The trouble at American Funds may have started with performance, but the key to turning things around is going to rest on the company's ability to engage fee-based financial advisers.
American Funds, which has seen its mutual fund assets shrink to $857 billion, from a peak of $1.2 trillion in 2007, was built largely through relationships with commission-based broker-dealers. It hasn't had nearly as much success with registered investment advisers, however.
Consider some numbers. Among national, regional and independent broker-dealers, American Funds, which is advised by Capital Research and Management Co., ranks either first or second when it comes to brand recognition, according to Cogent Research LLC's Advisor Brandscape 2012 report, which was published last month.
More than half the regional brokers and 48% of independent brokers surveyed listed American Funds as a mutual fund firm that they think of when preparing to make a new investment for clients.
That stands in stark contrast to RIAs, a mere 15% of whom cited American Funds when asked the same question.
“American Funds is top-of-mind when it comes to brand equity,” said Meredith Rice, senior director at Cogent. “But they're less likely to be on the mind of RIAs.”
The most likely reason is American's reputation as a load family.
More than 80% of the RIAs surveyed by Cogent described themselves as fee-based. Overall, 56% of the advisers surveyed reported being fee-based, according to Cogent.
“People think of American Funds as this old load family,” said company spokesman Chuck Freadhoff. “When you do something for 70 years, it's hard to change people's thinking.”
The irony is that American Funds does offer no-load versions of its funds, and not surprisingly, they are a much better investment. In 2002, American Funds launched F-1 share classes, which carry no load fee, and in 2008, it launched F-2 share classes, which have no load fee and no 12(b)-1 fee.
The A shares of the $89 billion American Funds EuroPacific Growth Fund (AEPGX), for example, have an 84-basis-point expense ratio and a maximum load fee of 5.75%. The F-2 shares have an expense ratio of just 58 basis points.
[More: American Funds files for new share class to cut fund expense ratios]
An investment in the A share class, with the maximum front-end fee, would have a three-year annualized return of 2.79%, ranking in the bottom half of all foreign large-cap funds.
The same investment in the F-2 shares would have a return of just over 5%, ranking in the top quartile of the fund category, according to Morningstar Inc.
Even so, relatively few advisers are aware of the existence of the no-load share classes.
“Maybe if they did some advertising for them, it would help,” said Rachel Sanborn, a fee-only financial planner at Financial Focus Inc, who recalled a visit to her firm by a wholesaler from American Funds to talk about the fee-only share classes.
The lack of awareness among RIAs is evident when looking at the breakdown of American's assets as well. About 85% of American's $739 billion of non-retirement-plan mutual fund assets were in load share classes as of the end of last year, according to Morningstar.
American Funds, for its part, argues that it has done a lot to promote its no-load funds.
“We've been talking about it for 10 years,” Mr. Freadhoff said.
Not all fee-based advisers are convinced that American Funds is doing the best job conveying that message.
“It seems like they're really straddling the line between the clients who made them who they are today and the RIA space,” said Melissa Joy, a partner at the Center For Financial Planning Inc. “Other firms really want to focus on the RIA space.”
Mr. Freadhoff said the focus isn't on fee-only or commission-based broker-dealers, for that matter.
“We're agnostic when it comes to compensation. That's up to the client and the adviser,” he said.
“Our emphasis isn't on what share class an adviser uses but to make sure they understand the American Funds philosophy.”
It might be in the best interests of American Funds to start emphasizing the no-load share classes. According to the Cogent survey, two-thirds of advisers are expected to be fee-based by 2014, up from 56% today.
jkephart@investmentnews.com Twitter: @jasonkephart
