It May Be Time to Say <i> No </i> to Some Do-It-Yourselfers
For many investors, do-it-yourself stock and bond mutual funds have been one of the financial system’s greatest innovations. You call up a fund, get an application, send your check and suddenly you’re enjoying all the benefits of professional money management--even if you have only a few hundred dollars to invest. No broker needed, no hassle involved.
But the phenomenal success of the do-it-yourself funds now is raising painful questions for the funds and their shareholders: Has investing in stocks and bonds become too easy? Should the funds begin saying no to some would-be investors who don’t belong?
Over the past year, millions of Americans have left the safety of low-yielding bank accounts for potentially higher returns in stock and bond funds. Mutual fund assets overall surged $281 billion last year to a record $1.3 trillion.
The do-it-yourself funds--generally, those that sell their funds direct to the public for no sales charge (“no load”) or relatively low charges--account for more than $450 billion of that $1.3-trillion asset total.
The do-it-yourself funds include such giant fund families as Fidelity, Vanguard and Financial Funds. Their share of the mutual fund market, as measured by new investor purchases each year, has surged from 23.5% in 1986 to 36.2% last year.
So while the majority of mutual fund sales still are made through brokers, a growing number of Americans are choosing to make investment decisions themselves--because do-it-yourself funds make it as simple as an 800 phone number.
Tuesday, executives of many of those fund companies gathered in Los Angeles for a meeting of their new trade group, the Mutual Fund Education Alliance. In a candid discussion, the fund executives admitted that the burgeoning popularity of their product presents a huge problem: What if many buyers don’t truly understand the risks in stocks and bonds, including the risk of losing a lot of money?
This concern isn’t new, of course, but it’s more worrisome now than ever, because novice investors are coming to the funds in unprecedented numbers. “It’s a new type of investor,” admits John Butler, head of Denver-based INVESCO Funds, parent of the Financial Funds.
These are buyers, he says, “who need their hands held” and who may have no clue about the volatility of stocks and bonds. All that these investors may know is that the bank pays them 4%, while the Dow Jones rose 20% last year.
To service the horde of new investors, most do-it-yourself funds have expanded dramatically since 1990. The Twentieth Century fund firm in Kansas City, Mo., for example, doubled its staff in 1991, from 500 to 1,000. Another 300 will be hired soon to deal with the continuing torrent of calls from investors, spokesman Gunnar Hughes says.
But merely adding phone reps doesn’t cut to the heart of the matter, which is novice investors’ need for guidance. Most of the member firms in the Mutual Fund Education Alliance admit that their phone reps don’t have the time or ability to help callers pick funds that really fit their risk tolerance. Phone reps, after all, are order takers, and can’t be expected to do much more.
To help fill the void, the alliance was formed. The do-it-yourself funds want their new trade group to be a clearing house of basic information on fund investing for both beginners and experienced investors.
Already, the group has published a directory of do-it-yourself funds, including performance statistics and toll-free phone numbers for more than 500 funds. (It’s available for $5 from the alliance at 1900 Erie St., Suite 120, Kansas City, Mo., 64116.) This spring, the group will introduce a generic guide to fund investing, including tips on building a portfolio of funds.
Yet as commendable as these efforts may be, they likely will still fall short of protecting new investors from their own ignorance. That’s because most investors make their purchase decisions based on the literature they get with their fund application. And it’s here that do-it-yourself funds are most vulnerable to criticism: Much of the literature is too promotional, and the risks in stocks and bonds aren’t presented in the kind of “baseball bat to the head” way that would truly get the message across.
Why not, for example, include with every fund application a bright red card that reads: “Stop. Before you invest, understand that you could lose money in this fund!” Would such a card cause some would-be investors to back away? Probably. Would it cause some investors to read a lot more of the fine print in the fund’s promotional material? Hopefully. Would both parties--fund and investor--ultimately be better off? You bet.
Some of the funds at Tuesday’s meeting seemed receptive to this idea, or something similar. Yes, it could cost them some business. But better they say no now to people who aren’t true risk takers, than try and say sorry later on.
Do-It-Yourself Funds Mutual funds that sell themselves direct to the public-usually at no or low sales fee-have been gaining market share at the expense of funds sold by brokers. The trend since 1986: Direct-marketed funds’ share of new fund sales 1986: 23.5% 1989: 33.1% 1991: 36.2% Source: Mutual Fund Education Alliance
