Protecting Participants: What to Know About Mutual Fund Boards

Mutual fund boards often do a better job of protecting shareholders than corporate boards, one source says, which are potentially more focused on management and their own self-interest.

Art by Alessandra De Cristofaro


All registered investment companies are overseen by boards, and they perform a critical role in protecting shareholders’ interest.

“The SEC [Securities and Exchange Commission] holds fund boards up to a very high standard when reviewing their materials and doing field audits every two to three years,” says Kip Meadows, founder and CEO of Nottingham.

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These review boards’ primary function is to act in the best interest of the shareholders by looking carefully into such details as whether the investment advisory fee and expense ratios are in line with peer funds.

“Their biggest responsibility is to monitor the investment advisor by looking at legal costs and the quality of their service providers and auditor,” Meadows says.

In addition to this, most fund boards have an audit committee, Meadows says. “Financial reporting is another big responsibility of the board, and consultants pay close attention to that when recommending investments.”

Meadows adds that fund boards are so diligent that they often do “a better job of looking after shareholders than corporate boards, which are more focused on management and their self-interest.”

For investments that are difficult to price, fund boards typically turn to third parties for their specialties and experience, says Michael Patanella, Grant Thornton’s asset management sector leader.

“The role of the board is to understand what the fund’s investment objectives are and to have guidelines to make sure they are being followed,” Patanella says. Board members also must consider economic and market factors, such as “the current low interest rates and the tariffs” being imposed on imports to the U.S.

“The clear benefit to shareholders is that the fund board is an outside group operating within a charter to protect the shareholders’ interests,” he says.

Best Practices to Protect Investors

A recent report by the Investment Company Institute (ICI) and the Independent Directors Council (IDC), titled, “Overview of Fund Governance Practices, 1994-2018,” lays out many of the best practices of fund boards.

“Fund boards have strong governance practices, in many cases adopted in advance of regulatory mandates,” says Lisa Hamman, senior associate counsel at the Independent Directors Council.

For example, 66% of board chairs are independent and 27% have a lead director who is independent, meaning that 91% of boards either have an independent chairman or an independent lead director. Eighty-four percent have independent directors comprise 75% of their board, and 98% of the board members have not been previously employed by the fund complex.

The ICI/IDC report notes that current SEC rules require only that funds relying on common exemptive rules have boards with a majority of independent directors. In addition, at year-end 2018, 68% of complexes have an age-based mandatory retirement policy for their board members.

On average, fund boards meet seven times a year, and 33% of complexes have a formal policy requiring board members to own shares of the funds they oversee. Ninety-eight percent of complexes have a financial expert serving on their audit committee.

In 2012, the study began reporting on the gender composition of fund independent directors. The percentage of female directors increased from 20% at that time to 28% in 2018.

Preventing Financial Abuse of Aging Clients

Retirement plan advisers do more than help shape their retired clients’ finances; they can and indeed must play a part in making sure their clients are treated equitably.

Art by Lars Leetaru


Anecdotal evidence and large scale surveys both show financial exploitation of seniors is all too common.

According to a new report on financial elder abuse published by AIG Retirement Services, almost half of Americans ages 65 and older handle their own savings, investments and assets. While financial exploitation of this group is far from the norm, it is clear that isolation and a lack of expert support can leave even financially savvy individuals exposed to potential mistreatment.

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Part of the challenge for all investors—but especially for those who may be aging and experiencing cognitive decline—is the sheer complexity of most financial products and services on the market today. In addition, the legal framework that surrounds the issuance of the power of attorney is far from intuitive. Indeed, the AIG survey finds 66% of seniors are unsure if they ever signed a document granting someone power of attorney, and many say they are lost on how to do so.

“Elder abuse is such a critical issue,” says Michele Kryger, head of AIG’s elder and vulnerable client care unit. “Financial advisers are really in a unique position to see the red flags that otherwise would go unnoticed.”

Retirees and seniors are warned of the common red flags in financial exploitation—pigeon drop scams on the phone, invoice scams on the web—but Kryger says advisers should also pay attention to more direct forms of abuse, such as instances involving children or loved ones. While 90% of seniors in the AIG survey are aware of the 10 most common financial scams, 81% are confident that no one close to them would financially take advantage of them. Sadly, survey data and anecdotal information show this isn’t always the case.

Family Abuse Is Surprisingly Common

Elder financial abuse involving someone the victim knows looks a lot different from other cases involving strangers, Kryger says. The normal types of preventative measures—teaching people to ignore fake calls, email scams, etc.—really don’t help prevent this type of abuse. Another challenge is that, when it comes to assessing whether a client is being harmed by a loved ones, the warning signs can be much more subtle and the conclusions more nuanced.

Clearly, because a family member has easier access to authentication factors for bank accounts and credit statements, preventing this sort of abuse is trickier for financial professionals. The only solution is to pay close attention to an investor’s behaviors and statements. Keep a close eye on withdrawals, understand what the senior’s financial goals are, and keep tabs for when suspicion arises. If an investor suddenly starts forming a tighter relationship with a family member while growing distant from others, that could be a red flag, Kryger suggests. Or, if a large withdrawal is repeatedly being made from an account that previously went untouched, that could be another.

“Prevention also includes raising awareness with both the client and with family members about what you can all do to solve this,” she says. “Having seniors not believe and acknowledge that this can happen to them makes prevention more challenging. If you know or believe something could happen, you’re obviously more likely to put a protection in place that can prevent it.”

The Legal Obligation of Advisers, and Investors’ Role   

Aside from a moral and ethical perspective, financial professionals have a legal obligation to report fraud or any suspicion. In normal circumstances, placing holds on customer accounts and delaying disbursements is not allowed, but in the case an adviser suspects elder financial abuse, safe harbor protections are available under the law.

In 2018, the Senior Safe Act was passed to provide immunity to financial institutions, advisers, broker/dealers and insurance companies who report financial exploitation, but only if qualified employees were trained on how to identify and recognize financial abuse beforehand. Additionally, the Financial Industry Regulatory Authority (FINRA) passed two rules last year advising brokerage firms to obtain a designated, trusted contact’s information when opening up a senior investor’s account, and offering protection to broker/dealers who place temporary holds on accounts due to a suspicion of financial abuse. If there are signs of financial abuse, these institutions can either contact the trusted source or, if needed to protect the senior, place a brief hold on the account while an investigation is run.

To ensure financial professionals understand the signs of cognitive decline, the Securities and Exchange Commissions (SEC) recommends firms train their employees on the common symptoms. If a financial adviser finds that a senior investor is displaying signs, they are likelier to follow and address them before abuse could occur.

Experts agree that it is important for older investors to understand their abilities as they age, and to acknowledge the potential impact cognitive decline, dementia or Alzheimer’s disease could have on their ability to make financial decisions that are in their own best interest or, if applicable, in the best interest of their family.

“One of the most important questions to ask early on in the process is, what kinds of preventative measures can we put in place to prevent problems in the future?” Kryger concludes. “We educate our financial advisers to have these conversations early in the relationship. Don’t wait until someone is getting to the point where they’re becoming very forgetful or their more prone to fall into a scam.”

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