Series 6

AAA

Investment Companies - Important Factors in the Comparison of Funds

You should keep three things in mind when making comparisons among different mutual funds:

  1. Client objectives
  2. Suitable fund choices
  3. Individual fund features

Start with the client's objectives: What is the client's time frame and what are his or her expectations concerning return, risk tolerance, and so on? How much investment experience does the client have? Next, compare mutual funds with similar profiles and investment objectives. Comparing funds that are measured against different performance benchmarks is an exercise in futility that could also get you in serious trouble with your compliance department. Always present funds that are setting out with similar investment objectives and are measured against the same benchmarks, such as the S&P 500. Finally, decide what features of each fund would fit your client's personal financial needs - for example, regular distributions, fund family exchanges, and so on. Below are a few examples of each point of comparison.

Client Objectives
First, know your customer. This rule applies to everything you will do as a Series 6 registered representative, and it is the first rule to consider when comparing the 8,000+ mutual funds on the market today.

Typical questions to ask include:

  1. Does your client want growth over a long period of time?
  2. Is your customer's risk tolerance low and does he call you whenever there is a hiccup in the market, even though he is still years away from retirement?
  3. Is your client elderly and looking for something safe that provides a steady stream of income without much fluctuation in net asset value?

These questions and many others will need to be addressed before you can research the available options.

  • If the answer to the first question is "yes", the client is looking for capital appreciation and may not be too bothered by periodic fluctuations in the market. He or she might consider a growth or aggressive growth fund.
  • The client that answers yes to question 2 the client should remain in an equity fund investor because there are a few years left between now and retirement and he needs a vehicle to get him there; so perhaps you will recommend several growth and income funds or balanced funds to temper those market ups and downs that make him so nervous.
  • The needs of the third client, an elderly widower, are markedly different from the client who has answered yes to question number one. An elderly client might want to consider a number of bond funds that contain a diverse portfolio of interest-paying, safe debt securities.

Suitable Fund Choices
Selecting the "best" funds is not the ultimate goal of the investment representative. Selecting the best fund for your individual client should be. So, the starting point in selecting a mutual fund is to clearly define a client's investment objectives, and then match the objective to the client's risk tolerance before matching the client to a mutual fund. Investment representatives must recognize the many dimensions of a mutual fund and then exercise good judgment in order to make an appropriate selection.

Compare Mutual Fund "Apples" with "Apples"
You must compare mutual funds that have similar stated investment objectives. It is folly to recommend a mutual fund that returned 15% last year because you want to impress a wealthy client who tells you that Fred at The Other Bank recommended the Boring-but-safe Fund and that he is simply looking for a way to preserve his capital while staying ahead of inflation. In other words, don't compare a balanced fund with an aggressive growth fund, or a municipal bond fund with an equity income fund.

Individual Features for Individual Investors
Depending on your client's needs, you will recommend mutual funds from particular investment companies that offer certain benefits. These options may include conversion or exchange privileges, systematic accumulation and withdrawal plans, tax reporting, contribution amount tracking and other features. Many of these benefits will allow your younger clients to conveniently add small amounts of money to their mutual funds, while your retirees can depend on monthly checks from systematic withdrawals as their retirement funds continue to grow. At the end of each year, investors will receive a 1099 from the fund company detailing the tax information necessary for income tax filing.

Fees and Performance
Both of these factors should be considered when comparing mutual funds. A fund with higher-than-average fees may well produce a lower-than-average performance. When analyzing bond funds, it's important to take after tax return and total return into account, not just the dividend yield.

Performance
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