The Deception Series, Part 5--The Threat of Mass Redemptions

Part 5--The Threat of Mass Redemptions
While the WM Group of Funds and it successor, the Principal Funds, knew that the APF curtailed fund redemptions, they also knew that reducing or eliminating the APF would result in mass redemptions. At its peak, the APF became addictive since it produced the thrill of attracting assets, yet everyone knew it would cause withdrawal pains when paying the fees stopped.

For employees, the APF was the cloud which separated the company from the industry. There were only two fund companies in the United States which offered this type of arrangement (the other was a small fund company also based in California). Years earlier, major-name national brokerage firms barred the WM Group of Funds from selling the SAM Portfolios in their networks because of the APF. From their perspective, it would have given WM a competitive advantage based on a questionable business practice.

The wire houses also recognized that this subterranean fee could have tainted all of their other mutual fund company sales arrangements as customers questioned whether a fund was being sold on its merits, or because their broker was being paid to give the fund preferential treatment. These logical concerns barred the SAM Portfolios from most of the national wire house distribution channels.

This left the SAM Portfolios to be sold in the independent channel. (Here is a partial list of some of the major independent advisory firms which accepted the APF agreement). This included national firms comprised of individual, independent investment professionals and financial planners, many of who were former brokers at the national wire house firms (Merrill Lynch, Dean Witter, Prudential, etc.)

While the independents enjoyed a reputation for being more objective and critical, many of them readily bought the valid investment concepts of the SAM Portfolios, but were fully converted by the attraction of the lucrative APF. So much for objectivity. Twelve years later, these independent investment professionals were the main recipients of APF fees, as they entered the realm of the ethically compromised.