The annual Morningstar Investment Conference took place last month. It’s a great conference loaded with useful information. But for those inclined to walk the exhibit hall where the sponsoring fund companies try to get the attention of attendees, it’s a bonanza of toys, gizmos, satchels, golf balls, cupcakes, stuffed animals, leather-bound notebooks, thumb drives and rechargeable power sticks. One company printed out miniature Eiffel Towers on a 3D printer. A magician performed card tricks, and a portrait artist did quick caricatures on an iPad. There was even a bootblack.
No one would confuse the swag with Fashion Week’s in New York City. Still, there seems to be a growing competition for the best giveaways. Josh Brown, the former Wall Street broker, posted an email on his blog from an attendee joking that the monetary value of the handouts was inversely proportional to the performance of the company’s funds.
A funny idea, but the quest for attention raises a bigger thought: Are there too many mutual funds out there? Or not enough? According to Vanguard Founder John Bogle, quoted in a U.S. News and World Report article last year, 7 percent of all mutual funds are either liquidated (or merged into larger funds) annually, suggesting there was probably no need for them in the first place. Despite this, there remains a consistent net gain every year, meaning many more funds are created than die off. The number of mutual funds in the U.S. (not counting money market funds) went from 2,395 in 1990 to 7,552 in 2014, up 215 percent, according to recent Morningstar data. There were 543 new funds in 2013 alone. But at the same time, total net assets in the mutual fund industry (again, not counting money markets or funds of funds) grew even more dramatically, from approximately $500 billion to $10 trillion over the same time frame, says the Investment Company Institute’s 2013 Fact Book. That’s a 1,900 percent gain.
Is this too much money chasing too few options? Or does the consistent rise in the number of funds stimulate more demand? A few academic papers on this (go to the online version of this letter at WealthManagement.com for the links) argue fund proliferation is a marketing game, as individual companies increase profits by introducing new options, convincing investors their individual needs are diverse enough to warrant ever narrower slices of the investable universe. (Tactical funds? Smart beta funds?) At the same time, this produces more information in the market than investors can possibly absorb profitably. Fund companies can charge more for a fund that is not much different (at least in performance, and who can predict that anyway?) from others investing in similar securities with similar strategies.
That’s where financial advisors can prove their value. I am sure the best conference swag sways few. Many more fund companies, however, are now vying for attention by producing practice management materials for advisors, positioning themselves as consultants and business partners. That may be more useful than pens and mouse pads, but if you really want to build a good business, bring objective information to your clients and help them understand their options are not as complex as they seem.