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Thursday, May 18, 2000

Brennan, Fink Outline Challenges

Reported by Sean Hanna, Editor in Chief

Yes. It's once again time for the Investment Company Institutes annual gathering in Washington, D.C. This year more than 2000 industry executives made their annual pilgrimage. Sessions started this morning with remarks from ICI Chairman John Brennan (better known as chairman of the Vanguard Group) and ICI President Matthew P. Fink.
Related Links

Brennan's Remarks
(May 18, 2000)
Fink's Remarks
(May 18, 2000)

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Brennan told the assembled throng that a number of challenges still face the industry. Foremost, he said, is setting reasonable expectations for investors.

"We must continue to emphasize to investors the importance of reasonable expectations. Polls still find that individuals are incredibly confident about the future, expecting average annual returns of 20 percent or thereabouts in the stock market over the next 10 years -- far more than the long-term average of 11.3 percent for stocks would suggest. In fact, many investors apparently see no need to save more for the future, given the gains they' ve seen in their existing portfolios in recent years. But these investors are overlooking the risks of the stock market. "

Brennan added that "It' s critical that we as an industry take a more active role in educating investors about the risks and rewards of investing -- because open communication has been a vital element in the confidence that the mutual fund industry has earned with investors throughout its history."

Brennan also emphasized the increased "Asset Velocity" in funds. The average annual redemption rates for stock funds has climbed to 40% from roughly 10% in just a few years he pointed out. "Constant trading activity is perilous for the investor who engages in it, as well as for everyone else."

"Many investors jump into a 'hot fund' just in time to see it cool off. But hyperactivity also can harm the long-term fund investors who, in many cases, bear the transaction costs and tax burden of market-timers and speculators. Constant trading activity is bad for our business."

Part of the issue, Brennan argued, is technology which allows investors to trade more quickly creating a "double-edge" sword.

Following Brennan, ICI President Fink to the rostrum and celebrated the sixtieth anniversiary of the passage of the 1940 Investment Company Act. He then outlind three initiatives the industry is taking to work with regulators.

  • The first is on fund directorships. The ICI has already suggested the adoption the recommendation of an advisory group of industry leaders and independent directors, headed by Jack Brennan.

  • The ICI is also paying close attention to the various financial regulators in Washington as they implement the Gramm-Leach-Bliley legislation that repealed the Glass-Steagall Act. Fink stated that the ICI has supported "functional regulation," a concept†that is part of the legislation. "Functional regulation" is shorthand for requiring all financial regulators to embraceórather than replaceóthe SECís successful system of regulating the fund industry and protecting fund shareholders under the Investment Company Act, said Fink.

  • Lastly, he reported that the SEC is holding a roundtable to examine the regulation of investment advisers. "We will be urging the SEC to consider the broad ramifications of internet-based investment advice, and to take steps that will reassure investors that the Internet can be a trusted and reliable source of information," said Fink. 

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