American Funds, once the top-selling mutual fund company, was built on the back of devoted financial advisers, many of whom earned a commission for selling its funds. But today, fee-based financial advisers and retirement plans drive most of the firm's sales.
The adviser-favored fund brand, now the third-largest U.S. fund company after a brutal setback during the financial crisis, has re-positioned both its brand and the concept of active management in the face of massive investor redemptions since the financial crisis.
American Funds this year is on track to deliver its best net sales since 2007.
But a less-told part of the firm's story is its evolution from a dealer of “load” funds it sells through commission-paid brokers to its increasing emphasis on products that offer limited and, in some cases, nonexistent embedded fees for brokerage firms and their financial advisers.
BEST YEAR IN EIGHT
American Funds has taken in nearly $9.4 billion through Aug. 31 this year, which, if it holds through December, would be its best annual result in eight years. The result comes even as the firm has seen a net outflow in its “A,” “B,” and “C” share classes totaling $9.6 billion, according to Morningstar Inc. Those shares, which hold two-thirds of American Funds mutual fund assets, often levy loads of up to 5.75% and pay distribution fees of up to 1% annually.
By contrast, the firm has taken in $9.6 billion from its retirement-oriented share classes, such as “R-6,” and another $9.3 billion from a grouping that includes the firm's “F-1” and “F-2” shares, which American Funds
says are “designed for investors who choose to compensate their financial professional based on the total assets in their portfolios, rather than commissions or sales charges.” The shares generally pay 0.25% or less in distribution fees and no load.
“I certainly wouldn't claim we've cracked the code because I think this is an ongoing mission,” said Matthew P. O'Connor, director of North American distribution for American Funds, in an interview. “It's a different angle and it's a different type of conversation. [And] it's an acknowledgement that American Funds is going to play a part of a broader portfolio.”
Mr. O'Connor said the “vast majority” of the firm's business has historically come from “a brokerage environment.” Now that's changed somewhat, he said.
INDUSTRY PUSH
The firm's evolution comes amid an industry-wide push for advisers to do more fee-based business and use the cheapest method of investing in funds. That move, in turn, has coincided with growing anticipation of regulations governing the standard of care advisers must use in handling retirement accounts, including a pending proposal by the Labor Department. As many of its peers, American Funds
has said it opposes that proposal for fear it could prohibit advisers from selling commissionable products.
It can be difficult to tell exactly which advisers are doing business with a mutual fund. But a look at regulatory disclosures suggests the largest brokerages have also become among the best customers of fee-based share classes. American Funds pays tens of millions of dollars in separate revenue-sharing agreements annually for access to advisers affiliated with those firms.
On the disclosures, alongside custodians for independent fee-based advisers are firms such as Morgan Stanley & Co. Inc., which held nearly 17% of the outstanding F-1 shares for one top American Fund product. Merrill Lynch held 11% of the outstanding shares for the F-2 shares. And Edward D. Jones & Co. held a fifth of the outstanding A shares, according to
the disclosure, which is known as a fund's statement of additional information.
Introduced in 2001, American Funds' F shares never topped A shares in sales until the firm's outflows began in earnest in 2008. From 2008 through 2013, the company suffered $251 billion in redemptions, a level that's more than all the U.S. assets in mutual funds sold by BlackRock Inc. But it mostly kept flows positive in F shares.
DOMINANT PLAYER
The firm has always been a dominant player in the retirement space. In the early 2000s, the firm was among the first in the industry to start serving that market with a raft of different types of R shares. Now it's ranked seventh in distribution through defined-contribution plans, with some $133 billion in that market, according to the most recent data from BrightScope Inc. Prominence in retirement plans has funneled American Funds a steady stream of monthly contributions from workers.
“They're on every 401(k) platform,” said Wesley D. Bigler, chief executive of Longview Wealth Management. “Every month, I don't know what that number is but it's millions and millions of dollars that's going into 401(k)s every month.”
Combined with better retention of existing clients, the firm said growth in its F shares has helped its overall business.
“We believe in the value of advice and that investors outcomes are better with professional guidance,” American Funds said in an emailed statement. “We recognized that we needed to put more resources including people, marketing and training against distribution channels that are more weighted to a fee-based business as we want American Funds to be part of the consideration set for advisers regardless of their business model. As a result of our expanded focus, we've seen good growth in our F-share business.
But some advisers remain skeptical of how much traction the firm is getting among fee-based advisers.
“Those [funds] always seem to be in retirement accounts,” said Russ Thornton, a financial adviser at Wealthcare Capital Management, a fee-only financial advice firm that manages $1.2 billion. “Very few, maybe none of my fee-only adviser peers have ever said that they would recommend American Funds for part or all of their client portfolios.”
