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Sep 1, 2010 3:41 am

When, in your experience, has a mutual fund switch been justified and what criteria does compliance use when making a decision to green light moving out of one fund company and into another.

I know, vague question, right?

I've never had any problems in the past justifying nice switches particularly when dealing with Munder, American Funds, etc. I recently moved a 240k account from Merrill and along with it some munder (was surpised about this) and american funds. Of these funds, the client had 9 ( no surprise here) american funds in the portfolio. Did snapshot of portfolio, found majority holdings in large cap and 31% singled out by American Fund holdings.

Now, I hate American Funds and that's really no rationale to get rid of them. But I get the client to sign a new proposal I put together (franklin, blackrock, first eagle, pimco) and it was shot down instantly by compliance despite signature in blue ink noting that client understands the breakpoints she would be submitting and new fees she would be paying (two of which would hit new breakpoints)

"What's you're rationale?" I was asked. Simple, practically kill the overlap, bump up clients holdings in small cap from less than 1% to 9%, introduce 17% weigh in in midcap core, and still have some nice large holdings in income paying equities that will give the client a new nice spread, near no overlap hence managing the risk in the portfolio that is to be untouched for at least 15 years.

"I don't like this allocation" is my compliance officers response. "there's no benefit to the client. you can stay in American funds and be diversified." I asked what specifically froma  compliance and regulations standpoint was holding this portfolio back. The answer I kept getting: "I don't like it."

"well, what if client doesn't like American Funds?"

compliance: "why wouldnt she like American Funds?"

I'm...really confused because I'm not understanding the logic behind this guy. The question is how does the client benefit paying this cost?" Cost this cost that..."I don't like it".

"Mr. Compliance officer, what if we wrap her account?"

"that would be great!" (except client does not want to pay an annual fee but a transactional)

This industry bothers me sometimes. Guys get away talking about diversification in 9 american funds and the trade flies. Putting together a better mix of funds and getting paid for it doesn't.

What is my naive mind missing? Thanks in advance and sorry for the long post.

Sep 1, 2010 4:47 am

If this stuff bothers you, and it should, you should go independent.  There are lots of good reasons to move between funds, but the best ones usually start with lower fees for the client...

Sep 1, 2010 11:20 am

Sounds like a ridiculous conversation. If ever there was a situation where you should (i would) push back, and even go over the guys head to his direct supervisor, this is it.

American Funds are like index funds, they are too big to manage, and they are biased to large cap with major overlap. You said it already, there is every reason to make this change . Push back. Or go indie. I am indie, and if i do a switch all i need to do is fill out a form with the reasons, and send it to compliance. A copy gets sent to the client, which is fine, because when i do a switch its for good reason. And if the switch is less than $10,000 i don't even have to fill out the form.

Seriously, your compliance guy is a jerk who doesn't know anything about investing and he's basically managing your clients portfolio.

Sep 1, 2010 1:48 pm

I would say that there are some very good reasons to diversify the American Funds portfolio.  But, at the same time, there are some great funds at American, and just because you don't like them, doesn't really mean you should move out of them.  Which of the four companies you listed were you going to use to get LCV?  Why blow out ALL of this guy's portfolio when you could keep SOME of it and still make the necessary changes? 

I disagree with your compliance guy that you can stay at American Funds and be fully diversified.  Tell me, Mr. Compliance Officer Genius, which American Fund I can use for the small domestic space?  How about the mid cap growth?  How about anything other than plain vanilla funds?  Niche classes?   

I think you've got a good argument to make some switches, but I also agree, up to a certain point, that your new client probably could keep some of his American Funds. 

Sep 1, 2010 3:48 pm

Have you looked at the correlation of the American funds?

If I remember correctly, they are quite high for their domestic equity funds.



Sep 1, 2010 5:32 pm

I hit him with standard deviation, earnings off liabilities, past performance ('08) in particular. still below average mutual fund expenses, he's still spewing bile at me.

"I dont like this. you're not hitting breakpoints.". So the criteria is  cost because clearly everything else is non-essential.

"Mr. compliance guy, yet you have no problem putting Mrs. client in fee based which also bypasses bp but, oh, it pays us 1% for life.

"I tell you what, Anabuhabkuss, pick one fund family."


"Finra regulations" (i swear to god he said this)

"Show me in your compliance manual"

"it's not written anywhere"

"then what basis do you have for this claim?"

"not all ryules are written"

"because these are your rules".

"no. pick one fund family. and I'll take a look at it. for now I'm going to bust these trades and you're going to pay for it"

"Going to talk to (his boss) and we'll see. your argument is going to fly if you can't show me written regulation from finra suggesting every investor in the united states of america can only be in one fund family."

Sep 1, 2010 5:53 pm

I dealt with switches and rationales for many years at a firm that had strict oversight like you're describing, have since gone indy, no more problems. But, that doesn't help you...

You need to quit fighting the system, instead find out what their hot buttons are, and what the "magic words" are. They are not going to tell you that, certainly not in writing. Dude, it's a game, stop thinking that your firm is against you, they are simply CYA.

Take a deep breath, calm down, then take my advice. All a sudden, you'll magically never have a problem with this again. Your "practice" has to take into account, the playing field. You'll more than likely need to adjust, modestly, your business style. But, once you do, you'll be fine with it.

Hope that helps.

Sep 1, 2010 5:53 pm


Post the tickers of the American Funds in the questions and I will post the correlations for you. I will try to get to it today if you post, but may not. Leaving early today.

