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American Morning

Minding Your Business: Mutual Fund Payola

Aired January 14, 2004 - 07:55   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


BILL HEMMER, CNN ANCHOR: Federal officials are opening a new front in their investigation of mutual funds. Is another scandal about to emerge in that part of the industry?
Andy Serwer is "Minding Your Business," checking it out, and joins us now.

Good morning.

ANDY SERWER, "FORTUNE" MAGAZINE: Good morning, Bill.

Have you ever wondered why your broker is recommending a certain mutual fund? This investigation might shed light on that.

Of course, a broker is supposed to recommend a fund to you, because it's a good-performing fund or that fund is suitable to your investment goals. However, a new investigation by the Securities and Exchange Commission, today being talked about in the newspapers, suggest otherwise. It suggests after looking at 15 of the largest brokerage firms over the past nine months that there is a payoff going on.

Now, these payments between the brokers and the funds are OK, as long as they're disclosed. They often aren't.

So, here's what's going on. The fund companies are paying the brokers in exchange for shelf space. In other words, for the brokers to say, hey, I think you should buy this nifty XYZ fund. Gee, where did that idea come from?

Access to the sales staff. In other words, the fund people are allowed to talk to the brokers and say, hey, you really should be selling our fund, because we're going to be giving you compensation.

Inclusion in the broker's recommended list. In other words, the broker says, I think these funds are the best funds -- i.e., I'm getting compensated for them.

So, this really is a whole another angle, as you suggest. The Securities and Exchange Commission is sort of picking up here and investigating this. This is not the end.

Here, you can see the kind of money we're talking about -- $100,000 in new sales. The broker puts that money in his pocket $100,000 stays in the account, and they get up to $250 a year.

So, you know, this stuff adds up. HEMMER: It does.

SERWER: You're selling to all kinds of clients, and it's real money.

HEMMER: Good deal. Thank you, Andy. We'll talk to you next hour.

SERWER: OK, yes.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.







Aired January 14, 2004 - 07:55   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: Federal officials are opening a new front in their investigation of mutual funds. Is another scandal about to emerge in that part of the industry?
Andy Serwer is "Minding Your Business," checking it out, and joins us now.

Good morning.

ANDY SERWER, "FORTUNE" MAGAZINE: Good morning, Bill.

Have you ever wondered why your broker is recommending a certain mutual fund? This investigation might shed light on that.

Of course, a broker is supposed to recommend a fund to you, because it's a good-performing fund or that fund is suitable to your investment goals. However, a new investigation by the Securities and Exchange Commission, today being talked about in the newspapers, suggest otherwise. It suggests after looking at 15 of the largest brokerage firms over the past nine months that there is a payoff going on.

Now, these payments between the brokers and the funds are OK, as long as they're disclosed. They often aren't.

So, here's what's going on. The fund companies are paying the brokers in exchange for shelf space. In other words, for the brokers to say, hey, I think you should buy this nifty XYZ fund. Gee, where did that idea come from?

Access to the sales staff. In other words, the fund people are allowed to talk to the brokers and say, hey, you really should be selling our fund, because we're going to be giving you compensation.

Inclusion in the broker's recommended list. In other words, the broker says, I think these funds are the best funds -- i.e., I'm getting compensated for them.

So, this really is a whole another angle, as you suggest. The Securities and Exchange Commission is sort of picking up here and investigating this. This is not the end.

Here, you can see the kind of money we're talking about -- $100,000 in new sales. The broker puts that money in his pocket $100,000 stays in the account, and they get up to $250 a year.

So, you know, this stuff adds up. HEMMER: It does.

SERWER: You're selling to all kinds of clients, and it's real money.

HEMMER: Good deal. Thank you, Andy. We'll talk to you next hour.

SERWER: OK, yes.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.