Preferred Vendors

If you read the papers, it would appear that America's 95 million mutual fund holders have been systematically defrauded out of millions of dollars over the last several years. Abusive trading, late trading and brokerages' preferred vendor lists are the culprits, some argue. Though late trading and pushing in-house product over more suitable funds are deplorable, it's hard to say how much money retail

If you read the papers, it would appear that America's 95 million mutual fund holders have been systematically defrauded out of millions of dollars over the last several years. Abusive trading, late trading and brokerages' “preferred vendor” lists are the culprits, some argue. Though late trading and pushing in-house product over more suitable funds are deplorable, it's hard to say how much money retail investors were actually dinged for. As such, I submit, the brouhaha surrounding these practices might be more than a little overdone.

Critics argue that if a fund pays for the privilege of being a preferred vendor, a brokerage's due diligence is compromised. But FundQuest, a Boston-based managed account platform provider, examined 40 different mutual fund programs looking back over five years, ending 2002. The conclusion: Picking a handful of managers for inclusion on a preferred vendor list doesn't hurt the performance of the client portfolios. Put another way, the brokerages' model portfolios performed as well as an open architecture program, in which a broker could choose nearly any fund.

“Paying to play on a platform didn't have any impact on the ultimate performance of the program,” says Tim Clift, vice president of investments for FundQuest. “Having 200 [funds] in each category doesn't buy anything. But if you have five to 10 choices in an asset class, that's usually enough.” The only area where it helps to have more choices is in so-called inefficient asset classes, such as small-cap or international funds.

As for the performance of funds, if retail fund clients were getting robbed, why did FundQuest find no significant difference in the performance of funds and separate accounts? The study examined 3,481 domestic SMAs and 2,462 domestic mutual funds and covered the last 20 years. Even just focusing on the last few years, despite the scandals and a volatile bear market, there is no significant difference in the performance or volatility.

“Separate accounts and mutual funds meet different needs for different investors,” says Brian Carroll, head of the separate account program at FundQuest. “The study proves that investors in mutual funds are not being underserved in terms of performance.”

It's time to begin taking nominations for our 24th annual Outstanding Broker Awards. This is a peer-driven honor, meant to applaud reps who not only provide excellent service to clients and firms but also exhibit some harder-to-quantify qualities, such as leadership and charity. That the candidates all should have clean U-4s goes without saying. For an application form, see page 81. In the end, we'll select 10 people from the nominations we receive. Let the nominating commence!

We thank you for your support. Drop us a line with your comments at: 249 W. 17th St., New York, N.Y. 10011-5300. Or email us at [email protected]. Publisher Rich Santos can be reached at [email protected].

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