Financial Advisor Blog on Marketing, Lead Generation, Prospecting and Sales

So many mutual funds have problems with poor performance, high fees, excessive tax impact; it is simple to show a prospect why the funds or managed account you offer is better. However, realize that your prospect has some allegiance to their existing holdings even if those holdings have been poor performers. The inertia to do nothing is large and for many investors, “the devil you know is better than the devil you don’t know.” Therefore, before presenting your recommendations, you must loosen their grip on their current investments. In other words, before you "sell" a new approach, you must "unsell" what your investor already owns.

Use this technical approach. When meeting a prospect, tell the prospect you want to obtain independent reports on their current funds that will show them how their funds are really doing (most investors have no clue about their performance other than “up” or “down”). Then get Morningstar reports on each fund for your next meeting. That report gives you so much detail that you can shoot bullets into almost any fund as follows:

At the next meeting, I make enough space on my desk for two piles, “see” and “hold.”I show the first Morningstar rating to the prospect. If the Morningstar Star rating is low, point out the rating. Explain to the prospect the rating system (5 great, 1 terrible). I often see people with 2 star funds. I explain the rating and explain that their fund is worse then average and ask them if we need to continue. They usually say to me “sell that dog.” I place that page in the “sell” pile. If the rating is good, you still have plenty of data to show as follows.

Point out the turnover. A Financial Analysts Journal article in 1993 calculated that 100% turnover was equal to a 1.2% fee (see Bogle on Mutual Funds by John Bogle). Additionally, high turnover creates short-term gains and taxes at ordinary income rates (rather than capital gain rates). You can then show the tax-adjusted return of the fund, which Morningstar also calculates. Even if the fund has performed well, you might ask the client “Were you aware that this fund, although it’s done okay, has caused you to lose almost 3% off of the return due to taxes each year? Would you like to see a solution (a low turnover fund that you recommend) to cut down those taxes?

Draw the prospect’s attention to the numbers on a Morningstar page showing the fund’s performance relative to its peer group and relevant index. Even though the fund may have done well, it might be a real laggard in its group and should be sold.

If you are a fee-based advisor, you will of course, disclose your fee. Then point out that by using your services, they will reduce their investment expense by using you. When you add up many funds management fee, 12b-1 fee and turnover impact, many funds are taking 3% to 5% of the account value, annually. Your fee, at say 1.25%, plus your recommended institutional fund fee of .2% is a huge bargain over what the prospect currently pays.

I have used these reports for years to gather ALL of the client’s assets because investors don’t really understand what they own and have most likely relied on some advisors unsupported verbal recommendation. Additionally, it’s likely that no advisor has ever presented compelling third-party evidence for their recommendations. By the end of the meeting, I have a stack of pages in the “sell” pile and the prospect asks me, “What should we do with this money?”