Sharp Responses to the "Frontline" Fee Rebellion
Financial advisor Joe Fareed got a voicemail from his mother on the morning of April 24. The previous evening, she had watched the now-notorious episode of PBS’s Frontline that was highly critical of investment fees.
The criticism was particularly harsh with respect to managed mutual funds, which a Frontline reporter said were making it harder for consumers to save for retirement.
The advisor's mom was worried that the show might breed discontent among her son’s clients. He did recommend managed mutual funds to them, after all.
Fareed, who owns Nashville, Tenn.-based Fareed Wealth Management, overseeing $40 million in assets, soothed her fears. What he told her could help other advisors whose clients get riled up by media reports about investment fees. “I tell clients some managed mutual funds are well worth their costs over an index fund,” Fareed says.
To convince them, he shows them data from 2008, when the average S&P 500 index fund lost 37.3% in value, according to Lipper. Quite a few managed funds suffered much less that year. “I believe that there are fund managers who do have skill in really managing the downside,” Fareed says.
Another way to fend off an anti-fee revolution is by taking a proactive approach. One financial planner who spoke to FA-IQ on condition of anonymity says she never recommends a mutual fund of any kind without sitting the client down and deconstructing its expense ratio — including the 12b-1 fee, if any. Then she displays the fund’s one-, three- and five-year returns and asks, “Are we getting what we’re paying for?” That helps clients focus on each individual investment’s cost-benefit analysis, she says, rather than on media-driven panic about fees in general.
Some fee-based advisors just say yes when clients insist on avoiding high-expense funds. Melissa Anne Cox, a financial advisor with Fetterman Investments in Dallas, which has $65 million under management, tells such clients she’ll be happy to help them pick an index fund instead. But she also reminds them that the advice doesn’t come for free.
But there are advisors who agree wholeheartedly with Frontline’s conclusions. Edward Zurndorfer of EZ Accounting and Financial Services in Silver Spring, Md., tells his clients to avoid managed mutual funds. “An investor will end up with more money in his or her pocket by investing in index funds,” he says. “You want to get a good return, don’t pay those high expense ratios.” Zurndorfer turns away prospects who can’t follow that advice. Putting clients in managed mutual funds, he says, is “against my moral standards.”