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Did American Funds' exec diss advisers?

Clifford reportedly pinned fund firm's recent outflows on Pollyannaish sales pitches

Apr 11, 2011 @ 2:59 pm

By Jessica Toonkel

American Funds appears to have bitten the hand that feeds it.

In a rare interview with Barron's published last weekend, Kevin Clifford, president of American Funds Distributors Inc., is quoted as blaming advisers for the huge outflows the firm has seen since the most recent market meltdown.

In the article, Mr. Clifford is quoted as saying that advisers were characterizing American's funds as “able to defy gravity,” based on their strong returns after the dot-com crash. He described the hawking as “foolish.”

American Funds suffered $50 billion in outflows in 2010 and so far this year has seen another $14.79 billion go out the door, according to Morningstar Inc. (See a recent list of the 'The 5 fund families with the largest outflows'.)

Industry observers advisers said they were surprised to see American Funds point the finger at them for the outflows at the giant fund firm.

“The comments were just jaw dropping,” said Don Phillips, director of research at Morningstar Inc. “To lay blame on the people who sell their funds is astonishing, and you have to think, rather foolish.”

Advisers were equally unimpressed by the comments.

“Advisers were overselling the funds because they were over-marketing them,” said Steve Johnson, an adviser with Raymond James Financial Services Inc., who uses American Funds selectively. “Their wholesalers were out there beating you up on how cheap their funds were and how consistent the track records were.”

American Funds needs to take some responsibility for setting expectations, said Kevin McDevitt, an analyst at Morningstar. “You have to wonder what the wholesalers were telling advisers,” he said.

Some advisers were shocked to see an American Funds executive point the finger at advisers so directly, even if what he was saying was accurate. “I think it's hysterical that he is questioning advisers,” said Rich Zito, an adviser with Flynn Zito Capital Management LLC. “It's like, ‘Let me beat up on my customers.'”

American Funds contends that Mr. Clifford's comments were taken out of context. “Kevin Clifford absolutely did not blame advisers,” said Chuck Freadhoff, a spokesman. “I am not saying that the reporter misquoted him, but there was a miscommunication.”

Mr. Freadhoff said that the number of advisers selling American Funds doubled from 100,000 to 200,000 between 1999 and 2006. Many of American Funds' offerings did well during the dot-com bust, he said, and thus many new advisers invested with the firm, believing that the funds would be able to maintain that level of outperformance.

“Many advisers believed we would hold up much better in a downturn, but in 2008, many of our funds didn't do that,” he said.

American Funds has reached out to its wholesalers and adviser-facing employees about the miscommunication so that they can address any questions or concerns from advisers stemming from the Barron's article.

“We have provided them with the full context of what Kevin said and prepared them to answer any questions,” Mr. Freadhoff said. “Our entire business model is built around the value of advice.”

But Mr. Phillips believes the remarks are emblematic of Capital Research & Management's culture. “They are not experienced with talking to the press and they need to be,” he said. “They are a massive manager of money.”

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