Falling stock prices have shaved stock-fund assets, yet sales themselves have softened only modestly.
Most brokers probably don't feel particularly buoyant right now, given what's been happening in the stock market lately. But as several mutual fund industry researchers see it, financial advisers have much to be thankful for amid the current gloom on Wall Street.
For starters, a majority of fund shareholders continue to seek advice and are willing to pay for it — a trend that has been hastened by the current bear market.
More people are coming to realize that “it's scary to do it on your own,” said Avi Nachmany, director of research at Strategic Insight in New York. “Everyone's now shifting to the community of financial consultants.”
Nachmany and other industry experts were panelists in a “state of the fund industry” discussion at a conference sponsored by the Investment Company Institute and the Federal Bar Association in March.
The growing array of investments and financial tools is creating plenty of confusion out there, affirming the need for assistance. “Investors have more information … and product choices than ever before,” said Paul David Schaeffer, manager partner at Investment Counseling in Mill Valley, Calif., and a speaker at the conference.
If that's not enough, the Internet fizzled in terms of luring away clients from traditional channels. Steve Lipper, global markets director for Lipper Inc. in London, said it's a mistake to view the Internet as a fund-buying medium. It's a supplemental distribution channel geared primarily to client services, he said.
If anything, Internet trading in general may have received a black eye from the recent market downturn. “The era of legalized gambling is over,” Nachmany said, “and it will take a long time to come back.”
As another plus for brokers, variable annuity sales have been rising in tandem with investors' long-term preference for stock mutual funds. Although no-load annuity contracts are available, advisers account for the lion's share of sales.
By contrast, index mutual funds, which tend to be no-load products, aren't taking the world by storm. Despite four straight years of superior performance during the late 1990s, they have carved out only a modest percentage of new fund sales. That bodes well for brokers, who account for the majority of sales of actively managed funds.
The Long View
The general upshot from the discussion was that mutual funds — and particularly stock funds — should remain viable despite the market slump. Lipper noted that even during the industry's greatest prior crisis, the prolonged 1973-’74 bear market, fund assets remained flat. He predicted the current setback would be less severe, for reasons ranging from a generally healthier economy to net investment inflows from 401(k) accounts, which didn't exist during the 1970s.
Granted, falling stock prices have shaved stock-fund assets, yet sales themselves have softened only modestly. For example, Lipper Inc. reported that while investors withdrew $2 billion more from stock funds in February than they invested — a rare month of net redemptions — that outflow accounted for less than .1% of total equity-fund assets.
In short, given what's been happening in the stock market lately, fund shareholders should be switching around more than they are. Instead, purchase activity is dropping, but so are redemptions. “People … freeze and keep what they own,” Nachmany said. “Most investors are not redeeming more.”