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Industry Leaders Look to Restore Investor Loyalty

WASHINGTON -- Putting the interests of investors first and fostering investor loyalty were two of primary topics at the Investment Company Institute's annual General Membership Meeting here.

While acknowledging the mutual fund scandal that has ensnared several fund companies since September and caused the ousting of top executives, Paul Haaga, chairman of the ICI and executive vice president of Capital Research and Management in Los Angeles, called for industry leaders to rededicate themselves to the industry's core values.

In his opening speech, Haaga acknowledged that senior officials at some fund companies had exploited the trust of investors by engaging in criminal acts, "ethical transgressions and egregious management failures." Moreover, he noted that while the actions of a few have caused pain for many, the blame has not been misdirected. "We have no one to blame but ourselves for triggering the notoriety we [the industry] received and the criticism we heard," Haaga conceded.

Haaga called for the industry's leaders to rededicate themselves to four core principles upon which the fund industry had previously built its reputation and sustained its history of success. The most important principle "is that mutual fund managers must always put the interests of fund shareholders ahead of everything else, including the managers' own interest," Haaga said.

He also reminded the audience of the need to support strong governance and tough regulations. Thirdly, "in light of its importance, we must vigilantly protect the independence and effectiveness of the fund governance system," Haaga said.

Lastly, he called for the industry to embrace the intense scrutiny of reporters, experts and academics, referring to such as "informed criticism." But he reminded attendees that this scrutiny should never displace the need for the industry to continue self-examination.

In a subsequent session of the ICI's General Membership Meeting, Fred Reichheld, director emeritus of consulting firm Bain & Co. and founder of the firm's "loyalty practice," led a panel discussion and counseled attendees on how to foster client loyalty and enhance employee retention.

Adapting the teachings of "The Golden Rule," Reichheld explained that "loyalty is committing yourself to treating people right." Leadership loyalty fosters employee loyalty, which in turn fosters customer loyalty, he said.

One way to begin the loyalty process is to have company management define and then articulate the company's core values and sanctified principles inside and outside of the company, Reichheld said.

Paula Meyer, president of American Express Funds in Minneapolis, noted that her firm clearly articulated its desire to be as well known for its financial services as for its credit cards. The firm helps to create a better experience for investors by providing great products and performance. She also explained that the firm focuses its efforts on those proprietary financial advisers who expend the most effort helping clients achieve their goals.

To reward loyal clients, 18 months ago American Express rolled out a suite of Platinum financial services for its best clients and is currently launching a comprehensive Gold financial services plan, which includes a free credit card and better rates on some investments.

Customer loyalty, built upon top-notch service, is one of the firm's articulated core values, said Edward Bernard, president of T. Rowe Price Investment Services in Baltimore. That service used to include gently steering retail investors away from specific investment recommendations when they asked for help, he said. But that has changed. Now call center employees focus on proactive guidance. That transformation has changed who T. Rowe hires to work with customers and the training they receive, he added. The end goal is to "make our customers more successful," Bernard said.

Both Meyer and Bernard agreed that for a mutual fund firm, one measure of loyalty is how long an investor remains invested in a fund. But Bernard also pointed to looking at how much of a shareholder's total wallet has been entrusted to the firm, as well as analyzing shareholder satisfaction.

Meyer noted that American Express annually surveys its customers, and when it finds that a customer is not satisfied, the firm follows up.

Reichheld pointed to the success of Enterprise Rent-A-Car, which built a customer survey asking just a few, but important questions, such as would the customer rent again, and would they recommend the firm to a friend? Enterprise then waited a year and tracked the past year's rental behavior of those same customers to gauge a correlation.

Perhaps even more important is polling employees to judge their satisfaction level, since their degree of satisfaction trickles down to client interactions, Bernard added.

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