Chalk one up for the mutual fund guys

Chalk one up for the mutual fund guys

Chalk one up for the mutual fund guys The world’s biggest regulator is turning up the heat on fee-based players on a product that they’ve backed to the hilt.

“Exchange-traded products have become an increasingly important investment vehicle to market participants ranging from individuals to large institutional investors,” said SEC Chair Mary Jo White. “As new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded, and marketed to investors, especially retail investors.”

The regulator is especially interested in examining how complex products including some ETPs are sold to clients. But also included in their request for public comment from market professionals and non-professionals alike is the desire to study what gap, if any, exists between advisors and their clients when it comes to understanding these hugely popular products and how they should be used.

“While all ETFs are ETPs, not all ETPs are ETFs. “In fact, the U.S. has a highly-developed system of closed-end funds and other sophisticated products that trade on exchanges (hence the ET part), that are not ETFs,” said Burgeonvest Bick portfolio manager John DeGoey. “MOST (note: certainly not all) ETFs (in contrast) are well-established, easy to explain and easy to understand.”

Fee-based advisors such as DeGoey use ETFs to capture segments of the market in a passive and expeditious manner. The SEC’s investigation could threaten how advisors of all stripes use ETFs in the future both in the U.S. and Canada.

DeGoey’s not buying this theory.

“To me, this simply means the SEC is going after those who miss-sell complex products to moms and pops who almost certainly have no business buying those products in the first place,” says the veteran advisor. “This is not about fee-based advisors or the products they recommend; this is about complex products that are inappropriately recommended to unsophisticated investors and the need to clamp down on the practice.”

Expect to hear more of this story line in the weeks ahead. 
  • Ross Birney 2015-06-17 10:19:02 AM
    Will, I don't see how this story in any way relates to mutual funds. Perhaps a different title may have been more appropriate.
    Post a reply
  • Will Ashworth 2015-06-17 4:32:16 PM
    Ross, thanks for the comment.
    That headline was used because mutual funds, at least from the client's perspective, are much easier to understand how they work, and thus less prone to regulatory interference.
    But, yes, another headline might have been more effective.
    Post a reply
  • Ross Birney 2015-06-17 6:02:18 PM
    Will, the problem is that far too often, the media (no offence intended) group mutual funds, ETFs, closed end funds and alternative investments together as if they're all the same thing. This only serves to add confusion on the part of the investing public.

    A regular ETF is actually much more straightforward, simpler in structure and easier to explain to a client than a mutual fund.
    Post a reply