Brokers find more profit in selling stocks than funds
Mutual funds that rely on the brokerage community to sell their shares have a problem: The industry is not selling the fund shares as aggressively as it used to.
Thus, in spite of some recent excellent performances, the funds have continued to see a steady stream of redemptions instead of the flood of new sales they would prefer.
According to the projections made by the Investment Company Institute, net redemptions of broker-dealer distributed mutual funds came to $1.2 billion in 1979 compared with net redemptions of $690 million in 1978. Although the no-load mutual funds -- which are sold through advertising -- had net sales of about $830 million last year compared with net sales of $468 million in 1978, the ICI says the main reason for the no loads' sales increase was due to municipal bond funds. "People are just 'risk adverse.' They need the money to cope with inflation," declares Reginald Green of the ICI, trying to explain the sales problems.
Although the brokerage houses say they are not trying any less hard than they used to, mutual funds observers disagree. Duane Waldenberg, vice-president for national sales for Eaton & Howard, Vance Sanders, a large Boston-based mutual fund, explains, "I think there are a lot more investors out there that should be investing in funds than are currently doing so." Mr. Waldenberg holds that one reason brokers are not pushing funds as hard arises from their training today. "In the large wire houses and national firms," he explains, "you always had a considerable amount of time spent explaining the nature of investment company shares. Now, it's a quick lick and a promise."
Mr. Waldenberg adds that the brokerage industry "has an economic interest" in pushing stocks rather than mutual funds. But, he contends, there are some investors who would be better off buying a mutual fund than chasing stocks.
A spokesman for the ICI agrees that the economics of the brokerage business favors selling stocks rather than mutual fund shares. "When a person buys a stock," he explains, "there is the possibility that it's going to be sold in a short time. A mutual fund is a way of investing for the long term. And, once there's been a sale, there is no commission when the investor redeems the shares."
Chandler Converse, the president of Calvin Bullock, the manager of a large group of mutual funds, thinks another reason brokers have stopped pushing mutual funds is because many of the wire houses have their own internal mutual funds. "A good deal of their effort goes into promoting those funds," he believes. He adds, however, "more recently there has been some interest in some specialized products."
Mr. Converse also states that regional brokerage houses have made more satisfactory efforts in selling his fund than the large national brokers.
However, Roy Brenna, president of Strategic Investments Fund, a gold fund, complains: "The brokerage industry has chosen not to sell the gold mining mutual fund shares," he contends. "I don't know whether its because of political concerns or because of myth or ignorance. The brokerage industry just doesn't appear to be turned on to the mutual fund industry."
The brokerage industry, however, disputes this assertion. George Meyer, senior vice-president of Bache Halsey Stuart Shields Inc., a large brokerage house, claims, "It's not the concept of funds we're adverse to. It's just that the public is still not common-stock oriented." He points out that the individuals redeeming their mutual fund shares today are investors who are just getting even from the 1960s when they purchased them.
Still another broker, who asked not to be identified, pointed out that he was selling municipal bond unit trusts, which gave individuals in the 50 percent tax bracket a 15 percent return on their money. "If you can make 15 percent without any risk, why pay a commission of 8-9 percent to get into a risk-oriented fund?" he asks.
Also, as the broker points out, the commission on the unit trusts is only 3 percent. "Why are the brokers settling for a 3 percent commission instead of an 8 percent commission?" he queries, adding, "It's because it's better for the client.
Another reason some brokers are wary of selling the funds today is because of the memory of what happened when Dreyfus and Fidelity both moved to no-load status. The funds called up their shareholders -- most of whom had bought the shares from brokers -- and told them they could now buy the shares commission-free. This left a bad impression on some brokers of mutual funds.