Questions to funds bring no answers

REGULATORS and politicians are talking about how to fix the mutual fund business, but they're missing the real problem.

The proof comes out of a noble effort recently undertaken by what may be the most influential network of financial advisers in the country.


The Alpha Group is a loose alliance of 15 leading financial advisers and three top financial services industry practitioners whose primary agenda is to elevate financial planning to new heights.

These forward-thinking advisers have more than $3 billion under management -- much of it in funds -- but their real influence comes from their involvement in almost any key issue facing the investment business.


Last month, the Alpha Group sent the nation's major fund companies a questionnaire "as part of our due diligence process," asking for answers to basic questions that all shareholders should be concerned with these days.

The questions covered rapid-trading issues (is it allowed? how is it discouraged?), disclosure (how often is the portfolio revealed?), operations (fair-market pricing, soft-dollar arrangements and more), the manager's holdings in the fund and the composition of the board.

Some of the questions would be made obsolete if the rules that the Securities and Exchange Commission has proposed are enacted. The proposals require funds to have an independent director as chairman, and to make independent trustees the majority of the board; the Alpha Group's query on board make-up, therefore, would be moot.

But the passage of the new rules is still in doubt, and Alpha Group's questions are valid concerns for any investor, from high-end adviser to 401(k) newbie.

Alpha Group members got some phone calls from fund companies wanting more information on the questionnaire. What most firms wanted to know, however, was whether the Alpha Group would move money around based on the answers.

Responses were due by Jan. 7. None arrived.

No one in the group was surprised.

Says Alpha Group member Mark Balasa of Balasa, Dinverno, Foltz & Hoffman in Schaumberg, Ill.: "We didn't necessarily expect answers. Answering some of these questions might have put a fund company in harm's way, from a legal standpoint. But a shareholder should be able to get answers to most of these questions.


"I'm sure someone is getting answers, it's just not us."

Matthew Nestor, director of the Massachusetts Securities Division, noted that regulators seldom get straight answers to the kinds of questions the Alpha Group posited.

And that is the biggest problem in the fund industry, the one that the current rule-making and legislative solutions don't truly address: Disclosure solves problems, but only if the information is open to all.

"These are questions that every fiduciary, every adviser, every shareholder should be asking," says Morningstar Inc. Managing Director Don Phillips, one of the industry practitioners in the Alpha Group. "The fact that every fund company is unprepared to answer them is very telling, especially when you know that every major pension plan is asking these same questions and getting documents or prepared responses that the rest of us don't get to see."

Part of the message the Alpha Group wants to send with its questionnaires goes to financial advisers, who members believe need to stop thinking of themselves as a "distribution arm" for a fund firm.

Says Phillips: "If you are taking your role as a fiduciary seriously, you have to ask the questions, even if you know they won't always be answered."


Indeed, one of the problems that led to the current scandals is the general malaise of investors through the bull market of the 1990s. When funds were going gangbusters, people were too busy counting their money to be asking tough, technical questions.

Now, investors and their advisers want answers. Even if you don't figure to get them, ask the questions; it will send a wake-up call to your fund managers.

The proposed rules changes are a step in the right direction, but until disclosures are made in a way that the playing field is level -- so that you could send in the Alpha Group's questions to your fund firm and get the same kind of response as a pension fund executive -- the fund industry will still be operating with a double standard.

And until the information flow on funds is fair, there will still be loopholes and opportunities for some rogue sharpie to take advantage of.

Says Nestor: "This is what should happen in a free-market system. The regulators find something and punish to the level they find appropriate, but the public then gets involved and eventually votes with its money.

"You can't eliminate all of the problems without total transparency, but you can probably feel comfortable about a fund company that gives you answers to your tough questions and doesn't give you the runaround."


What the top mutual fund firms were asked

The Alpha Group, a network of top financial advisers, sent the following list of questions to the nation's top fund firms:

Market timing and related issues

Do you have an explicit policy regarding market timing?

Do you have any publicized or unpublicized agreements that exempt any investor(s) from your market timing or trading prohibitions or restrictions?

Aside from explicit prohibitions or restrictions, do your mutual funds have transaction procedures, additional costs or fees, or other structural features designed to minimize in-and-out trading?


Do you allow anyone to place trades after 4:00 p.m. or whatever other deadline the fund applies to investors in general?


How frequently do you disclose complete holdings? Holdings that represent at least 50% of the portfolio assets?

How frequently do you provide detailed portfolio attribution?


Do you use fair-market pricing?


Do you use lot basis tax trading?

Do you manage money independent of the fund(s) (e.g., hedge funds, separate accounts)? If so, what percentage of your assets is represented by non- fund assets?

Do you participate in any significant soft dollar arrangements? Please describe.

Do you have preferred arrangement (i.e. "shelf-space deal") relationships with any distributors?


What is your policy regarding managers investing in their funds and/or positions held by the fund?


What percentage of fund assets is owned by those responsible for fund management?

Fund board

How many members serve on your board?

How many board members are independent?

How many of the independent board members have previously served as employees of the manager or related firms?

How many multiple boards of the fund family do board members serve?


What is the compensation for board members?

Source: The Alpha Group