Ads Won’t Help You Determine Your Needs

If you think it’s hard to sort out mutual funds by the numbers, just try to get a good picture of a fund or management company from its advertising.

Fund companies are advertising as never before, spending $360 million last year to reach you. That number doesn’t include the $1.5 billion spent by brokerage firms, insurance companies and banks to advertise their products, many of which are funds.

And the barrage of messages is going to grow.

For investors, the advertising push is a neutral event: As always, Madison Avenue is adept at selling the sizzle when what you need is steak.

“Fund companies are fighting to be recognized and to develop a name and reputation at a time when there are so many fund companies that almost all of them look alike,” says Geoff Bobroff, a Rhode Island-based fund industry consultant. “With dozens and dozens of managers, it is exceedingly difficult to develop a real affinity for one of them. The fund companies hope you will do that as a result of their ads.”

Funds not only need to develop name brands, they also have the cash to do it. The bull market that has been kind to investors has also made record profits for fund groups. Television commercials, avoided by funds as recently as 1994, now feature Fidelity Investments, Janus Capital, John Hancock, Berger, Scudder, Oppenheimer, Neuberger & Berman and many others.

A few years ago, mutual fund print ads featured hot offerings with a bevy of fine-print disclosures describing how performance was measured.

These days, however, there isn’t much performance to brag about; while the stock market has risen like the morning sun, most funds have lagged their comparable index. That shortfall doesn’t look good in print.

Ads focusing on specific funds are a double-edged sword.

Sheldon Jacobs, editor of the No-Load Fund Investor newsletter, once studied fund advertising and concluded that since management tends to advertise its best funds, “you could do worse than buying from the ads, where you were pretty likely to be getting a fund with a good track record.”

At the same time, Jacobs and other critics note, the funds that advertise fancy performance often fall out of favor soon thereafter, meaning they accumulate the numbers to justify the ads and lure new investors as they’re about to fall from grace.

That’s why later ads tend to focus more on the fund company’s service and a consumer’s needs than on returns. Just as you wouldn’t expect a political candidate to advertise positions as being “anti-education, anti-environment and pro-crime,” funds aren’t emphasizing their short-of-the-index performance.

Notes Bobroff: “Nobody says, ‘Our service stinks and our funds are average.’ Instead, they say you need to save more or suggest that you need help in the complex world of investing.”

In short, the commercials sound alike. Plenty of investors recall seeing these ads; they just don’t remember what supposedly distinguishes one fund company from the rest.

Fund groups don’t necessarily expect you to run right out and plunk down your money--they just want to get on your radar screen so that they gain consideration when you make an investment decision.

Colonial Funds, for example, has taken the extreme step of using billboards and commuter rail station placards to hype the Colonial Newport Tiger funds; the billboards feature the name of the company in the middle of the name “Asia” in giant print.

The fine print suggests talking to your financial advisor about the funds.

“If you are thinking about diversifying and mention us to your advisor, then the ads have worked,” says Tom Gariepy, spokesman for Boston-based Colonial. “You may decide to go with someone else, but we want to be in the process.”

In that kind of circumstance--in which you and/or an advisor do the work necessary to see how a fund fits into your plans and consider its competition--there is no downside to being swayed by fund advertising. But investors who select a fund group or a specific fund on the basis of advertising alone, rather than on what is in the prospectus, are asking for trouble.

“I can’t think of anything in an ad that would actually make me buy a fund--or would even be a key factor in purchasing a fund,” says Stephen M. Savage, editor at Value Line Publishing. “It’s just not the right way to select an investment.

“First look at your needs, then look for funds that can meet those needs based on performance and prospects,” he adds. “You’ll get that data from newsletters, magazines or newspapers, but not from advertisements.”