Sep 1, 2010 6:02 pm

You guys have been a great help and I was prepared to hear that it's me (which i'm always prepared to change). I just got off the phone with the compliance director and he's backing me on the situation but JackBlack, I would still like your help. Is this something I can do using my membership on morningstar because if so, I can do it on my own if you'll direct me there. Otherwise let's work with these:


..are the ones that keep getting thrown in my face.

Sep 1, 2010 6:14 pm

Kuss, seriously, I can save you an enormous amount of time. It's not about exposure to this sector, correlations, track record... Finra indeed is one sided, it's all about costs, breakpoints, when using similar products.

Sep 1, 2010 6:18 pm

Spaceman, nice points you make. And this is why my typical client has bonds, cds, stocks, etfs, preferreds, uit, and mutual funds. Compliance can't argue when I move from one product, to a different product... 

I can move the entire chess board, for the benefit of my client, and get paid.

Sep 1, 2010 6:23 pm

yeah, I do not know why this is now only becoming apparent to me after 6 years in the business. Like I said, I've never had this problem before until I moved to this new firm. I passed on an independent route two months ago for where I am now.

The director of sales and marketing called and just chewed me out for this before the chief CO could even have a conversation.

Sep 1, 2010 7:04 pm

FINRA is getting tougher and tougher on firms regarding breakpoints, commissions, etc..  Don't get too angry with Compliance.  Get angry at Congress.  Someone got a bug up thier whazzu and now has the entire world convinced that commissions and expenses are the ONLY thing that matters.  Who cares if you outperform?  YOU have higher COSTS.  THEREFORE, it MUST be bad for the CLIENT.  You must be taking SO much RISK to get those returns because the expense hurdles are so high. 

I have no problem with ETF's, index funds, etc as far as products are concerned.  But half the industry is condemning managed funds as some sort of devil's child.  And to be honest, I think it has more to do with PR and positioning than anything..."My firm only uses low-cost ETF and Index blah, blah, blah's because did you know that you are paying 2-3% in expenses for your funds, plus spreads, plus market timing costs, plus trading costs that they don't even disclose, on top of 5.5% commissions, on top of account fees, blah blah blah."  They make it seem as if you are being completely ripped off.  There are entire books dedicated to chastising mutual funds.

Back to the topic....A shares are a blessing and a curse.  But Compliance departments are forced to take a hard stand with any switches due to how hard FINRA comes down on these.  But to play devil's advocate...can you imagine how bad clients would get taken advantage of if A share switches were granted whenever any advisor wanted to?  You could claim almost any fund company was inferior in the A share world.  There's maybe a handful of fund families that are accepateble for an entire A share portfolio.

Sep 1, 2010 7:12 pm

Then I need to adapt and come up with a new game plan and put this behind me. I've scheduled a time to meet with the director of sales, our ceo, cheif co tomorrow to talk about what models I've used in the past. The trades are bust and that's final. So now I need to understand from them what the expectation is for mutual funds whether coming from pre existing invesments or just new money. The line that was just told to me is "we don't like our advisors putting together model portfolios; that's why we hire third party money managers." (ie. sell one fund family and hit breakpoints)

B24, from what it sounds like you're saying, I need to either adapt to a new investment strategy for my clients or just leave if I don't like it. For now, I'll work on the adapting part.

Thanks everyone.

Sep 1, 2010 7:19 pm






                                                                        1                      2          3              4    


American Funds EuroPacific  1                         1.0                   xx         xx           xx


American Funds New Perspective  2               .99                  1.0         xx           xx      


American Funs SMALLCAP  3                     .95                   .97          1.0          xx


American Funds Wash Mutual   4                  .89                      .93       .90         1.0

As you can see these funds have very high correlatiom. I do not think that you are getting much diverication from these funds.

Sep 1, 2010 7:36 pm







                                                                        1                      2          3              4    


American Funds EuroPacific  1                         1.0                   xx         xx           xx


American Funds New Perspective  2               .99                  1.0         xx           xx      


American Funs SMALLCAP  3                     .95                   .97          1.0          xx


American Funds Wash Mutual   4                  .89                      .93       .90         1.0

As you can see these funds have very high correlatiom. I do not think that you are getting much diverication from these funds.



Sep 1, 2010 7:42 pm


Your point?


Sep 1, 2010 8:06 pm

Jennifer is a smarmy sales assistant, pay no mind to her bs. She only comes on here to poke fingers into eyes...

Sep 1, 2010 8:32 pm

Jack - If the argument for switching funds is that there is a ton of overlap, then that's not actually the case.  The worst overlap between those four funds is between New Perspective and EuroPacific @ 44%.  The next worse is 17% between New Perspective and Washington Mutual.   American Funds has a chart that shows what their overlap between funds actually is.  It's a really good tool. 

Now, I get the correlation.  But correlation and overlap aren't the same thing.  I agree that you could add some additional asset classes, or alternative investments, and lower the correlation which would be a good thing.  But the argument could be made that the client could, instead of moving to Franklin or Blackrock or wherever, just move some of those assets, like New Perspective, to different asset classes, like Bond Fund of America, High Income Trust, Capital World Bond, Fundamental Investors, lower the correlation AND lower the overlap.  The client wouldn't have to take on another fund family, keeps their current breakpoint, and doesn't incur any additional costs. 

While I think the CO is full of crap, from a pure cost perspective, which is what they look at, it's really difficult to argue with them.    

Sep 1, 2010 8:53 pm



Your point?



please see 14 above. sums up my feelings