Fund Companies: Few Clients Trust Them

Paul Das

12 April 2005

Few American consumers trust their primary mutual fund company or believe it’s an especially good money manager, according to a survey from Forrester, the research consultancy. Despite this, the three biggest mutual fund firms, Vanguard, American Funds, and Fidelity, continue to grow. Forrester says this is because all three “demonstrate customer advocacy, raising the perception that they do what’s best for their customers, not just their bottom line.” Less than one-third of the US households surveyed by Forrester agree that their mutual fund companies can be trusted to advertise honestly, to perform well, or even to do the right thing. Many confidence issues include:

Advertising. Only 29 per cent of consumers trust mutual fund ads.

Performance. Just 30 per cent of mutual fund holders think their firms manages money better than its competitors.

Integrity. Only 31 per cent think their fund company is more trustworthy than its peers.

Market-timing and other scandals have tarred the mutual fund industry for some time. But Vanguard, American Funds and Fidelity have flourished during tough times. Forrester believes customer advocacy is the strongest predictor of loyalty and future purchase intention among US investors. A consumer survey of the mutual funds companies revealed the following:

Vanguard tops the list. Of all the fund firms, Vanguard is the most likely to be seen by its customers as a customer advocate, offering products that are best for the customer, not just for the firm’s bottom line. This perception helped Vanguard vault past Fidelity to become the largest mutual fund company.
American Funds is coming on strong. In the past two years, American Funds was the top recipient of new money in the mutual fund industry, and it is about to overtake Fidelity, as well. Like Vanguard, its customer advocacy score was higher than Fidelity’s.
Fidelity continues to grow. Fidelity is one of the few other fund companies to continue to attract fresh money. It remains the largest fund company when money market funds are also taken into account.

Forrester asked the question, what can other firms learn from the three mutual fund leaders:

Vanguard is vocal about customer advocacy. On its home page “Pledge To Our Clients,”Vanguard promises that it will “put your interests first at all times.” The corporate goal behind the pledge: Persuade customers to stay put and to put more assets with the firm. As Vanguard’s chief executive Jack Brennan told the audience at the June 2004 Forrester Finance Forum, “We have a corporate dashboard, and one of only four outputs we produce for crew members is client loyalty. It’s right there and you cannot ignore it as a core part of how we think of success.” This clear and consistent customer-first message pays off. Not only do most Vanguard customers rate the firm high on customer advocacy, but most also believe that it manages money better than its competition — the most of any firm’s customer base.
American Funds takes care of advisors, who promote the firm to their customers. At the poker table of public perception, American Funds has an ace up its sleeve — its sales channel. More than 71 of American Funds’ end customers trust American Funds because their financial advisors do. Why do advisors and brokers love American Funds? For one thing, the funds have posted solid returns during the past few years. But the firm also demonstrates the principles of customer advocacy with advisors, who feel that American Funds is always willing and able to assist them, makes its rates and fees clear, and honors its promises.
Fidelity commits to low prices. This month, Fidelity contractually committed four of its Spartan Index Funds to total expenses of no more than 10 basis points. This cap puts their costs below many of Vanguard’s market-leading rates. The contract change guarantees that the only way fees can rise is if shareholders vote them up. By making its pricing more transparent and putting price control in the hands of shareholders, Fidelity demonstrates customer advocacy — and sends a strong statement to consumers who buy funds direct.