Group, used not only candor on his audience but humor by opening his presentation with a "Saturday Night Live" video clip of a television commercial for the "Reliable Funds." Playing a broker, Alec Baldwin tells his client on the other end of his cell phone that now is absolutely a terrific time to invest in the "Reliable Funds," as he jumps out his window. "Getting spoofed on Saturday Night Live'--does that give a comment on where we are?" McMullen asked the audience.
As bad as the markets have been, the fund industry should take this crisis to turn around investors' "fear and anger" into renewed, unshakable confidence, he said.
The Tylenol Disaster
Take a page from the Tylenol disaster that Johnson & Johnson faced in 1982, the senior EVP suggested. Hysteria swept the nation when seven people who had taken Tylenol laced with cyanide died, McMullen recalled. The drug industry and marketing experts wrote Tylenol, and to some degree, J&J, off as finished and done with.
Instead of admitting defeat, Johnson & Johnson recalled 31 million bottles of Tylenol and came back to market with a triple-seal, tamper-proof bottle that set a new standard in consumer product safety. Within just five months, the pharmaceutical giant regained 70% of its market share, with customers of competing brands even selecting Tylenol over their familiar, favored brands, McMullen said.
The way to regain the consuming public's trust is one investor at a time, the Wachovia leader said. "If we generate that relationship, where client interest comes first, we will build relationships that allow us to have a conversation with our customers that can sometimes be loud," McMullen said, alluding to the difficult questions many investors have today. But fund companies should welcome those loud' and difficult questions, for if they do not enable investors to ask them, they will stop communicating with their investment management firms altogether, and the only message fund companies will get, he said, will be redemptions.
"Investment information that's more readable, understandable and friendlier will begin to improve customer satisfaction," McMullen said. Beyond that, fund companies must speak more honestly with investors, just as a financial planner or broker of the highest integrity would, about what is really right for them. And from the highest levels right down to the back office, "every employee must be keenly aware of ethics."
Firms should not only have senior officers sign off on a fund complex's financials, but also members at junior levels, he said, referring to the new SEC rule stemming from the Sarbanes-Oxley legislation. "Remember, money really does talk. Create a culture of accountability by taking the sign-off process to lower levels," McMullen suggested. "There is something sobering about asking all members of an organization if they are comfortable with the books."
Greater transparency with regards to proxy vote disclosure has been a "radioactive hot potato" for the fund industry, but as much as the industry has fought it, he said, greater transparency is how investor trust is going to be re-won. "We will only make legislators and investors more comfortable if we speak up," he said.
"I am bullish on this because we don't have anything to hide. We care about them and have the talent to invest for them. We need to tell them that," he said.
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