Are you feeling overwhelmed by the task of sorting through a multitude of mutual funds to offer clients? Think of narrowing down the appropriate funds as a funneling process.This technique works for Sean Bergin, managing director of Citrin Cooperman Wealth Management Co., based in Philadelphia. For him, the key is to slim the selection down via a handful of requirements.

"We take the mutual fund universe, then we take no-load funds and look for managers who have been with their respective funds for 10 years," Bergin said. No-load funds don't include a commission to a financial salesperson. "What that does is give us a good sample, and you can see how the manager has done over different time frames, which is very important."

At that point, Bergin said that the list of mutual funds will drop considerably, but he's still not done with his funneling process. The fund managers are put through another test -- how they perform against their benchmark and peer groups. For example, if Bergin is looking at a large-cap growth manager, his results would be compared not against the S&P 500, but against the Russell 1000 Growth Index, which measures that type of investment equity.

"Within that, we look at risk-adjusted return," he explained. "That means, if we saw a guy who did 30 percent last year, but 50 percent of his holdings were in three companies, he took on a lot of risk to do that. We need to make sure he's achieving these returns within the guidelines of what his risk parameters are within the prospectus."

Bergin completes his funneling process by going a step further and investigating the fund managers' strategies -- something he said that those who don't practice financial planning full-time would have difficulty achieving.

"You can make a lot of money by investing in a mutual fund with a manager who is a terrific manager, just holding that fund for years," he said. "But it's very difficult to do that if you don't understand the strategy, because there are inevitably going to be times where that manager is going to underperform. It doesn't mean his strategy is broke, it just means it may be out of favor. If we have a deep understanding of how the fund manager is picking those stocks, then we're able, in some cases, to add to that manager when his strategy is out of favor, and in our experience this has led to creating future excess returns."

Nearly 51 million U.S. households, or about 44 percent of all the households in the U.S., own mutual funds, according to a 2007 study released by the Washington, D.C.-based Investment Company Institute. Additionally, in 2007, 33 million households held mutual funds through employer-sponsored retirement accountants, an increase from 27 million in 1998.

Professional management is one of the advantages to investing in mutual funds over other strategies.

"When you buy a mutual fund, you're buying a pool of securities ... plus you've got a manager or management team that is overseeing the investment of that pool of securities," said Lisa Featherngill, CPA/PFS, CFP and director of financial and estate planning for the Winston-Salem, N.C., and Palm Beach, Fla., offices of Calibre, a financial management concern. "The second advantage would be diversification, so instead of buying a stock, you're buying a pool of securities."

Alan Mandeloff, CPA, PFS, and president of Citrin Cooperman Wealth Management Co., agreed. "The real advantage is you get to make a lump-sum payment into a mutual fund and you immediately are diversified," Mandeloff said. "The emergence of the mutual fund industry has changed the complexion of investing very significantly. Today, there are people that wouldn't even consider buying individual stocks, because they've been conditioned to believe mutual funds are the way to go. There's a fund manager in place who is making the investment decisions, presumably with reliable models, good technology at their fingertips, a track record, and the funds are regulated by the Securities and Exchange Commission."

In many cases, CPAs or a CPA firm would offer mutual funds through an overall investment platform, according to Featherngill, and advisors can't provide that offering unless they are registered as an investment advisor or a broker with the SEC. "You can't just start selling or recommending mutual funds without some additional work," she said. "Typically, what I see with CPA planners who are offering investment advisory services is that they have an arm of their practice that is dedicated to investment advisory services. And that's really important."


Ask experts the first step in the client investment planning process, and they all have the same advice: Determine the proper asset allocation that is suitable to meeting the client's goals.

"The asset allocation should be based on the investors' goals, their investment horizons, and their risk/return preferences," explained Brian Reid, chief economist for ICI. "Once you've done that, the challenge is finding the right investment vehicles to meet that asset allocation mix."

Reid describes the most efficient way to do this as through a "packaged product" such as a mutual fund, an exchange-traded fund, or a closed-end fund. "These products provide a cost-effective way to get asset diversification, as opposed to an advisor trying to pick individual stocks and bonds to meet their client's investment goals." He added that approximately $2 trillion was invested into packaged products over the past five years.

Reid added that once the types of funds are identified, there are a variety of other attributes to consider, including how consistently the manager is in adhering to the fund's objectives, the volatility in their returns, and the level of fees involved. "All of this information is in the prospectus," he said. "There's no one factor, but I think all of these are important factors in a determination of whether or not that is the best fund or ETF for that particular client."

The final part of the process, added Featherngill, would be to force the client to rebalance their portfolio annually. "Let's say you've had a really good year in the domestic stock market and now perhaps your current allocation to large-cap domestic stocks is higher than the target," she explained. "The act of rebalancing the portfolio makes you sell some of that fund and re-invest the proceeds in the part of the portfolio that is below its target allocation. I think that's really valuable."

For Mitchell Freedman, CPA/PFS and president of MFAC Financial Advisors Inc. in Sherman Oaks, Calif., there's no one right method to determining what makes a good mutual fund investment.

"If an advisor uses a sound analytical approach to determine what they are going to recommend to their clients and they apply that consistently, chances are the client will do well," he said, adding that new financial advisors should network with qualified individuals and develop a resource list to help with their strategy. "What I have seen qualified investment advisors do is have a methodology that they follow, and they follow it with discipline. There is also quite a bit of art in the process as well. You can analyze things to death, but ultimately you have to utilize experience, wisdom and a certain amount of guesswork in terms of making a determination as to what investments would be specifically appropriate for a particular client."


"We're growing," said Andrew Gotfried, director of mutual fund research and marketing for Raymond James and Associates. "We are seeing more investments in mutual funds, and specifically more in mutual fund asset allocation models. The focus is on what model to buy based on the risk tolerance, with less emphasis on selecting the individual funds themselves. It's definitely more turnkey. These target risk models are great vehicles for advisors who don't have the time necessarily to go in and research all the underlying mutual funds and build their own model. Instead, you're buying the model based on the client needs and relying on skilled professionals who do the decision-making for you and your client."

According to Gotfried, target risk models are portfolios constructed to a specific investment goal and risk tolerance. The underlying vehicles are constructed in a way to meet this mandate. The ratios of the underlying vehicles remain fixed. The portfolio may rebalance occasionally, but only to ensure that the ratios are maintained.

ICI's Reid pointed to the increasing popularity of lifecycle or target-date funds in IRAs and 401(k) plans; these funds pulled in $83 billion last year, even though they are not a new investment strategy.

"What they do over time is, as the investors get closer to the time that portfolio will reach the target date, they will begin to change the portfolio and slowly reduce the stock mixture and increase the bond mixture so that by the time they get to retirement, most of these target-date funds are somewhere around 50 percent stocks and 50 percent bonds," Reid said. "They are very convenient."

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