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Fund Shareholders to Advisors: We Need Ya’, Big Guy

If you’re a rep who sells mostly mutual funds, you may sometimes wonder whether you’re adding enough value to justify your fees

If you're a rep who sells mostly mutual funds, you may sometimes wonder whether you're adding enough value to justify your fees. (Or a savvy, expense-oriented client might actually ask you to prove it.) After all, investors can now access a wealth of information online through fund-tracking websites, such as Morningstar and Lipper. In addition, the mainstream newspapers and magazines cover mutual funds in a comprehensive way. And the self-directed investor doesn't want for a sales pitch either as seemingly every televised sporting event and high-profile TV show has at least one or two commercials pushing investment products and services. When you also consider that target-date funds and other forms of indexing are very popular and available on a low-cost, direct basis, it's enough to give you, the advisor, cause for concern.

But if you are among the mutual-fund only caste of advisors, don’t lose heart: Investors really do need your advice. Just ask them. A new research report published by Washington, D.C.-based Investment Company Institute, the mutual fund industry’s largest trade association, shows that professional financial advisors provide a wide range of investment and planning services that go way beyond just helping investors select and purchase mutual fund shares.

In a report titled “Why Do Mutual Fund Investors Use Professional Financial Advisors?”, the ICI found that 63 percent of shareholders with ongoing advisory relationships receive at least five distinct services from their advisors including regular portfolio reviews, financial planning assistance, retirement asset management and investment recommendations. Other notable services under the financial planning umbrella were access to specialists in areas such as estate planning, tax management and college savings.

“It’s a very deep relationship,” says Sarah Holden, ICI director of retirement and investor research. “There’s really a lot of interaction going on in terms of both the services that individuals get from their advisors in very tangible ways such as expertise, asset allocation and explaining investment options. There’s also the intangibles, for example, a lot of these investors say going to advisor gives them peace of mind.”

According to the survey, 74 percent of those surveyed said “help with asset allocation” was a major reason they seek advice. Seventy-three percent said they want investment options explained, 71 percent tabbed “making sense of their whole financial picture” and 71 percent said they want to make sure they’re saving enough to meet their financial goals.

While most studies aim to link the value of advice to some metric like risk-adjusted performance, the ICI survey looks more at why people go to advisors in the first place and the extent of that relationship. It’s based on interviews with more than 1,000 households owning mutual funds outside of retirement plans. “We were trying to determine the reasons why and the context in which investors seek professional advice,” Holden says.

It’s no secret that the advisor-sold model has become the preferred method of delivery for mutual fund shareholders in recent years with traditional direct shops like Vanguard and Janus launching advisor share classes. At present, an estimated 82 percent of fund shareholders outside of 401(k) and other retirement plans seek advice from some sort of an intermediary, according to ICI. Within that universe, 49 percent have used financial advisors exclusively to purchase funds and 33 percent have used both professional advisors and other sources.

Investors partner with advisors for a myriad of reasons: For nearly half (48 percent) the fund owners surveyed hiring a financial advisor was due to a trigger event. Within that demographic, 27 percent say it was lump-sum disbursement, such as inheritance or a rollover from a previous job, that prompted them to seek advice; 21 percent said there was a change in their household such as marriage, the birth of a child or a death in the family. Another 40 percent said they went to an advisor to meet a financial goal like saving for retirement or education.

Who are these people? The answer to that Seinfeld-ian question is folks who aren’t as young or as tech savvy as other investors. Shareholders who do not go online for investment information are nearly twice as likely to have ongoing advisory relationships compared with shareholders who do use the Web. Other shareholder groups that are more prone to having ongoing advisory relationships include older shareholders with household financial assets of $250,000 or more and women who are responsible for their household’s investment decisions.

The 14 percent of the respondents who said they don’t use advisors either feel they have sufficient knowledge to make their own investment decisions or have had a bad experience with an advisor in the past, the report says. So despite all the market timing and late trading scandals, high fees and pay-to-play arrangements that have marred the fund business in recent years, investors still need and value your advice. It’s always nice to know you’re appreciated.

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