ICI conference reveals advisors are the top source of investors' fund purchases.

    Being the number one source of investors' mutual fund purchases is a big job and investment advisors are handling it well, according to a new survey on investors' buying practices and preferences. The survey was released at the mutual fund industry's annual Washington, D.C., conference in late May.
More than 73% of investors relied on professional financial advisors when making their most recent mutual fund purchases, according to the survey-not exactly a shopping spree to sneeze at considering that nearly 91 million shareholders hold more than $10 trillion in mutual funds. The value of advisors in the fund buying process was the key finding of the new study Understanding Investor Preferences for Mutual Fund Information, released during the 48th annual Investment Company Institute conference. The importance of advisors to the industry and the role they play in assisting investors was also trumpeted from the podium during the three-day event.
    In fact, senior executives who spoke at the conference said the number of investors following advisors' recommendations when buying funds at their firms is even higher than the ICI's new survey suggests. "More than 90% of my assets are influenced by investment professionals," Peter Sundman, president of Neuberger Berman Management, told the more than 900 attendees at the ICI conference.
    "The vast majority of investors seek professional financial advice in making investment decisions," says Sandy West, who as ICI's director of market policy research oversaw the survey.
    Advisors beat out a number of other sources in terms of the impact they have on investors' buying decisions. It's worth noting here that the term advisors includes stockbrokers, insurance agents, bankers and CPAs. Investors said that they use multiple sources of information, so they didn't just pick one.
    Still, only 46% of investors said they used the Web sites of fund companies or other entities before making a purchase decision and only 40% relied on friends, family or business associates. Just slightly over one-third of investors eyeballed mutual fund prospectuses (34%), trailed slightly by those who used newspapers or other media (33%) to make up their mind about which funds to buy. Low on the list of information sources that investors used to make purchase decisions were shareholder reports (30%), fund company literature (25%), mutual fund rating services (20%) and fund company customer service representatives.
    The debate that's been limping along for years now among mutual fund executives and regulators concerns how to deliver relevant information that investors will find useful "I think funds have either been lionized or demonized for this," said James Riepe, retired vice chairman of T. Rowe Price Group Inc. and the moderator of a general session on how the fund industry is perceived by the media. "The question is, how much do investors pay attention to what's written?"
    According to the ICI's survey, more than 60% of investors find prospectuses "very or somewhat difficult to understand." They say they contain "too much information." It's worth noting that investors must form these opinions about fund documents quickly, since 52% said they read very little or none of the prospectus, 12% don't read it but save it for later and 18% throw the prospectus away. Actually, critics say, that's not surprising, since prospectuses are delivered after investors make the decision to buy mutual fund shares.
    But that doesn't mean that investors aren't seeking out relevant information elsewhere. "What we see," said Don Phillips, managing director of Morningstar, "is that investors are asking tougher questions. They're smart and capable of making good decisions, and in the aggregate the industry has served investors well."
    In some ways, that may be true. In other ways, it's not. What investors look at first is fund fees (74%), the ICI found, with historical performance of the fund coming in second (69%). Advisors, however, may have their work cut out for them when they consider that only 57% of investors consider which securities a fund invests in before making a purchase decision. Only 52% of investors look at sales charges, 40% look at a fund's investment objectives and a mere 35% turn to a rating service such as Morningstar or Lipper. (This may be because they're using advisors to do this heavy lifting for them.)
    Riepe echoed this note himself at the conference: "I'd argue strongly that this information doesn't have to be read directly by shareholders. It is probably too much information for them. But advisors have fiduciary responsibility to know."
    James Glassman, a former mutual fund columnist for The Washington Post, argued if the industry had fewer regulatory controls, it might produce better disclosure. "Dollars go where disclosure is best," he said. Perhaps it's not surprisingly that Glassman, a fellow at conservative think tank The American Enterprise Institute, believes in less government oversight for the industry. But not everyone agrees that fund companies left to their own devices will always do the right thing.
    This is, after all, the industry that has been beset by numerous and very pricey government and shareholder lawsuits, almost all of them settled, and dozens of regulatory sweeps, almost all of which have found very clearly that funds and their managers allowed all sorts of anticonsumer, antiinvestor practices like after-hours trading, to go on.
    The abuses today, may be more insidious, but they exist, critics say. For instance, there are still fund companies creating new emerging market funds every day after the hottest five years of performance the sector has ever witnessed, Wall Street Journal reporter Tom Lauricella told conference attendees. Investors flocking to these funds might be buying at the fund's zenith only to see their share price plummet quickly. As bad, only one fund family in the entire country actually measures asset-weighted returns, Morningstar's Phillips noted.
    The industry got a more alarming warning from the National Association of Securities Dealers top cop, Robert Glauber, who said point-blank that regulators aren't finished with the fund industry yet. "I know the industry would rather we went fishing in another pond. And I can well understand that, given the scrutiny that's been directed at market-timing, late-trading, front-running, brokerage and other issues in the last few years. But the fact is that mutual funds are not just another product on the shelf. They are the overwhelming favorite of mainstream Americans and half the households in the U.S. own them."
    As the king of the hill, the industry can expect "particularly harsh criticism when you falter," Glauber told the packed Washington Hilton. To avoid future criticism and give consumers what they need, Glauber said that the Securities and Exchange Commission needs to go even further with its proposed point-of-sale disclosure document, which is due to be re-released this summer.
    Right now, the SEC-proposed document discloses only conflicts and expenses, which isn't enough, the NASD regulator said. "Investors would be much better informed by a document that also describes the important features of the fund, such as its investment strategies, objectives, performance and risks." Glauber said an earlier NASD task force envisioned a concise, two-page summary he calls "the Profile-Plus," which would also contain the fund's strategies, objectives, performance and risks on the first page, along with the fund's conflicts and costs on the second. "This is the minimum amount of information investors should be able to easily compare from one fund to another, and having it would make them far better informed about the funds they consider buying," Glauber said.
    Another crucial element of the would-be Profile-Plus? Internet delivery, Glauber said. "This should be an integral part of the point-of-sale disclosure process, not an afterthought."
    Internet delivery would assure that most investors get the pertinent disclosure materials they need before they make a purchase (more than 90% of mutual fund buyers have Internet access). It would also mean that investors could follow along via the Internet with pertinent disclosure information that advisors and brokers were discussing (since 70% of investors can use the Internet while talking on the phone, according to the NASD).
Glauber called this a "pragmatic approach" to current disclosure shortcomings that would not slow down the sales process, but would ensure that investors could quickly obtain valuable information on the fund either through e-mail or via a Web site. Even if an investor says he wants to review the materials later, he can still proceed with the purchase, he said.
    And because the Profile-Plus would, in Glauber's vision, contain hyperlinks to a fund's prospectus, the investor could determine how much information he wants and click through to get it. "Giving investors the ability to click through to the prospectus should put to rest any fund industry concerns about liability for the information in Profile-Plus," Glauber added.
    While the disclosure debate will continue apace, the Internet may just be the answer investors and advisors have been looking for in terms of speeding things along. Still, say what regulators will, T. Rowe Price's Riepe summed things up for fund executives this way: "The industry didn't grow from $50 billion to more than $8 trillion in 20 years without being a pretty good value proposition."In other words, regulators and the media can talk. But money walks the walk. Nearly $124 billion poured into mutual funds in April alone, and year-to-date through April consumers already invested more than twice the net cash flows into stock mutual funds they socked away through April of last year.