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What I would like to ask the mutual fund shrill’s? April 26, 2016

Posted by shaferfinancial in Finance, mutual funds.
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Sometimes I imagine the ability to actually press the facts on the mutual fund industry.
Alas, this isn’t likely to ever happen. But what if it did? Here a made up scene of a mutual fund executive getting grilled on the witness stand by an attorney. Again, this is a product of my imagination!

MF= Mutual Fund Executive
TA= Trial Attorney

TA Your company has 10,000 sales people giving advice to people on retirement savings, right?
MF We don’t call them salespeople, they are Registered Investment Advisors or Certified Financial Advisors, but yes that is about the number.

TA The majority of the time they suggest clients invest in mutual funds, correct?
MF Not sure about that
TA How many of your mid income clients are suggested to be in stocks or bonds and not mutual funds?
MF In that group I would agree with you that most are in mutual funds.
TA In fact, your company in involved with over 100 of the fortune 500 employees, correct?
MF Sound about right
TA So you have a fiduciary duty to put 100’s of thousands of employees into the correct retirement savings vehicle.
MF Yes

TA Have you seen the Dalbar reports on individual returns for those investing in mutual funds?
MF I believe we give that out to our representatives
TA Does you company have any internal analysis of individuals’ returns that invest in mutual funds with your company?
MF Yes.
TA What is the average returns that you are finding for individuals?
MF I’m not sure
TA Can you read the report generated by your company that I just handed you [Exhibit 34]?
MF Yes, give me a second
TA Just read the last paragraph out loud to the jury
MF Overall returns average around 3.3% over the last 25 years for individual investors……..

TA Where in your printed advertisements does that number appear?
MF Don’t know, you would have to talk to advertising
TA Does it ever appear in your companies advertisement?
MF Not sure
TA Again, are you aware if that result ever appearing?
MF No, not aware of it.

TA Does being a fiduciary mean you should disclose items like that?
MF No, the SEC has never made a rule like that.
TA So because it is not required by the SEC you don’t feel the need to be honest with your clients?
MF That is not how we think of it. If our clients do what we tell them too, they will get much higher returns than that.
TA But they don’t do they?
MF I’m not sure.
TA Did you not just read your internal research indicating that they don’t?
MF I’m not sure we are talking about the same thing

TA What is the object for these employees in their 401Ks that you are suggesting they fund with mutual funds?
MF To save for retirement
TA Would you say that the objective is to ultimately have a stream of income when your clients no longer work?
MF Yes, that would be correct
TA Would you also say that you want to have them get the largest stream of income they can?
MF Yes
TA Would you say that part of your fiduciary duty is to make sure you suggest financial instruments that would accomplish the largest stream of income they can achieve?
MF I would agree with that

TA Have you heard of sequence of return risk?
MF Yes, but what does that have to do with mutual funds?
TA Explain what your understanding of sequence of return risk is
MF The order of returns. In other words, is the order of returns such that it increases the risk to the overall return given a certain time period.
TA When people save for retirement are they looking for a return in a certain time period?
MF Well, yes I guess, they are going to retire at a point
TA So wouldn’t they have to deal with sequence of return risk?
MF Yes, but we have products that deal with that
TA What are those products?
MF Annuities and certain mutual funds that move the percentages of equities down as one ages.
TA What does that do to the overall return?
MF Well it would decrease it.
TA Your products that your company suggests to deal with market variation reduce the returns below the 3.3% return you previously read?
MF Well….if you put it that way….but anytime you reduce risk you reduce returns
TA What percentage of your clients are in these risk reducing products?
MF It would be a small percentage of folks approaching retirement.
TA So, for most of your clients sequence of return risk is a real concern?
MF We aren’t concerned with it for most of our clients
TA Why?
MF Most of our middle income clients are more concerned with overall returns
TA Do you think if they understood SOR risk they might be concerned with it?
MF We don’t speculate on that, we give the clients what they want
TA But aren’t you a fiduciary?
MF Again, the SEC doesn’t require us to talk about SOR risk

TA As a fiduciary you are not discussing the overall returns experienced by consumers and the ways to decrease SOR risk?
MF We discuss what the most appropriate vehicle is as required, and for most of our middle income clients mutual funds are the most appropriate vehicle. We have worked hard to get the overall expenses down in mutual funds and are very proud of our products that lead the industry in low fees!
TA So you are very proud of the fact that your clients are receiving 3.3% returns over the long run when the market has returned over 8%?
MF Well that is a function of investor behavior that we have no control over. The product itself does great when matched up to our competition.

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