GANG OF 71’S NEW PUSH: DISSED BY FUNDS, IT HOPES RATINGS SEPARATE TRADERS FROM INVESTORS

A group of prominent advisers known as the Gang of 71, rebuffed in their underdog bid for institutional-caliber pricing and service from big mutual funds, soon may have a tool to dispute the notion that, as a group, advisers are “hot money.”

A consulting firm specializing in securities compliance is devising a system that would put a stamp of approval on the fund-trading habits of advisers, industry sources say.

Some members of the adviser group, composed of self-styled “wealth managers” who consider themselves long-term investors, hope such a ratings system will result in better treatment from fund families.

Lakeville, Conn.-based National Regulatory Services Inc. wants to develop a database that would track how frequently fee-based planners trade. The data would come from Charles Schwab & Co. and other fund supermarkets used by many of those advisers.

Such a service, if accepted by the fund industry and prominent custodians like Schwab, could separate the quick-trigger advisers who bedevil portfolio managers from the buy-and-hold set managers covet.

The initiative is months away from becoming reality, but NRS is said to be working diligently on the project with prominent advisers, Schwab and other major custodians, and mutual fund companies. NRS didn’t return repeated phone calls seeking comment.

The concept gained momentum after the informal summit at last year’s Schwab conference between the Gang of 71, led by Florida adviser Harold Evensky, and a select group of fund-industry representatives.

One of the advisers at the meeting, Edd Hyde, president of Radnor Financial Advisors Inc. in Wayne, Pa., says: “Multi-parties are involved. That’s why it’s a slow process. It will evolve more quickly if someone grabs the bull by the horns. It’s in the evolutionary stage.”

Mr. Hyde, whose firm has about $200 million under supervision, says several companies other than NRS are candidates to put together a ratings system, but at least one executive with a custodial firm says NRS is the only one that has contacted him about gaining access to trading data.

The advisers, who together control some $12 billion of assets, had penned a high-profile open letter to the funds requesting treatment more like that of pension plans and other well-heeled institutional clients from money managers (InvestmentNews, Oct. 6). That would mean lower expense ratios, more access to portfolio managers and forewarning of capital-gains distributions, among other things.

The funds retorted that advisers as a group didn’t display the same characteristics as institutional investors, which typically keep their assets with the same managers for long stretches. To buttress the point, they produced data showing that advisers, in fact, trade in and out of mutual funds more frequently on average even than retail investors.

a pledge to keep talking

But the meeting did lead to an informal pledge that the two sides would keep talking and try to develop a better understanding of each other’s needs.

That dialogue continues, and the adviser-trading tracking system that’s in the works may be the first concrete result.

Representatives of all sides seem enthusiastic about the concept. Many questions, however, must be answered — and parties satisfied — before a tracking system is in place. Mr. Hyde says the system won’t be rolled out at least until summer, and perhaps not until the next Schwab conference in November — if, indeed, it happens at all.

It’s not as easy as it sounds, though. Advisers presumably would have to give their consent before Schwab and other custodians could provide data on their trading to NRS. Perhaps advisers would have to pay to be rated and fund companies could be charged for data access.

Another question is: How long should advisers have to hold a fund to be considered buy-and-hold investors? Mr. Hyde suggests three years, but says all bets should be off if, say, the fund manager departs, the fund company is sold or performance falls off a cliff. Could the ratings service reflect those circumstances?

There are issues for the custodians as well, such as, what’s in it for them? Such a system would require building interfaces to feed the data to NRS, at a cost of money and time. “All of us have an overflowing plate of technology projects,” says Skip Schweiss, director of business development for Denver-based DataLynx Inc. Advisers have $5 billion invested in mutual funds through Data-Lynx’s no-transaction-fee fund platform.

Smaller players like DataLynx and San Diego-based Jack White & Co. also would want to ensure that information on their adviser clients didn’t fall into the hands of Schwab, which controls 80% of the mutual-fund supermarket traffic.

assets carry clout

Schwab officials decline to comment on the project. A Jack White executive couldn’t be reached.

And then there are the funds. Even if they find the system credible, economic considerations may keep them from creating lower-priced institutional share classes for advisers. Some question whether advisers as a group have the kind of buying power to justify such fees.

“First of all, you’ve got to look at what assets (the advisers) control,” says Pete Moran, chief marketing officer of Berwyn, Pa.-based Turner-TIP Funds, who was at last year’s Schwab confab. He adds that fund companies with big 401(k) clients could risk having to lower fees for them if they do so for advisers.

Ultimately, he argues, advisers would be more effective in getting fund expenses down if they voted with their feet and took their business to lower-priced fund families. “There’s always an alternative. Go to the alternative.”