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Fee-Only Planners, Reps Stick With Mutual Funds

Hedge funds, separately managed accounts and other alternative investments may be getting a lot of hype in the press, but some intermediaries prefer old-fashioned mutual funds.

According to the latest Tiburon Strategic Advisors reports for independent reps and fee-only planners, mutual funds are by far the most popular investment vehicle for use with clients. The fee-only survey analyzed information from 298 participants, while the independent rep report had 1,476 participants.

About 61% of the planners said they used no-load mutual funds. The top-five families are Janus, Vanguard, Invesco, Fidelity and American Century.

Reps, on the other hand, preferred a combination of annuities and load mutual funds. The top five are American Funds, Putnam, AIM, Oppenheimer and Franklin/Templeton. On the annuity side, top product names were Nationwide and SunAmerica.

The report said that only 15% of fee advisers had invested in commission products, including annuities. One reason that fee-only advisers may not use annuities is because they are traditionally commission products and they don't want to impose any additional fee on clients, said Mark Kaizerman, a rep with Royal Alliance.

Kaizerman said this is a detriment to clients. Annuities should be used if appropriate for the client situation despite the adviser's compensation method. "This is an example where the method of compensation of the adviser may have an adverse impact on what's available to the client," he said.

The report also stated that turnkey asset management programs are becoming increasingly popular with fee-only advisers and reps. Both groups preferred SEI's and Lockwood Advisors' platforms.

In addition, advisers of all types were implementing alternative investment strategies such as hedge funds, exchange-traded funds, separate accounts, venture capital/private equity and real estate. Going forward, advisers expressed the most interest in hedge funds and venture capital/private equity, whereas reps were interested in learning more about exchange-traded funds and separately managed accounts.

Pete Wheeler, a fee-only planner in San Diego, said his alternative investments included private equity deals in mobile home parks, storage centers and local start-up banks as well as hedge funds and managed futures.

But Steven Ames, a financial planner in Annapolis, Md., said he doesn't use alternative investments because he can achieve the same results using non-correlated mutual funds. "I have a clientele that is mature in age [with] more traditional biases. It's tough to explain the hedge universe to clients," he said.

Kaizerman said his clients have very low risk tolerance, agreeing with Ames that mutual funds achieve the same results. "I don't know if the new products out there will perform any better than what we have" he said. "We continue to use a well-balanced diversified portfolio of mutual funds based upon an asset allocation model and personal interview with a client."

Robert Gerstemeier, a fee-only planner in Naperville, Ill., said there is too much unknown about hedge funds and that he would like to see more transparency with the funds before using them in client portfolios.

"We don't get very exotic with our clients. We don't feel the need for it," Kaizerman said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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