Archive for the ‘mutual funds’ Category

All bets are off in the race for financial services AUM in about five weeks, when hedge funds and private equity companies formally gain the right to market directly to potential clients. That’s when the provisions of the JOBS Act that lift the ban on hedge fund and private equity advertising become effective. These rules were formally approved about a month ago by the federal Securities and Exchange Commission.

There’s been a lot of speculation about exactly what hedge funds and private equity companies will do when they can advertise and market, which could be anything and everything including:

  • Celebrity endorsements
  • Billboards
  • National advertising campaigns
  • Direct mail and email solicitation
  • Fancy dinners, conferences and seminars

It’s all likely, but what hasn’t been discussed as much is the impact of the entrance of extremely well funded entities who are set up to compete with financial advisors, financial services companies and asset managers for a limited pool of high net worth, ultra high net worth and institutional assets. There’s a limited pool of these assets, and competition is already fierce among companies that have the right to directly market and advertise today.

Imagine what it’s going to be like in a few years when extremely well funded hedge funds really get their arms around what they can do and hire the brightest and the best Mad Men to formulate and execute a marketing strategy for them. While all healthy financial services firms have money to burn to a degree, hedge funds charge fees far in excess of what other asset managers can charge and they also have the ability to lock up AUM so that it can’t flow out in the same way that it does with mutual funds and financial advisors.

If you are currently seeking to gather AUM, you better watch out. These guys are coming and they have the ability to suck all the air out of the room so that there is even less space for other messages. In an already noisy atmosphere, it will be even harder for potential clients to distinguish your message from all the others out there.

That means if you don’t have a clearly defined ideal client type and a plan to attract those clients to you, you better get moving. Time’s a wasting…..

When I first began writing about mutual funds in 2000, I was horrified at how expensive many of them were and how diabolically clever and incomprehensible the expense ratio and load system was to the average investor. In fact, one of the reasons I started writing about mutual funds was that I owned some and wanted to understand how they worked (or didn’t, as the case may be).

In any event, one pleasing trend in the asset management industry is declining expenses. When I wrote about mutual funds regularly — for 10 years as the mutual fund columnist for Better Investing magazine — I was on a continual campaign of education about expenses and how they undercut fund returns.

So you can imagine how happy I was to find out that one of the casualties of the war on expenses has been Class B shares, according to the WSJ’s The New ABCs of Mutual Funds. These expensive, obnoxious fund shares tend to carry higher than average ongoing expense ratios plus a painful back-end load or sales charge. Once an investors is in a Class B fund share, it’s hard to get out for years without incurring a large sales charge on the way out.

And as anyone who is familiar with basic math in the asset management industry knows, the higher the expenses, the bigger the hit on returns. So in return for investing in generally worse performing Class B shares, investors pay higher fees and have to pony up to get out before five years, which is when the load typically disappears. Though, in some cases, it can last as long as seven or eight years.

I’m thrilled to see that investors as a whole are wising up and choosing lower fee options such as institutional class shares. And not a little of this trend is due to financial advisors, who have become much more proactive in protecting their clients’ best interest and placing them in low expense mutual funds.

As I see it, the extinction or at least marginalization of Class B shares is a benefit for all investors, In most cases, I don’t think it makes sense to buy a fund that carries any kind of sales charge, but if you’ve got to do it, the institutional class is the best deal.