How to Sell Mutual Funds to Your Clients

Mutual funds can make excellent additions to your clients' portfolios, yet many people—especially those new to investing—aren't familiar with mutual funds or what they entail.

As a professional, you should be offering information about the benefits of mutual funds and the way in which these specific products can help your clients meet their investment goals.

Providing the type of information contained in the following tips will help you sell mutual funds to even the most skeptical clients.

Key Takeaways

  • A mutual fund's two main selling points are personal customization and diversification.
  • Because mutual funds typically handle a large pool of assets, they have access to many more stocks and other funds that an individual investor won't have the capital to buy into.
  • One of the main reasons investors steer away from mutual funds is their high expense ratios. A 2-3% ratio is hard to justify when investors can choose broad-based ETFs with expenses as low as 0.1%.
  • When selling mutual funds, focus on the total return of investment versus the mitigation of risk.
  • Professional portfolio management of mutual funds may appeal to clients who aren't DIYers.

Automatic Diversification

The first benefit of mutual funds that you should emphasize is the incredible diversification they offer. Explain how diversification helps your clients avoid catastrophic losses and protects portfolios during economic turmoil by spreading out the total investment over several different types of assets in different industries.

Diversification Without the Cost

To create optimally diversified portfolios on their own, your clients would need to invest in a wide range of securities from different sectors. A sufficiently diversified, self-managed portfolio requires an immense investment of research time and capital.

Even with your help in selecting profitable assets, your clients would be looking at considerable costs in the form of trading commissions and transaction fees.

A mutual fund offers shareholders automatic diversification, either across industries or within a single sector. Mutual funds also allow your clients to pick a mixture of high-risk, high-reward securities and stable growth assets to spread their risk and benefit from both investment types.

Diversification in Foreign Assets

Mutual funds can be a great way to get diversified exposure to just about any asset class. For instance, many international markets, especially the emerging ones, can be difficult to invest in directly. Surprisingly, many European markets are not highly liquid or investor friendly.

In such cases, it pays to have a professional manager on your side, wading through all the complexities. A mutual fund can specialize in smaller markets and offer investment expertise. That can make paying an active manager's fee worth it.

Mutual Funds for Customization

Besides diversification, the greatest advantage of mutual funds is their virtually endless variety. This wide assortment of products makes it relatively simple to find funds that fit your clients' needs.

As you discuss the benefits of mutual funds with your clients, ask about specific investment goals and assess your clients' risk tolerances. A clear understanding of these two factors will help determine which funds you recommend and can mean the difference between successful investments and very dissatisfied clients.

If your clients want to preserve their initial investments and are comfortable with modest fixed rates of return, point them toward money market funds or bond funds that invest in highly rated long-term debt.

Mutual Funds for Desired Income

Mutual funds generate two kinds of income: capital gains and dividends. Though any net profits generated by a fund must be passed on to shareholders at least once a year, the frequency with which different funds make distributions varies widely.

If your client is looking to grow their wealth over the long-term and is not concerned with generating immediate income, funds that focus on growth stocks and use a buy-and-hold strategy are best. They generally incur lower expenses and have a lower tax impact than other types of funds.

If regular investment income is your client's main goal, you should discuss the benefits of dividend funds that invest in dividend-bearing stocks and interest-bearing bonds. Explain that a variety of funds can offer consistent annual income from different sources, depending on your clients' risk tolerance.

If they are primarily focused on making big gains quickly, talk about stock funds that might offer the best chance of speedy profits. However, be sure to discuss the increased risk of loss that accompanies aggressively managed high-yield funds. Help your clients understand that sky-high profits come with a price.

Access to High-Value Assets

Mutual funds pool the investments of thousands of shareholders, so they can invest in stocks, bonds, and other securities that may be well out of the price range of your clients if they invested in them individually.

This pooling allows your clients to benefit from the growth and dividend payments of big-ticket assets, such as The Coca-Cola Company, Alphabet, and Costco Wholesale Corporation, without requiring the massive amounts of capital necessary to purchase any substantial holding in either company.

Affordability and Liquidity

Mutual funds are far more affordable for the average investor than the assets in which the mutual funds invest. Do the math, and show your clients how mutual funds allow them to invest in the same assets as Warren Buffet without having his net worth.

Explain how open-ended funds work. Open-ended funds will allow your clients to liquidate their holdings at any time, giving them easy access to those dollars when they need them.

