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| Chris Dodd and Barney Frank |
Reactions to the Dodd-Frank Bill to end advertisements that tout past performance are all over the news media.
According to an article in The Wall Street Journal, the Dodd-Frank bill is designed to protect investors. “Academic research suggests that ‘short-term performance ads really do drive investor dollars, and unfortunately not in a good way,’ says Ryan Leggio, fund analyst at investment-research firm Morningstar Inc. ‘Those usually lead investors to the hot fund of the month or the year.’”
It will be important for fund companies to follow developments of the bill.
However, I don’t believe performance ads are the cause of hot money. Fund companies have been limiting the use of performance ads for years as a result of unimpressive returns during the market’s volatility and high costs to place the ads.
Instead, I would argue inflows follow better performing mutual funds. So while ads may help a fund tell its story, an advisor using a Morningstar screen can also discover your fund without any ad or promotion.
But who wants “hot” money based on performance anyway? If you are thinking, “I’ll take it,” click learn how to get your fund discovered.
If performance is the lone reason investors buy, those investors will likely be the first to leave when performance drops. And that is expensive for the fund and bad for shareholders. But if the qualities of the fund make sense to investors, they will stick around much longer.
I have been helping my clients focus on finding the right investors – those who understand their story. That’s why in addition to performance, it’s even more important to feature messages such as experience, a disciplined and repeatable investment process, the benefits and risks of a unique fund category or asset class, why your portfolio managers make the decisions they do, and the need for investment advice.
One client in particular claims that because their shareholders understood their disciplined four-step process, they kept most of their investors during periods of underperformance.
It is also important to tell your story using a wide-range of communications tools, ideally in an integrated manner.
Consider public relations. Share your story with the news media and let them tell their readers about your strategy, thoughts on the market, and of course, performance.
Email marketing programs help you communicate with advisors in a timely way to drive them back to your Website. Hopefully you have one that keeps them coming back.
Webinars provide access to your thought leaders. These regular communications create a forum where advisors can hear your thoughts and ask questions.
Finally, you can leverage social media such as Twitter and LinkedIn to promote your press coverage and communicate with your advisors.
What do you think about the bill? How will it affect your firm?
Morningstar's comments are quite interesting and possibly a bit disingenuous. The last time I looked at the data -- and it has been a while -- the lion's share of investor dollars go to funds that have four- or five-star ratings from Morningstar. Perhaps any tightening of rules on mutual fund ads should include restrictions on the use of Morningstar ratings as well. Just a thought.
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