American Funds executive blames advisers for outflows

Industry observers and financial advisers have expressed their surprise to see American Funds point the finger at them for the outflows at the giant fund firm since the market meltdown.

In a rare interview published in the April 11 issue of Barron’s, Kevin Clifford, president of American Funds Distributors Inc., was 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 last year, and so far this year has seen another $14.8 billion go out the door, according to Morningstar Inc.

“The comments were just jaw-dropping,” said Don Phillips, director of research at Morningstar. “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 [American Funds was] 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 mention advisers so directly.

“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.”

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

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

American Funds has reached out to its wholesalers and other employees so that they can address questions or concerns from advisers stemming from the Barron’s article, he said.

“We have provided them with the full context of what [Mr. Clifford] 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 said that he thinks that the remarks are emblematic of the culture at American’s parent company, Capital Research and Management Co.

“They are not experienced with talking to the press and they need to be,” he said. “They are a massive manager of money.”

E-mail Jessica Toonkel at [email protected].

Related Topics: American Funds Distributors