his article, a companion article to “ The Mutual Fund Trading Scandals ,” discusses the techniques that five investment advisers used in dealing with client concerns over the mutual fund trading scandals. These techniques can be used by CPA/investment advisers.
TAKE A PROACTIVE APPROACH
But the more recent scandals involving late-trading, market-timing and trading ahead of clients have arguably hit harder at the comparatively naive clients of CPAs offering financial advice than at professional investors. “The mutual fund scandal has cast a dark cloud over the (investment) industry in a way that no other financial scandal has over the past several years,” says Richard Vitale, CPA/PFS, MST and chairman of the Boston-based firm, Vitale, Caturano & Co. PC.
All the CPA advisers we spoke with realized the emotional hit the charges evoked in their clients. Most of them told us they took a proactive stance in broadcasting their positions on the scandals before clients even called them. Advisers, perhaps seasoned by the corporate governance scandals that preceded the recent charges against mutual funds, know clients often are slow to react to the news. But delayed or not, the questions will come. Here’s how some of your CPA colleagues are handling the issues.
BE READY TO ANSWER QUESTIONS
“We maintain an open dialogue that distinguishes between firms where employees behaved criminally vs. those that were said to have weak internal policies, but not criminal activity,” says Vitale. He calculated the damage to the average investor’s mutual fund account to be “a small fraction of 1%.” Still, he says, the breakdown of trust by the criminally charged companies was intolerable. “In the end our clients were comforted knowing we managed their accounts with only their best interests in mind, and we were more than willing to openly discuss, explain and differentiate the issues and status of the various investigations.”
CONTACT CLIENTS IMMEDIATELY
In some cases advisers told clients who came to them with older portfolios invested in these mutual funds to continue holding them because tax consequences made liquidating them impractical, says Randi Grant, CPA/PFS, a partner with CPA firm Berkowitz Dick Pollack & Brant in Florida. Grant’s firm had two clients caught in the situation, one invested in Strong and the other in Putnam. When the scandals broke, “we called them up and advised them to liquidate,” she says.
MONITOR FUNDS AND THEIR MANAGERS
At Evensky Brown & Katz, the staff of 17 also prides itself on maintaining close contact with fund managers and sources close to funds, so that if any are being mismanaged they’ll pick up on it early enough to exit. However, Katz also feels that the firm’s 19-page, 81-question fund screen, which she jokingly calls the “Evensky Sieve,” helps the firm avoid getting into bad funds to begin with. At least five questions on the form relate to trading costs and fund fees. The firm requests details on basic procedures, including how internal trading procedures are conducted, to avoid conflicts of interest. And most questions go right to the heart of the matter: Are any of your professionals allowed to invest in individual securities for their own account? What is your policy on front-running? (Front-running refers to the practice of alerting favored customers or partners when a fund plans to buy or sell a large stock position.)
Pillar Financial Advisors in Waltham, Massachusetts, queries its fund managers monthly as follows: “Do you or have you in the past ever provided special privileges, including preferential pricing arrangements, to hedge funds or any other investor? If so, please explain in detail the arrangement, including how this may have affected other investors.” In the scandal alerts it sends to its clients, Pillar cites this paragraph as an example of the firm’s ongoing diligence.
KEEP CLIENTS UP TO DATE
According to Pillar vice-president Beth C. Gamel, CPA/PFS, the letter dated February 25, 2004, said, in part: “We immediately called Pimco and spoke with senior vice-president Andre Mallegol, who said that an ‘exhaustive review by an outside law firm’ found no violations of prospectus rules. We also reviewed a statement on Pimco’s Web site by Chief Investment Officer Bill Gross, who asserted that all trades were consistent with prospectus rules.” Mallegol said he believed Pimco’s Newport Beach, California, office was unfairly lumped into the complaint with PEA Capital.
Pillar stayed with the investigation until its conclusion, writing a subsequent letter to tie up any loose ends for its clients. It said: “In February we informed you that the New Jersey Attorney General had filed a civil fraud complaint against Pimco Funds. We use Pimco Total Return and Pimco High Yield Bond in many of our client portfolios. We’re writing to let you know that after Pacific Investment Management, which runs the Pimco bond funds, provided additional information to the New Jersey Attorney General, all improper trading charges against Pacific Investment Management were dropped.”
Vitale, Caturano also was careful to keep clients in the loop when a management firm with which it places assets was targeted in an investigation. When Massachusetts Financial Services Co. (MFS), a subsidiary of Canada’s Sun Life Financial, the oldest mutual fund company in America, came under charges of market timing, Vitale, Caturano rode it through, while keeping its clients up to date about developments in the case.
However, Vitale says that in retrospect it’s doubtful that his in-depth analysis of the complaints was even appreciated by all of the firm’s clients. “Over time,” Vitale says, “our clients tended to lose interest in the specifics—particularly when the investigations were largely administrative issues, not criminal behavior.”
“Encourage clients to take a college course or read some of the excellent books available,” he advises. Authors such as Greenwich Associates founder Charles Ellis and Burton Malkiel of Princeton University in New Jersey can empower investment advisers and their clients. Ellis wrote Winning the Loser’s Game: Timeless Strategies for Successful Investing and Capital: The Story of Long-Term Investment Excellence; Malkiel wrote A Random Walk Down Wall St. and 10 Rules for Financial Success. Other good sources for improving your financial literacy are any of the books by John C. Bogle, outspoken founder of the Vanguard funds, especially his Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.
“If reading doesn’t calm client fears, remind them that modest returns over inflation (such as those from insured savings accounts) may not bring financial security,” says Thomas. “Running out of money also is a risk—and investing wisely is a much better solution.”
As have the five investment advisers we spoke with, smart CPAs have responded to the mutual fund scandals by taking a proactive stance. Keeping close to their clients and a close watch on the funds they recommend has strengthened the CPA-client relationship and has shown clients once again the value of a professional adviser.