(January 20) – “The telephone rings. Your broker is on the line. He has a suggestion: Move some of the extra cash in your account into a mutual fund managed by his firm.
Before you do, consider this: Through last November, the big five retail brokerage firms — PaineWebber, Morgan Stanley Dean Witter, Salomon Smith Barney, Prudential and Merrill Lynch — posted three-year cumulative returns for their diversified domestic stock funds that were 7.3 percent to 26.3 percent lower than the industry average. One-year returns also lagged behind, by 1.8 percent to 7.9 percent, according to Kanon Bloch Carre, a Boston consulting firm that compiled its rankings through asset-weighting — giving large funds more weight than smaller ones.

“For all international funds, the relative performances of the same five brokerage firms were even poorer,” writes Richard Oppel, Jr. in The New York Times special mutual fund report.

“Weighted by assets, the cumulative returns of their international offerings trailed the industry average by more than 20 percent over the three years, Kanon Bloch found, and by 2.5 percent to 21 percent over the last year.

“The big brokerage firms have ‘fumbled the ball in mutual funds,’ said John Rekenthaler, research director at Morningstar Inc., the financial publisher in Chicago. “They took their position for granted,” he added, “and they lacked the hunger that a lot of other mutual fund companies have had.”

“Of course, there are some flowers amid the weeds. The Merrill Lynch Pacific fund, for example, has been the top fund in its category over the last decade, according to Morningstar.

“But in general, brokerage firms’ funds have not been known for standout performance. And since the bull market shifted into overdrive in the mid-1990s, the relative overall record of the brokerage funds has been downright dismal. Many investors who bought in-house funds have paid a steep price in lost opportunities, as many other broker-sold funds — including those of Alliance Capital, MFS Investments and AIM — have outpaced their investments.

“But investors seem to be waking up. Or perhaps some brokers are splashing some cool water on their clients’ faces. Whatever the case, investors are yanking assets out of brokerage-managed funds. The top five retail brokerage firms, which started 1999 with a combined $240 billion in long-term assets in their funds, had combined estimated outflows of more than $13 billion through November, according to the Financial Research Corp., an industry researcher in Boston. In the previous decade, combined flows had never been negative, and as recently as 1993 the five firms enjoyed $30 billion in inflows.

“The outflows, poor performance and new competition from index funds and others have had a big effect on market share: Brokerage firms now have 10 percent of all mutual fund assets, down from 19 percent a decade ago, according to Sanford C. Bernstein & Co.
The poor performance has been humiliating for some large firms at a time when the fortunes of so many fund groups have soared.