Earlier this year an informal group of independent investment advisers and financial planners met in Palm Beach, Fla., to discuss the frustrations they face when dealing with no-load mutual fund companies. In August the group sent a formal statement of its concerns-which center on expenses, reporting, and accounting issues-to 100 fund groups and asked them to respond by Sept. 8.
"The funds are our friends and are an important part of the (financial planning) process," said financial planner Harold Evensky, head of Evensky Brown & Katz. "We want to avoid confrontation. But they need to pay attention to these issues. It's time."
What follows is a copy of the advisers' statement. According to Mr. Evensky, it was signed by 71 independent investment advisers and financial planners who manage a total of $12 billion.
During the last few years the growth of mutual fund assets has been extraordinary. As investment advisers and financial planners, we have encouraged this growth. As fiduciaries for our clients we are concerned about several issues that directly affect them.
Note that as independent practitioners, there are differences among us about the relative importance of these issues. The issues are:
Management fees should reflect the institutional character of our clients' assets.
On behalf of our clients, we purchase almost all of their fund shares through the "supermarkets" provided by the well-known custodians. You see these purchases as those by a single account held by the custodian. Most of us purchase your shares for long-term investment. We recognize that managers should be compensated fairly for their talents and skills, but we believe that the fees now charged to our clients are in excess of those appropriate to the nature of the investments. Your mutual funds represent significant institutional clients of your firm. As such, we think your management fee should reflect fees charged to comparable institutional clients, especially for funds that now benefit from substantial adviser assets.
We support the imposition of reasonable minimum purchases for each adviser, if necessary to achieve lower fees. To limit your distribution costs, we are willing to pay reasonable transaction fees to the custodians and expect that the custodians will adapt their systems to a pricing structure that both fund companies and advisers want.
If a wide gap exists between mutual fund management fees and the fees for comparable institutional accounts, a small reduction will not address our concern.
We will look favorably upon those companies who are responsive, and will gladly participate in finding ways to accomplish this goal given the regulatory constraints.
Expense charges should also reflect the institutional character of our clients' assets.
We realize that you must be good stewards of the money entrusted to you and comply with applicable laws and regulations. However, we are concerned that fund expenses (over and above management fees) charged to our clients do not recognize the lower costs of servicing the investments placed through "supermarket" custodians. Further, assets placed by advisers are generally even more cost-efficient, and we do not require many of the services you provide for "retail" accounts.
We expect fund expenses to reflect the actual costs of servicing adviser-placed assets, especially through "supermarket" accounts.
We strongly oppose 12b1 fees on such assets, since they penalize our clients for the costs associated with other distribution channels.
For ourselves, many of us will strengthen our efforts to ask our clients for their proxies, which may help control your costs. We may also use these proxies in the future to enlist your support on shareholder issues we believe serve the best interests of our clients.
Portfolio reports should be more frequent.
Existing regulations require only semiannual statements of portfolio holdings, which are not very timely. Advisers should have access to timely information about the implementation of your investment strategies. Although we recognize a legitimate concern about the potential for abuses, we believe that reporting of positions on a monthly delayed basis should reasonably protect your proprietary concerns. We do not ask for expensive broad distribution, only access on request, through an Internet site or other cost-effective means.
Tax-efficient accounting for sales of securities should be ensured.
Much has been written about the tax-efficient management of portfolios. After-tax results for our clients are impacted adversely when you sell securities in lots whose cost is lower than others. To minimize the tax consequences for our clients when you sell securities, we urge you to ensure that such sales are executed using the HIFO method (highest in, first out). This concern does not relate to how you manage porfolios or taxable distributions, only to the tax basis of securities when you decided to sell.
Your response is important.
We are providing this statement to those mutual fund managers we use now, those we are considering, and those who may approach us to consider using their funds. We hope you will make a timely response (by Sept. 8) to these questions to:
P.O. Box 1613
Southeastern, Pa. 19399-1613
Your response will be distributed to each of us, to be weighed as part of our due diligence process. We encourage advisers to query managers about the concerns expressed herein, and encourage the media to use these issues as questions for interviews of fund managers.
While there are many ways short-term revenues can be maximized, our respective businesses will prosper in the long run only by putting the interests of clients first.
We believe that addressing these issues fairly and equitably will help our clients maintain their trust in the mutual fund investments that have to date served them very well indeed.
We are all independent practitioners, united in our concern about these issues. Many of us will continue our ongoing dialogue with you. There will continue to be forums in which these issues are discussed. We look forward to it.