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Funds Play Intermediary Musical Chairs

Isn't it funny how even though millions of investors are losing money these days from their portfolios - many crying a sad story after witnessing their retirement savings washed away by a consecutive three-year bear market - that, ultimately, it's these burned investors who drive the market for the mutual fund industry?


Three years ago, investors gravitated toward the "do-it-yourself" option, and mutual fund companies started spitting out no-load funds in order to appease this control-happy group. Now as the markets continue to drop, dragging investor confidence to increasing new lows along with it, this same group has realized that they need help with their investments.

Enter the Financial Adviser

Many fund firms have done an about-face - reorganizing to appeal to the financial planner. Many companies that traditionally offered direct, no-load funds have introduced load shares to distribute through commissioned-based advisers.

Earlier this month, American Century switched over 10 of its funds to loads, in order for advisers to sell them (see MFMN 2/24/03). Besides American Century, Scudder, Invesco and T. Rowe Price are just a few that have begun offering load funds, according to industry sources.

"In this recession and this fall-off, trading volume in a number of funds which have been no-load funds are languishing, [so] they're looking for the brokerage community to sell their funds," said Joel Ticknor, a planner in Reston, Va.

But for fee-based advisers, they need a movement in the other direction. In fact, it's not a new thing for fund firms to waive loads for them, according to Chip Roame, managing principal at consulting company Tiburon Strategic Advisors of Tiburon, Calif.

It's not really about load vs. no-load, it's about adviser vs. direct, as Roame sees it. "The direct retail channel has collapsed," he said. "You're seeing a shift in fund flows to more adviser-sold funds. So you're seeing fund companies reposition themselves to go after that, whereas three years ago you saw the exact opposite of that. Everybody wanted to be a no-load [fund company]."

Even the fee-only adviser is now being given choices of mutual funds. Though American Funds introduced what it calls an F share in March of 2001, it's really only lately that recognition of the share - available in all 29 of its funds - has taken place by advisers.

"We had a number of fee-based advisers come to us saying, We would really like to sell American Funds, but we can't because of the compensation structure,'" said Chuck Freadhoff, a spokesman for the Los Angeles-based company.

Though more expensive, F shares have no up-front or back-end sales charges like their load siblings, Freadhoff explained. However, the share is slightly more expensive because of the transaction fees that occur in order to place it on platforms like Schwab and TD Waterhouse. Additional costs for the share ranges from six to 12 basis points annually, depending on the fund, averaging around nine basis points, when compared with its A share sibling, Freadhoff said.

Roame said American Funds already has about a 60% penetration rate in the independent group with its load funds, and an even higher satisfaction rate.

For the fund company to start offering a share class specifically for fee advisers, American Funds "gets it," Roame said. "They're extending their brand name into new distribution channels and new products where they are already beloved."

American Funds Top of the Game

In fact, at the National Investment Company Services Association operations conference in Miami last week, speakers cited American Funds as the No. 1 fund company when it comes to third-party distribution (see related story, page 1).

With so much choice, how will advisers decide which share is best for clients?

"If advisers view themselves as an fiduciary, then they are looking out for their clients' best interests rather than their own interests," and should use no-load shares or the F shares, said Michael Joyce, chair-elect at the National Association of Personal Financial Advisors or Arlington Heights, Ill., and a planner in Richmond, Va.

However, Joyce wonders if clients truly understand the differences between the classes and whether they realize that returns will differ depending on the share. "It creates a lot of confusion with the investing public to see A- through F-type class shares. They don't know that it's the exact same portfolio [or if] the returns are going to be different based on the different cost and expense structure of that class," he said.

"From the adviser point of view, I would say the answer is always full disclosure to the client," Ticknor said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.