Brokerage Firms May Have Conflicts of Interest in Rating Mutual Funds

Does the brokerage firm have a business relationship with the mutual fund? This is not unlike brokerage firms recommending stocks to buy for which they have an investment banking relationship. With mutual funds, find out whether the brokerage firm is being paid an upfront fee by the mutual fund company for special marketing - sometimes called the "Preferred List";

Are the brokerage firm's marketing and sales departments separated from the firm's mutual fund rating department? This is similar to the requirement that brokerage firms separate their retail departments from their underwriting departments. Watch out for firms that have their mutual funds rating personnel assist in selling the funds; and

Does the brokerage firm recommend purchasing many mutual funds besides its own proprietary funds? Avoid the Dean Witter trap, where investors are steered in the direction of Dean Witter funds, sometimes wrongly. Instead, look for signs of objectivity in rating mutual funds.