Keep Your Best Financial Interests at Heart

Physician's Money DigestOctober 2005
Volume 12
Issue 14

According to the Investment CompanyInstitute (, in 1990 the fundmarket was comprised of 3079 funds, almost62 million shareholder accounts, and total net assetsof just over $1 trillion. By 2003, those numbers hadgrown to 8126 funds, more than 260 million shareholderaccounts, and more than $7.4 trillion inassets. With mutual funds controlling such a sizableamount of assets, including 22% of the nation'sretirement market, you want to feel comfortable thatyour fund manager is putting your interests first.

Government Efforts


A recent article in explains thatmutual funds, like corporations, have a board ofdirectors that is responsible for ensuring shareholderinterests. A conflict of interest on the part of a boardmember could impair or compromise that member'sdecision-making ability. With that in mind, the articlepoints out that approximately 22% of all directorshave disclosed in fund documents that they are"interested." In other words, they have business oreconomic ties to an investment advisor, broker, orother firm that provides services to a fund.

A recent ruling by the SEC requires fund boardsto appoint a chairperson who is independent, and tofill at least 75% of the seats on the board with independentdirectors by early 2006. That's a large leapup from the current requirement of 50%. Of course,there's still no guarantee that directors won't messup, but there are steps you can take to protect yourselfand your investments.

Proactive Approach


According to the article, funds arerequired to annually file a Statement of AdditionalInformation (SAI) with the SEC. You can eitherrequest a copy from your fund company or downloada copy at The SAI will provideyou with information on how much each member ofthe board is paid. The higher their salaries, the articlestates, the harder it might be for them to back certainproposals, such as fee reductions, that hurt managementcompanies but benefit shareholders.

However, fund management companies are notrequired to divulge how much they compensateportfolio managers. But beginning this year, the SECwill require funds to publish in the SAI the formulasused to determine manager compensation. Armedwith that information, says Julie Allecta, senior partnerat the law firm of Paul Hastings, Janofsky &Walker, physician-investors will be able to determinewhether fund managers receive a better payoff byhitting long-term goals or maximizing short-termperformance. If you're a long-term physician-investor,your interests will not be well served if yourportfolio manager has shortsighted goals.

It's also good to know if fund management personnelare putting their money where their mouths are.Mutual fund company Franklin Templeton states thatit requires its directors to invest one third of their payin Franklin funds as a way to align their interests withthose of shareholders. But that may not be the norm.

Morningstar suggests that directors should putaway an amount greater than their annual pay. Butaccording to a study done by Equilar (, an independent provider of executive andboard compensation analysis solutions, 13.4% of allfund directors have yet to invest a dime of their ownmoney in the funds they oversee.


Starting next year, the SAI will begin publishinginformation on how much portfolio managers haveinvested in the funds that they manage. Accordingto the article, the information willbe published in broad ranges, such as from "none" to "over $1 million."

With more than 8000 mutual funds to choosefrom, there's no reason for your money to be investedwith a company that doesn't have your best interestsat heart. Remember, it's your money and it's yourchoice.

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