Grant Second Chances to Deserving Funds

The past year has brought somelong overdue reform in regard tomutual funds. With regulators andmany board members asleep at theswitch, the $7 trillion invested in mutualfunds was bound to tempt some unsavoryactivity. And we all learned that it did.

But despite all the bad headlines andpress, physician-investors shouldn't rushto abandon mutual funds. That's becausethey happen to provide the best methodof achieving investor objectives for lowcost diversification across the world'smarkets. And when properly run, mutualfunds can level the playing field fortoday's retail investor.

Beyond Mutual Funds

Only Exchange Traded Funds (ETFs)might be an appropriate alternative tothe traditional open-ended mutual fund.In markets and market segments wherethey are available, these funds are agreat option for investors. At presenttime, however, many desirable assetclasses cannot be purchased throughETFs. Investors who want to diversifybeyond the usual US and foreign developedmarkets will find scant pickings.

It's absurd to believe that a separateaccount would provide greater protectionagainst mischief than a traditional mutualfund. There is no possible way that regulatorsor compliance officers can keep trackof millions of different separate accounts.What you will get with a separate accountis higher costs, higher risk, lower diversifi-cation, and a certain amount of ego satisfaction.And while ego satisfaction is certainlyan effective marketing techniquefor separate account sponsors, investorswould be better off in mutual funds. Butthat hasn't kept the separate account folksfrom promoting themselves.

Place your bet:

Hedge funds and most other alternativeinvestments are even worse. Theseinvestments lack the basics of regulation,disclosure, transparency, and accountability.In most cases, investorswould be better off at the dog track.

Investment Integrity

None of this is to suggest that physician-investors should put up with a dishonestfund. They should pull theiraccounts from funds or companies thatcheat. There is nothing to be gained bysupporting proven criminals and liars.And the argument, "Now that we'vebeen caught, we're going to reform,"just doesn't cut it. Investors will have touse a little judgment. It's one thing for afund company chairman to trade his ownaccount after hours and another for arogue employee to cross that same line.

In the end, there is no substitute forintegrity reinforced by good corporategovernance. A few fund families standout as examples of both. For example,it's unlikely that Vanguard, USAA, TIAACREF,American Funds, or DimensionalFund Advisors will be dragged into themutual fund scandal. I'm sure that thereare many other fund firms that operatein the shareholder's best interest as well.

Rather than abandon funds as theinvestment medium of choice, physician-investorsshould become more discriminatingby seeking out fund firms that deservetheir trust. Meanwhile, keep up the pressurefor meaningful reform and vigorousenforcement. And let's all toast New YorkAttorney General Elliott Spitzer, who againgets my vote for "Man of the Year."

is the founder

and principal of Investor Solutions,

Inc, a fee-only, SEC-registered

investment advisor. He is

also the author of The Informed

Investor: A Hype-Free Guide to

Constructing a Sound Financial

Portfolio (Amacom; 2002), which is now available

in paperback. For more information, visit

www.investorsolutions.com.

Frank Armstrong III