In addition, many funds allow your clients to set up redemption schedules, so they can liquidate part of their holdings on specified days each month, quarter, or year, ensuring regular investment income.

Professional Management

Mutual funds are managed by professionals whose entire careers revolve around turning profits for shareholders. While your role is still to help your clients choose the right assets, investing in a mutual fund recruits a seasoned general to your clients' investment armies. You help your clients select the mutual funds that best suit their needs, and the fund manager ensures that your recommendation pays off.

Mutual Funds for Effortless Returns

The benefit of professional management ties right in with the next advantage of mutual funds—effortless returns. Initially, of course, there is some legwork that goes into selecting the right fund.

After making the investment, your clients can essentially sit back and watch their returns roll in, knowing that the fund managers are working to keep the funds profitable. Until they are ready to sell their shares, there is little for you and your clients to do except monitor the funds' performances and net profits.

If your clients are inclined to self-manage their portfolios, you might point out the amount of research and daily involvement that would be required to manage such a wide range of assets on their own.

Mutual Funds and Tax Strategy

When assessing the suitability of mutual funds, it is important to consider taxes. Depending on an investor's current financial situation, income from mutual funds can have a serious impact on their annual tax liability. The more income they earn in a given year, the higher their ordinary income and capital gains tax brackets.

Dividend-bearing funds are a poor choice for those looking to minimize their tax liability. Though funds that employ a long-term investment strategy may pay qualified dividends which are taxed at the lower capital gains rate, any dividend payments increase an investor's taxable income for the year.

The best choice is to direct them to funds that focus on long-term capital gains and avoid dividend stocks or interest-bearing corporate bonds. Funds that invest in tax-free government or municipal bonds generate interest that is not subject to federal income tax, and these may be a good choice. Still, not all tax-free bonds are completely tax-free, so make sure to check whether those earnings are subject to state or local taxes.

Many funds offer products managed with the specific goal of tax-efficiency. These funds employ a buy-and-hold strategy and eschew dividend- or interest-paying securities. They come in a variety of forms, so it's important to consider risk tolerance and investment goals when looking at a tax-efficient fund.

Mutual Fund Downside

Even if you do not have a fiduciary duty to your clients, you should act as if you did. Be honest with your clients about some of the less-attractive aspects of mutual funds, so that they are fully informed when making their decision. Chief among these disadvantages are the potential for increased taxes and annual expenses.

Fee Disadvantages

Since you should already have a clear idea of what types of funds fit your clients' needs, talk to them about the typical expenses incurred by those types of investments. For example, if they are looking for high-yield funds with active fund managers, explain that the increased trading activity will likely mean higher expense ratios.

Tax Disadvantages

Discuss the tax implications of their investment choices. While any type of investment will impact your clients' tax liability to some degree, it's important to outline the specific effects of the types of funds they're considering.

If they are looking into dividend funds, say, you could discuss the taxation of dividend income, and how investing in funds that employ a buy-and-hold strategy can reduce tax liability by paying qualified dividends that are taxed at the capital gains rate rather than as ordinary income.

Put Your Client First

Avoid recommending products based on the promise of commissions or other advantages. Always direct your clients to the products that are best-suited to their specific needs, regardless of which firm offers them.

Know When to Say No

Being a financial advisor requires a delicate balance of ambition and realism. While mutual funds are a great fit for a broad spectrum of investors, you should heed the signs that this type of investment may not be well-suited to your clients' investment style.

If your clients enjoy playing an active role in how and when their money is invested, mutual funds may not be for them. While the professional management of mutual funds is a huge advantage, it also removes investors from the day-to-day mechanics of security and market analysis and trading. Be sure your clients are comfortable entrusting their investments to someone else, thus forfeiting control over asset allocation and trading strategy.

In addition, mutual funds may not be the best choice for clients who are primarily concerned with annual expenses. Unlike taking positions in individual stocks or bonds, becoming an investor—in other words, a shareholder—in a mutual fund presupposes paying annual fees equal to a percentage of the value of one's investment. This means any mutual fund needs to generate annual returns greater than its expense ratio in order for shareholders to profit.

High-yield funds require a very active management style, which can mean expense ratios of 2%-3% in order to compensate for the fees generated by frequent trading of assets.

More passively managed portfolios may have much lower expense ratios, but these often correspond to lower returns, as these funds are primarily oriented toward long-term growth rather than the highest yields possible.

Article Sources
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  1. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  2. Internal Revenue Service. "Topic No. 404 Dividends."

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