Fund industry needs to defend itself

(September 30, 2004) The mutual fund industry needs to step up and defend itself, or risk serious damage to its reputation, according to one crisis management communications specialist.

“Everybody seems to be forgetting about defending the basic fund product category,” says Bruce MacLellan, president of Environics Communications. “Everybody is so head-down, competing against each other and looking at the micro, sales side of business, that nobody is reminding the public there is still a lot of merit here.”

There has been much high profile criticism of the industry in the major media, first over performance, then fees and finally alleged trading improprieties. But despite the scandalous headlines, most mutual fund investors have maintained a relatively upbeat outlook on the industry.

A survey conducted by Léger Marketing found fund investors are, by and large, fairly content with their investments. When asked what merit they saw in funds, 89% cited diversification, 87% appreciated the professional management and 72% enjoyed the ability to invest small amounts over time.

In fact, despite the media scrutiny, evidence suggests that investors are gaining confidence in the industry. The survey found that between November 2003 and July 2004, average confidence, measured on a scale of one to 10, actually increased from 6.2 to 6.4. A similar 0.2% increase was found in the average rating assigned for integrity, which climbed to 6.6.

One explanation for these improved opinions is that performance remains the number one concern for investors. When asked why they might stop investing, performance far surpassed other reasons, at 41% compared to 16% who said they were now retired. In fact, negative media coverage ranked very low, with only 6% saying this could dissuade them from investing in funds.

“The good news is that Canadians appreciate the many benefits of mutual funds and are not being unduly shaken by the recent negative coverage,” MacLellan says. But fund companies should not remain complacent, he warns, as silence allows the industry’s critics to define on these issues.

“Some media see themselves as extensions of the regulators in terms of being vigilant protectors of the consumer,” he says. “Canada is a leader in terms of government activity to protect consumers, but unfortunately in the financial sector we have this ridiculously fractured jurisdictional situation.”

This makes the role of industry associations like IFIC even more difficult, as they must address the concerns of each regulator, rather than addressing a single authority.

MacLellan also criticized the OSC for the approach taken in its mutual fund probe.

“I thought it was regrettable that after so many months the OSC’s statement was ‘we found four, but there’s a whole lot more that we’re looking at, but we’re not telling you who,'” he said. “In terms of providing investor confidence, that kind of statement doesn’t really meet the test of what I think is responsible.

“Can you imagine saying ‘there are some doctors out there not doing their job very well, but keep your appointments’?”

Shooting the messenger

Because the industry perceives the mainstream media as hostile, fund executives have been adopting a bunker mentality. Since they are increasingly reluctant to speak with the media, the pro-fund message is not getting out. Reporters are only hearing from critical sources, leaving them with nothing positive to report.

When industry executives do speak, MacLellan says they tend to be too wrapped up in competitive behaviour to promote the industry as a whole. They promote their own company or specific funds rather than defending the product as a class, with the message coming across as a sales pitch.

“We just don’t see ads that promote mutual funds anymore. We see ads that promote product,” he said. “I can’t remember the last time I saw an advertisement from a company that talked about the benefits of mutual funds.”

Fund companies have abdicated the role of defending funds to the advisors that are selling them, who have to explain to clients why they should stick with them. If they aren’t willing to take over this role, they should at least provide material support to the advisors.

“The poor advisors! They’re the ones that have to be on the phone talking to their clients, comforting them when there are concerns,” MacLellan says. “I really think that if the advisor is the foot soldier in the trenches, they need some air support and the fund companies have to provide it.”

He points to Mackenzie’s “plain language” brochure explaining fees as one example of firms getting it right.

“I believe mutual funds are a great product,” says MacLellan. “I also work with a financial advisor and I could never imagine managing my own investments. I’m very committed also to the value of the financial advisor for everyone.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(09/30/04)

Steven Lamb