Innovation: The Mutual Fund Marketing Machine

By Ken Kivenko | Wednesday, November 03, 2004

“Mutual funds are as much about marketing as investing in the 1990’s, which is why the hoary cliché” Mutual funds are sold, not bought” is as true as ever. As Glorianne Stromberg once told Canadian Business magazine, the fund business may have started out in the portfolio management business, but “somewhere along the line, the marketers got hold of it, and the advisory function has been almost superceded by the sales function.”

—Jonathan Chevreau, the Wealthy Boomer



The mutual fund is one of the greatest conceptual inventions of the financial services industry and a boon to small investors. The Canadian mutual fund industry has grown tremendously over the past 25 years- today the industry holds over $470 billion in assets, greater than the assets of the Canada Pension Plan (and also of all bank savings deposits). It has been estimated that about half of RRSP accounts consist of mutual funds and that 10 million Canadians own mutual funds. There are over 5000 funds to choose from, of all kinds, shapes and sizes.

There are few businesses that have shown such rapid consistent growth. Much of this success is due to a well-conceived, comprehensive and remarkably executed marketing plan. One cannot help but admire with awe such stellar performance. The good old days of flying to Hawaii for a “seminar” at a fund company’s (i.e. unitholders) expense are over. The media, investors, and regulators just got so fed up with the horror stories that the fund industry reacted by introducing a Sales Code, intended to ban the worst of the excesses. Even so, the old industry adage Mutual funds are sold not bought remains a hallmark of the industry.

Marketing is the process of planning and executing the conception, pricing, promotion, communication and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational goals. Through marketing, individuals and groups create and exchange products and services with others in order to create value or satisfy wants and needs. Marketing attracts customers; in the case of mutual funds, investors. Creative funds with zippy names like Aggressive Growth, Internet Infrastructure and Income Plus are hard to resist. Slogans like Freedom 55 have entered our everyday vocabulary and created a huge market. When income tax rules limited the RRSP foreign content percentage, the clone fund was invented. As income trusts become popular, new funds were promptly created to provide exposure to this class of security for yield hungry investors.

Our made-in Canada mutual fund marketing innovations include:

The introduction of the Deferred Sales Charge and trailer fees in 1987 turbo-boosted fund sales. This has been so effective that many investors don’t even realize they are paying a fee.
In 1992, Royal Trust invented the money market fund and advertised higher interest rates than the banks
Mackenzie Financial sponsorship of car racing created a brand name for its family of funds
Saturation advertising during the 1998 RSP season -the fund industry spent $125 million on television which is more than the beer industry spent
AGF have used Spiderman and the Hulk to sell the idea of a comfortable retirement via investments in their mutual funds, And let’s not forget “What are you doing after work?”
Celebrity shills like Brian Costello have been employed at financial “educational seminars” where investors signed on the dotted line
“Star” managers like Frank Mersch of Altamira were seen on TV and media ads hyping up investments in equity funds. At the time, he was anointed the “Wayne Gretzky of fund managers”. Altamira also pioneered the “no load” fund (which many investors mistakenly interpreted as no fee).
Television, radio, newspapers, magazines, billboard signs, the rink boards at hockey arenas and even security gate arms at airport parking locations promote fund investment. One firm was even rumored to be toying with placement of ads in movies and fortune cookies.
Mutual fund companies are very ingenious at making it appear as if you’re not paying a fee to invest. The daily newspaper price of mutual funds has already had an amount shaved off the top to reflect the fees charged. Out of sight, out of mind, clearly works.
The industry’s distribution system would be the envy of any manufacturer. It includes stock brokerage firms, discount brokers, financial advisors and planners, mutual fund brokers, fund company salespersons (e.g. Investors Group), banks and trust companies, insurance salespersons (segregated funds), fund companies such as Altamira (a pioneer of telemarketing) and online brokers such as E- trade Canada. You can buy funds by phone, by mail, in person or via the Internet.


“The investment game, with its hype and image obsession, is essentially a branch of showbiz. Every year you have something new to keep the salespeople awake and investors hungry.”

