Making it Work
Increased transparency has produced loads of information for mutual fund investors, but how can that help your clients?
By William T. Connolly
From the October 2005 Issue of Investment Advisor Magazine
The trend toward great-er transparency in the mutual fund industry has produced what seems like an avalanche of disclosure in the past two years.
A good deal of this information was compelled by new or proposed SEC regulations, and while some fund companies responded to new disclosure requirements with bare-minimum compliance, others went further to disclose more information voluntarily.
As we developed the new disclosure policies at Putnam, we looked at the issues from the advisor’s perspective, knowing that it would largely be your responsibility to ferret out these disclosures and help your clients understand what they mean. We often questioned whether the average investor was more likely to take the information and put it to its intended use or just be put off by it. Ultimately, we recognized that disclosure was not likely to make or break an investment decision, echoing advisor sentiment that service and performance are of most importance to clients, who have come to expect disclosure as a matter of course.
Revisiting the topic with some advisors recently, we discovered that the subject of how to use the new disclosures with clients warranted more discussion. On the one hand, “clients are more educated consumers of financial services, thanks to the media,” points out Christopher Hennessey, faculty director of executive education at Babson College in Massachusetts and a member of Putnam’s Business Advisory Group. “When you are working with a prospective client,” Hennessey argues, “being up front with disclosures about different share classes and compensation structures helps establish immediate credibility.”
On the other hand, discussions on required disclosure issues can quickly cause a client or prospect to tune out. “I start with the discussion about the different share classes and why I am recommending a particular class for their circumstance, but by the time I get to the letters of intent, their eyes have glazed over,” says Bob Ramsay, an advisor with Investacorp in Londonderry, New Hampshire. “I hand them the prospectus and direct them to the information I think is important,” he says, but Ramsay and other advisors we spoke to have little confidence that the prospectuses are read in detail.
This reality does not mitigate the importance of disclosure, however, nor does it preclude the possibility that advisors might use the new transparency of mutual funds to add value to their client relationships. Most advisors are clear about the need for disclosure and have developed effective ways to discuss the issues with clients and prospects. Following is an overview of what we’ve found that works well for them, as well as some ideas for opportunities that may have been overlooked.
Share Classes and Expense Structures
All the advisors we spoke to take time to explain the different share classes to the client or prospect, noting the difference in the fees and expenses, and the reasons they are using whichever class they are recommending. Most have counseled clients on the need for long-term discipline and suggest A shares are often the best alternative.
Fees and Expenses
Advisors and clients have taken some note of the SEC’s newly required format for fund expense disclosures, which translates expense ratios into dollars-and-cents amounts per $1,000 invested. The new charts enable shareholders to see more easily how much of their return they are losing to fees and expenses. “I simplify it further by discussing the cost in $100 increments,” says Ramsay. It’s also important to give shareholders a benchmark for comparison by showing average expense ratios for the given fund’s category, such as its Lipper peer group.
