Once called a profoundly subversive force, intellectual and moral pollution, a societal evil that trivializes, manipulates, is insincere, and vulgarizes; advertising has surely gotten more than its fair share of criticism. However, nowhere is it getting as much bad press today than among investment gurus and their mutual-fund- investing protégés.
“A dollar spent on advertising is a dollar out of the market,” they say. “It’s a dollar up on the expense ratio, a dollar down on net assets, and a dollar that isn’t going to find its way back into an investor’s pocket (unless, of course, she’s an ad agency executive).” An advertising dollar is said to be, in other words, a dollar that doesn’t add value to the industry’s core product/service.
But, if this were true for mutual funds, wouldn’t this be true for other advertisers too? (Gulp.) In the interest of truth, justice, and next month’s paycheck, we must rise in defense of mutual fund advertising!
Service to Investors
Think of it this way: Mutual fund advertising is a paid-for information service provided to current and prospective fundholders.
While our neighborhood bank branch or broker may have some useful information handy, without those glossy fund fact sheets, brochures, and investor reports (all paid for by the fund companies), we may not have enough information with which to make complex fund investment decisions. After all, investing hard-earned cash isn’t as easy as picking the most fragrant shampoo in an on-the-spot sniff test.
In many cases, mutual fund advertising does an even greater service to investors. It not only introduces them to the fund company, it introduces them to the fund industry. If it weren’t for mutual fund advertising, many wouldn’t have come to know the great benefits offered by mutual fund investing. Much of fund advertising is dedicated to investor education, the usual topics being dollar-cost averaging, adopting a contrarian point of view, and the principles of value investing among others.
Now, imagine a world where the average investor didn’t have access to that treasure tome of knowledge? What a great loss it would be!
Too Much Publicity
Some funds and fund managers get a lot of press. Too much press, some may argue. They’re featured in all sorts of magazines, newspapers, television programs, and websites. So much so that some begin to wonder how much of this publicity is really geared toward helping current and prospective fundholders make informed decisions and how much of it is needless and costly chest humping. The good news is while a lot of this publicity goes beyond the basic service of information dissemination, most of it comes at no cost to investors.
Good funds and fund managers are able to not only pick the right stocks and bonds for their portfolios but are also often able to generate good and, more importantly, free publicity. Fund houses that have strong brand names, like Fidelity and Vanguard, get talked about whether they like it or not.
While firms in other (less interesting) industries usually have to pay to be featured in the papers, funds often don’t need to. Consumer demand for news on the fund industry is usually a compelling enough reason to feature funds and fund managers free of charge.
Demand Planning & Management
That still doesn’t explain the big-bond-fund billboard ad you saw yesterday, does it? Surely, that wasn’t free. And, surely, that wasn’t done in the interest of keeping you better informed either. All it had was the bond fund’s name, the fund manager’s name, a picture of a big brown bear, and the words “a fund to take you through these bearish times,” printed in bright red.
There is one final reason why funds do and should advertise: to manage demand. Most investors have been made fairly conscious (partly through responsible mutual-fund-sponsored advertising) of the risks behind fund elephantiasis. But only truly savvy investors are aware of the downside that comes with funds that either remain or become too small.
Advertising is one effective way by which fund managers can manage the size of their funds. New funds can use advertising to stimulate growth, thereby allowing funds to reap the benefits of scale and, often, pass on savings to investors through a lower expense ratio.
Established funds, on the other hand, can use advertising to either keep current investors from cashing in their shares in the droves during a downturn or attract new investors to replace those who are about to leave. A purely selfish motive you say? Maybe not. Remember, when too many investors leave a fund at the same time, fund managers are forced to liquidate holdings prematurely, which turns what could have been a profit a few months down the road into a huge loss for fundholders today.
Alas, abusus non tollit usum (misuse does not remove the use). I rest my case.
Print ed: 03/09