Expert: Paul Henneman - 2/20/2004

Question
Hello Mr. Henneman:

I want to thank you for your reply.  I really enjoy your answers and feedback that you provide.

I do have a follow-up question.  Why do these mutual fund companies separate the average investor from the so called preferential clients?
What motivates these companies to show this type of favoritism?

Once again, I thank you for your answer!
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Followup To
Question -
Hello:

Why is it discouraged for mutual fund companies to trade after hours, and how does this activity negatively affect mutual fund investors who invest with a company that trades after hours?

I thank you for your reply.

Answer -
Thank you for your question!
 The problem is that the vast majority of investors do not have access to trade after hours. This is provided by some mutual funds to preferential clients. So, if a news items breaks late in the day, or some sort of event happens that will affect mutual fund price, then these preferential clients get an 'unfair' advantage by beating the rest of the average every day individual investor to the trade. The price of the mutual fund will be affected, ultimately costing the individual investor money. With all of the scandals recently in the financial world, mutual funds have been criticized for this as it does not offer a 'level playing' field for all investors.
  I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com


Answer
Thank you for the follow up!
Mutual funds have in the past been willing to offer 'special services' to large investors to get their business. The more money invested into a mutual fund, the more successfull it is as the fund gets a percentage of the overall networth of the fund. So, if they manage more money, the fund administrators and managers get paid more. A common way for mutual funds to get large scale investors (with millions or even tens of millions) to invest in their funds is to offer after hour trading, giving these large investors an advantage.
This practice is not restricted to the mutual fund market, but is done in other investment mediums as well. It is becomming increasingly frowned upon, and laws to prevent the most serious abuses of this are already being passed. It is a case of 'unfair advantage' to truly wealthy individuals (if you ask me, they are wealthy enough and don't need this anyway)! It is all at the cost of the smaller individual investor, but these practices are being reduced.  A good thing in my mind.
I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com