It’s Time to Create Customer Advocate Positions at Mutual Fund Companies

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Mutual fund companies need to convince their customers they are acting in their best interests by appointing shareholder advocates, according to a new op-ed essay in the Aug. 29, 2011 issue of Barron’s.

Mutual fund companies need to build customer confidence by creating shareholder advocate positions to eliminate potential conflicts-of-interests.

Mutual fund companies need to convince their customers they are acting in their best interests by appointing shareholder advocates, according to a new op-ed essay in the Aug. 29, 2011 issue of Barron’s.

Writing in the “Other Voices” op-ed section, author Chuck Epstein argues that shareholder advocates can bridge the gap between fund companies that emphasize sales practices, high fees and revenue sharing over the best interests of shareholders. The advocates would examine fund company activities regarding products, pricing, fund expenses, sales materials, sales practices, and shareholder communications.

This is needed because the bias of selling load funds using 12b-1 fees, revenue sharing and selective transparency helps foster the conflict-of-interest situations that exist at some load fund-companies.

Shareholder advocates are also needed because of the very contentious public debate over the need for mutual fund reform that has alienated many fund customers. This ongoing dispute erodes investor confidence in the investing process. Epstein, who has held senior-level marketing and PR positions in the futures and mutual fund industries and runs the Web site, http://www.mutualfundreform.com, says the advocates would work to bridge the misalignment of interests that exist between some fund companies, their customers, as well as their own employees.

While the idea of a shareholder advocate is new, they are necessary because independent board members have “failed as fiduciaries” and been unable to protect shareholders, according to Professor John Haslem of the University of Maryland. The advocates would also serve as a voice for fund company employees, who are privately uncomfortable with their employer’s sales practices that often create unethical situations that affect employee morale.

Advocates are needed because mutual fund companies have assumed a critical role in helping millions of workers and retirees build retirement wealth and to fund major expenditures, such as college tuition and home purchases. Flat investment returns, volatile markets, and a prolonged recession have created a poor investment return environment that is only exacerbated by fund companies, which are not working to maximize shareholder returns, according to the op-ed.

Overall, the essay notes that good mutual fund corporate governance is good marketing, and vice versa. It’s a modest idea for a critical, multi-billion industry, which has so far remained silent, or opposed most attempts at any modicum of financial reform. It’s time to change those anti-shareholder practices.

The op-ed is available at: http://online.barrons.com

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Chuck Epstein

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