—Andrew Bell, Mutual funds for Canadians for Dummies

The industry’s marketing machine also operates defensively. The threat of Low- MER exchanged traded index funds such as Spiders 0.12 % MER was rapidly addressed by a wide range of index mutual funds promoting ingredients –low initial investment, no-fee switching, no-load and customer service to counter significantly higher MER’s AND massive advertising. TD marketing has employed terrific imagination to reduce fees e.g. the “ e” version of Diamonds (“DIA”: AMEX) available only on the internet, carries a not unreasonable 0.31 percent MER to compete with the ETF’s 0.18 percent. Similarly, most investor advocates would have to admit that securities regulators have been kept at bay by astute marketing and Government Relations initiatives. Fund governance boards and disclosure of proxy share voting still remain elusive goals of consumer protection organizations. A few years back, the Federal government wanted to set up a national investor complaint processing and resolution system. The financial services industry quickly countered by conceiving of the Ombudsman for Banking Services and Investments, an industry –sponsored organization.

The marketing departments of fund companies have rightfully earned a growing share of the “management fee”-in some cases marketing budgets are actually greater than the budgets for portfolio management. While fund industry critics have called fund ads, brochures and sales literature a form of investment pornography, the Annual Canadian Investment Awards have set aside a special place for marketing. The Marketing Award Categories include: Best Direct Marketing, Best Print Collateral, Best Print Advertisement, Best Out-of-Home, Best Internet/Multimedia, Best Radio, Best Television & Best Overall Campaign. This material, coupled with the cheerleading of the financial media, are such powerful factors in investor decisions that low cost fund firm Phillips Hager & North’s felt obligated to prepare a protective Users’ Guide to the Business Media.

Notwithstanding the high fees/expenses, routine below benchmark performance and occasional scandal, the fund industry has, by and large, given GIC refugees and many financially- challenged Canadians higher returns than they would have achieved in Canada Savings, bank deposits or Guaranteed Investment Certificates at least over certain periods of time.

Performance, fees, disclosure and fund governance have successfully been moved out of the investor decision matrix replaced by imagery, branded products and high profile companies.

Sometimes however, the machine can get ahead of itself. The 2004 OSC Capital Markets Compliance Report an eye-opener .The latest OSC report, released July 12 contained a number of serious concerns to investors regarding repetitive non-compliances and a negative trend. For example, when marketing mutual funds, the requirements of Part 15 of National Instrument NI 81-102 Mutual Funds must be adhered to. During the reviews, the review team observed the following:

Marketing materials contained information that was incorrect
Marketing materials were outdated or had inadequate disclosure
Web-site information was incorrect, outdated or contained inadequate disclosure
Performance data incorrectly used return data from a different fund/period
References to the Association for Investment Management and Research ("AIMR") were used when the firm was not AIMR compliant or was incorrectly worded
Claims of "superior performance" were made that could not be substantiated
The disclosure and warning language required by Section 15.2(2) of NI 81-102 was not always present
Performance data of mutual funds was not disclosed for the required time periods
No evidence was maintained of any review of marketing material
OK, so the fund marketeers are human. But by and large they’re enthusiastic promoters of mutual fund investing. Even during the severe bear market, the creative marketing strategies of Buy and Hold, distribution reinvestment, Monthly Accumulation Plans and DSC early redemption penalty clauses minimized redemptions and kept Assets Under Management (and fees) fairly intact.

If a marketing case study were to be prepared, the Canadian mutual fund industry would be a terrific success story. If Oscars were given for glitz, imagery and showmanship, this industry would come out a winner. If the Olympics were to award gold medals for imagination and innovation, the fund industry would always be on the podium. While we can all hope for some urgently needed industry and regulatory reforms of this huge sector, we must for now admire it for its many outstanding marketing accomplishments. Millions of Canadians have benefited from mutual funds –the people’s capitalism. Other Canadian industries stand to learn a lot, good and bad, from our home-grown mutual fund industry marketing strategies and tactics.

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