One of the best-kept secrets in the mutual fund industry is that sponsors are paying more and more to catch the eye of the people who sell the funds.
They're not paying cash: There's a limit of 8.5 percent on how much a broker or planner can charge up-front when he makes a sale.
Instead, some fund sponsors are dangling exotic vacations and fancy gifts. When a planner assures you that Flingo's Fabulous Fund is going to take off, he may simply mean that he himself is going to take off, maybe for Hawaii, for having sold enough shares to win a free trip.
No one yet knows how widespread this practice is, although John Markese of the American Association of Individual Investors calls it "a trend that's picking up."
William Keogler, president of Planner's Securities Group in Atlanta, says it seems to be associated with some of the newer funds. He hates the practice. "Using marketing dollars for trips might steer a planner or registered rep to an investment that's not necessarily best for his client," he told my associate, Virginia Wilson.
Who's offering the goodies? That's hard to unearth. The National Association of Securities Dealers is in the process of surveying members to find out exactly what's going on.
"We did it just once for some new funds that came out last fall," says Jon Fossel, president of Oppenheimer Management Corp. The grand prize was a car, but he doesn't recall that any single salesman sold enough to win it.
Putnam offered Tiffany watches to brokers and planners who sold at least $250,000 of its Ginnie Mae fund, says Senior Vice President Charles O'Neil. "But we're not doing it now."
Security Distributors offers a "sales conference" each year. This year it's in Quebec. The biggest producers can bring their spouses. Security already pays high commissions for sales, "but not everyone is motivated by money," says Venette Davis, group director of corporate advertising.
This form of payola -- call it tripola -- is already endemic to the sales of public limited partnerships, where hardly a major sponsor doesn't sweeten the pot to keep salespeople interested.
JMB realty says it has to provide special gifts to brokers to remain competitive. But in a letter to the SEC, the company's senior vice president, Gary Nickele, condemned the practice. "Incentives such as trips to exotic locations and luxury merchandise may unduly influence retail sales of one product over another," he wrote.
The SEC and NASD are developing a rule to ban tripola among limited-partnership sponsors. But after two years of work, it's still not in final form. And there's "no thought yet to include mutual funds in this rule, although we're reviewing it at the committee level," says NASD spokesman Richard Fortwengler.
If you had doubts that a salesman can be swayed by a trip when he recommends investments to his clients, listen to two representative comments that have come into the SEC and NASD in support of the tripola ban:
"Many representatives have difficulty judging investments objectively when presented with an opportunity for a trip to some exotic port." -- Carole Harding, vice president of DPI Securities in Irvine, Calif.
"I have seen registered representatives compromise their sales behavior and become overly aggressive in selling a product or the wrong product to a client, in order to win a trip." -- Stewart Bronaugh Jr., president of Freeman Investments.
Unfortunately, the proposed rule covers only part of the limited-partnership industry. Big brokerage houses could continue their own incentive programs to get brokers to sell you their in-house products.
Many salesmen like tripola just fine:
"If major syndicators such as Equitec, Southmark and Damson choose to offer these trips, why not let them do so? Why listen to the complaining, whining consolidated capitals who choose not to compete in the arena of trips and awards? ... We therefore have no conflict of interest in recommending a program that offers a trip versus one that does not, assuming both investments have similar track records." -- Jerald R. Carey, The Carey Co., Kansas City, Mo.
Markese, of the AAII, finds trips "tacky, and all the more a conflict of interest in the public's eye." But at bottom, he says, they're no different from paying cash commissions to motivate sales.
That's all the more reason for mutual fund buyers to stick with true no-load (no sales commission) funds, that don't dip into your pocke