Mutual fund portfolio managers used to be as inaccessible as the Wizard of Oz.Fund companies for the most part hid their ideas and activities behind a wall of wholesalers and scripted messages on brochures. When Morningstar began trying to contact portfolio managers in the late 1980s, their analysts often were greeted with phone hang-ups.
Nevertheless, many of the larger advisors demanded more direct access. Today, some of the fund families managing the $8.5 trillion in mutual fund assets see direct contact with independent advisors not only as a smart marketing strategy, but as an integral piece of their company's business model.
The shift occurred about a decade ago for members of The Alpha Group, an informal association of wealth managers. A mutual fund portfolio manager came to them asking for an opportunity to chat. That initial call satisfied both sides, and the group talked monthly with different managers over the next 10 years. The group quizzed managers about their philosophies, investment ideas and even the behavior of their people.
"Over the years, we formalized the process," says Alpha Group member Harold R. Evensky, a CFP and a principal at the Coral Gables, Fla.-based firm that bears his name. "We tried to get an understanding of why this manager thought they could beat all the other people doing things similar to what they did."
The group personally interviewed hundreds of managers, including Bill Gross of Pimco, David Stein of Parametric Portfolio Associates, and Gary Brinson, of the firm then named Brinson Partners.
These managers talked to the advisors as peers. But other managers who came with canned speeches undermined their credibility with the group. "Advisors can get this same affect by reading a manager's letter in the company's reports," explained Evensky. "If the letter sounds like it's been written by the PR department, advisors probably want to avoid that fund."
Making the most of entrée
Direct access to fund managers is a critical factor in the business model of Legend Financial Advisors Inc., in Pittsburgh. "We're on a first-name basis with all the fund managers we use," said president and chief executive Lou Stanasolovich, CFP. "If a fund doesn't want to cooperate with that style, it's a simple decision not to use them."
Advisors now enjoy intense, direct contact when setting up the relationship, as well as on an ongoing basis. Legend Financial Advisors conducts roughly 100 interviews a year. While most of those are short, simple calls to current managers, others are to start the due diligence process for new funds. That process includes a questionnaire that some say is more intensive than those used by institutions. Legend also conducts several hour-long phone conversations and has face-to-face interviews with targeted managers.
"We might buy a little of the fund in personal accounts before we have those interviews," said Stanasolovich. "That way we track the performance and see how it's behaved in different market phases."
Building close relationships with independent advisors changed the business model of the mutual fund company. Big firms with a menu of no-load funds opened advisory service departments. Boutique firms could thrive by working directly with advisors. Legend Financial, for instance, doesn't work with any asset management firm in which the owner does not have substantial cash.
The close relationship with independent advisors drives the business model at Dimension Fund Advisors Inc., of Santa Monica, Calif. DFA's investment philosophy is based on the research of co-chairman and Investment Policy Committee chair Rex A. Sinquefield, who co-wrote Stocks, Bonds, Bills and Inflation with Roger G. Ibbotson. Since expanding into the advisory market from a purely institutional client base 15 years ago, DFA notes faster growth on the advisory half of their $82 billion under management.
"If we'd taken expert advice, we'd have set up an 800-number staffed by a bunch of telemarketers and hired a group of wholesalers," said vice president Weston J. Wellington. "But instead, we lectured at industry conferences and wrote articles. We talked with advisors about their interest in learning about passive investing and grew largely by word of mouth."
DFA used more traditional methods of mass marketing in their early introductions to the CPA community in the early 1990s, when Dan Wheeler joined the firm as the marketing chief. As a CPA, Wheeler saw the natural fit between DFA and accountants. He sent out 42,000 invitations to eight seminars held in major U.S. cities. Just 45 people showed up.
Industry experts are no less puzzled by the success of DFA's business model, which has grown to be a collaborative partnership with advisory firms. "We start the relationship by talking with advisors about what it means to be a fee-only advisor," Wellington said. "It's an unusual business model, in which a fund company educates advisors about practice management."
The open communication between funds and advisors has had an impact on how each do business. Collaboration between advisors and DFA led to changes in fund offerings. Based on a request from San Francisco-based Kochis Fitz, DFA combined three emerging equity funds into one. DFA, in effect, then does the rebalancing, saving costs and time at the advisory firm level.
Similarly, in response to discussions about the needs for funding charitable remainder trusts, DFA created a fund that invested primarily in traditional fixed income but targeted S&P 500-type returns by employing those index future contracts as well. "We're constantly in contact with our advisors, who we consider partners," says Wellington. "We consider these advisors as institutional clients, who are smart and sophisticated."
Evensky said that he rarely talks with managers any more unless there's something wrong with the performance. But if he's looking for some thinking on certain issues, he picks up the phone. "We talked with one of our managers recently about the impact of a potential GM bankruptcy on some individual holdings of one of our clients," Evensky said. "We're also going to query managers on what they think of the impact of the proposed Fed chairman, and on what an epidemic bird flu might do to certain assets."
Personal contact with managers gives advisors a more complete picture of who they're dealing with. The character of the asset management firm comes through in how the contact person treats advisors.
However, not every financial advisor enjoys such direct access. Smaller firms don't warrant a manager's personal time, nor is it likely that the advisor's questions need that personal attention.
Most fund families noticed the advantage in personal contact, though. "While the practitioner can't schedule or demand a contact, the mutual funds now do conference calls with managers," says Evensky. "They see the marketing value in more direct communication."
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