What Should You Do?

Don't let your practice become a victim of closed-minded thinking, like the railroad industry in the 1950s. Keep your mind open to innovations in financial services. For each client, consider which structure (mutual fund, separate account, ETF) meets personal investment objectives.
This is a good time to discuss separate accounts with your mutual fund investors who are disturbed by the scandals. The prime market for separate accounts is long-term investors holding non-qualified funds or personal IRAs worth $50,000 or more. The larger a client's assets, the more attractive separate accounts look compared to mutual funds.
Add these issues to your mutual fund due diligence process: 1) Recent patterns in a fund's net cashflows; 2) Recent trading costs; 3) Policies regarding fiduciary responsibility of directors; and 4) Comparison of active management value added vs. management fees earned. Let clients know that your role is to help them evaluate these areas and then monitor them on a continuing basis.
This is also a good time to prospect among small business retirement plans in your market, to see if decision-makers are troubled by the involvement of their fund providers in these scandals. (See related article.) In most cases, mutual funds are the best investment structure available for small business retirement plans. But you can show plans that your due diligence process has identified better mutual fund groups than those now serving the plan, and you can also help plans reduce vulnerability to any single fund group's problems.
Consider the cost of the time you must spend performing due diligence on mutual funds, compared to simpler alternatives like separate accounts and ETFs. Your time is valuable and clients should compensate you for it. You may conclude that for some types of clients, you can't afford the time required to dig into complex issues such as how mutual funds supervise trading activities or appoint directors.
Use the table below to help clients compare benefits of alternative structures.
Don't tie your own fate to that of mutual funds. Don't make blanket statements like The New York Times did: "Mutual funds remain the best way for individuals to invest in the stock market." Even if you have believed that idea in the past, it's not productive thinking today. Mutual funds remain one important way to access diversified investment programs with professional management. The role of a professional financial advisor is to help clients evaluate all ways that can meet their personal needs.

A Comparison Table for Four Asset Management Structures
Feature	Mutual Funds	Separate Accounts	Exchange-Traded Funds (ETFs)	Folios
Diversified?	Yes	Yes	Yes	Yes
Professionally managed?	Yes	Yes	Yes	Yes
Actively managed strategies available?	Yes	Yes	Not yet	Yes
Transparent portfolios?	No	Yes	Yes	Yes
Real time pricing?	No	Yes	Yes	No
Protection against trading manipulation?	No	Yes	Yes	Unclear
Protection against trading costs associated with large outflows?	No	Yes	Yes	Yes
Low management fees?	Sometimes	No	Yes	Sometimes
Low minimum?	Yes	No	Yes	Sometimes
Tax-efficient?	Sometimes	Sometimes	Yes	Sometimes

Other Embedded Problems

What Should You Do?

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What Should You Tell Clients About Mutual Fund Scandals?

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