Fund-switching offer can be a blessing or a siren's song

Your Funds

Dollars & Sense

December 07, 2003|By CHARLES JAFFE

IN THE MUTUAL fund world, one firm's misery is another's opportunity.

For investors, those opportunities can be a blessing. But they can also be little more than a siren's song.

Consider the positive actions taken recently by a few fund companies in the face of alleged trading improprieties by their competitors.

The Columbia and First Investors funds said recently that they'll allow investors who paid sales charges to other fund families to redeem their shares and transfer the proceeds into Columbia or First Investors funds without a sales charge.

The idea - and at both firms it is being offered only through the end of the month - is that an investor ticked off by improper behavior at, say, Putnam or Alliance or even load-bearing families that have not been implicated in the scandal can jump ship easily and cheaply.

For investors who work with financial advisers - and those are the people most likely to be interested in these deals - the incentive is a big one. One thing keeping many brokers, planners and customers with the troubled firms is the cost of making a change.

This transfer might let an investor move from one load-charging firm to another without transaction costs. The funds do carry 12b-1 fees, which serve to compensate the adviser and replace the fees the adviser collected from the funds the client owned previously.

If the fund firms caught in the scandal were being true to their pledge of serving investors, they'd waive exit fees for anyone scared away from them by the headlines. Unfortunately, none of the firms involved appears to have that much integrity.

That puts investors and their advisers in a sticky place.

Brokers and planners with clients in a troubled fund company could be in a position to profit from moving the customer's money. By pushing a client toward the exit and into a new fund complex, they can generate new commissions.

(As much as I wish the scarred firms would waive exit charges, I also believe that brokerage firms suggesting that clients move money should eat the associated charges.)

Some investment experts - Morningstar chief among them - have suggested that investors bail out of the tainted fund families entirely, with tax and transfer costs being the primary factors that might keep an investor in place.

That kind of recommendation is being used at some brokerage firms as an incentive to move all client money, which is a great deal for the firm but not necessarily so good for the customer. A more moderate approach is to leave any fund directly implicated in trading improprieties - which generally means international funds and not a firm's flagship offerings - and to see whether holdings in sister funds can be moved at little or no cost.

Columbia and First Investors are helping to bring down the cost and make it easier to switch, but investors might still have to pay a deferred sales charge, or back-end load, to leave the fund they own now.

There's nothing Columbia and First Investors can do to shrink those burdens. American Skandia, in the past, had a class of shares in which an investor's account was credited for any back-end charges paid when moving from a competitor's funds. But these types of rebates and fee waivers are exceedingly rare.

Not only do you have to wonder why these deals are so infrequent, but you also should consider why some enterprising fund firms have not gone to the boards of the accused funds and made a pitch to win over the management contracts.

"It's the unwritten credo of the fund industry that in times like this they do not feast on each other," says industry consultant Geoff Bobroff of East Greenwich, R.I. "But it is clearly in the best interest of investors if management companies do things to slug it out."

For shareholders, fund companies moving to repair the public trust and to give consumers new options in moving money around would be a good start. But as more deals are offered, investors need to guard against rushing into moves that might create new problems.

"Someone who was looking for reasons to stay with their old fund might see a waiver like this and decide it's time to move," Bobroff says. "But they also should realize that there's always something in it for the fund company or the broker. As an investor, they need to ask, 'What's in it for me?'"

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