Why Abby Johnson is Wrong
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an InvestmentWires' Publication
Wednesday, April 30, 2003

Why Abby Johnson is Wrong

Fund industry executives had better learn quickly that complaining about unequal treatment is not a way to win customers or sympathy with the media or even a way to build a business and compete for the long term. Even the top leadership at Fidelity is showing that it is not immune to falling into the whiny "why me" trap.

Yesterday, Abigail Johnson, heir apparent to the top job at the Boston Behemoth told reporters that fund firms are being treated unfairly as regulators up disclosure requirement.

"I think it's really not right for the mutual fund industry get singled out on this," Johnson told members of the fourth estate who were otherwise enjoying their dessert at the Society of American Business Editors and Writers annual banquet.

Johnson, who is president of Fidelity Management and Research and daughter of Chairman Ned Johnson, was referring to the fact the insurers and banks are not targeted for increased proxy disclosure. During the same speech, though, she said she believes that the fund industry is better for investors than separate accounts and hedge funds because it offers "much stronger protections and regulatory oversight."

That sounds like Johnson is trying to have her cake and eat it too. If the fact that regulations are one of the key selling points for funds against other investment vehicles is true (and it surely is), fund firms should find a way to turn the new disclosure requirements into a boon. Surely some will.

There are some facts that fund industry executives had better remember because their customers -- er, shareholders -- certainly will.

Unlike banks, funds are owned directly by investors in their funds. Fund firms can differentiate themselves in the market by treating their clients as shareholders. Shareholders presumably have the right to know how the company they own is being run. That includes knowing in what their fund company invests in.

Fund executives should also remember that one of the primary appeals of separate accounts is that the accountholder kept informed of what stocks and funds are held in the account. Indeed, in the classic managed account model the account owner can also control what securities are held in the account.

Corporate clients that open insurance separate accounts and accounts with bank trust departments also routinely demand, and receive, specific accountings of the securities they own.

By not reacting to the call for more openness, the fund industry is risking repeating history, only this time it risks being on the losing side.

In the late 1980s banks and insurers and actuarial consulting firms controlled the defined contribution industry. Then fund firms led by Fidelity remade that market by adapting their retail fund practices to offer daily valuation and trading to 401(k) plan participants. Rather than remake their systems to function in the new environment, the incumbents complained to sponsors that daily valuation was unnecessary. They failed to adapt and they lost their customers.

Fund executives should keep history in mind when they evaluate managed accounts as their competitor for the next decade. A number of defined contribution recordkeepers, including insurers, are seriously considering that structure as the future of 401(k).

We hope that today's fund firms will not make the same mistake of complaining about rather than reacting to their changed circumstances.

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