Matt Fink Chronicles Rise Of Mutual Fund Industry
October 27, 2008
Few people know as much about mutual funds as Matthew P. Fink. For more than 40 years, Fink dedicated his career to serving the industry and its 88 million shareholders through his work for the Investment Company Institute, serving as its president from 1991 to 2004.
Now in retirement, Fink has written "The Rise of Mutual Funds: An Insider's View" (Oxford University Press, October 2008), the first comprehensive, historical look at this $11 trillion industry, starting with its inception in 1924 and chronicling its rise and evolution through decades of changing regulations and public interest.
Money Management Executive recently spoke with Fink about his experience of writing the book, his opinions of high and low moments for the industry and some of the people in the mutual fund industry whom he admires.
MME: What are some of the most interesting things that you learned while researching your book?
Fink: I always wondered why the investment company industry supported the enactment of the Investment Company Act of 1940, because if you read the newspapers and magazines at the time, they all uniformly predicted that the industry would oppose the act and, in fact, defeat it. But the industry strongly supported it because of tax reasons.
In 1936, Congress had given mutual funds an exemption from taxes if they met certain conditions, but not for closed-end funds. The Roosevelt Administration and Congress basically told closed-end funds that they would receive tax relief only if they supported regulation of the industry, and the Investment Company Act provided that regulation. So, that's why the closed-end funds, which were the biggest part of the industry in 1940, very much supported the Investment Company Act. That hasn't been reported before.
The second thing I found was why the industry had been so well prepared to deal with Individual Retirement Accounts and 401(k) plans and 403(b) plans, etc. in the 1980s. And the answer was, in the early 1960s, Congress for the first time allowed self-employed individuals to have retirement plans, known as Keogh plans, named after Congressman Eugene James Keogh.
That was the industry's first experience with retirement plans. The industry had to learn how to market retirement plans for doctors and lawyers and architects. Back offices had to learn how to process orders coming from the same firm for a number of people, say two doctors or three nurses, or three attorneys or four secretaries. It was the first time they had to do multiple processing. And industry lawyers had to learn not only the Federal securities laws, but Federal pension laws.
The Keogh experience in the early '60s gave the industry grounding in retirement plans, which paid off in spades, when Congress allowed Individual Retirement Accounts, 401(k) plans and 403(b) plans.
MME: What have been some of the most impactful changes to the industry over the past 80-plus years?
Fink: Well, in the industry's first 50 years, from 1924 until about 1972, it was almost entirely all stock funds sold by broker/dealers. There were very few bond funds or direct-marketed funds. The industry for most of its life was 95% stock funds sold by brokers where they pay a percent front-end sales charge.
The industry underwent a revolution with the development of new types of funds-money market funds, municipal bond funds, international funds, balanced funds, so on and so forth.
The second big change was new ways to distribute fund shares. No-load funds that were miniscule for 50 years sold tremendously well in the '80s and '90s. And then other things happened, like 12b-1 plans and the use of financial planners, bringing forth a multitude of changes in products and distribution channels.
The third major change was in the types of firms offering mutual funds. In the early years, between the advent of the first mutual funds in 1924 until the mid 1960s, almost all fund groups were firms whose only business was being in mutual funds or money management including mutual funds. In the 1960s, the insurance companies entered the mutual fund business. In the 1980s, securities firms and brokerage firms entered the fund business. And in the 1990s, banks entered the mutual fund business.
MME: How has the ICI and the rest of the industry been able to preserve its good name and integrity after the tremendous upset of the mutual fund trading scandal of 2003 and the ensuing three years of fines and settlements?
Fink: First of the all, while the trading scandals were awful, they only involved very few firms in the industry. I think there were about 500 mutual fund companies at the time of the scandals, and my best count at the outside, 19 were involved. The vast majority of firms were not involved.