a relationship that has many more dimensions than is usually the case when securities are sold. The complexity of the decision, rather than of the plan, is probably the best explanation of why salesmen are needed. Without a salesman, few people, especially those without prior experience, will think through these problems and then act upon their analysis and conclusions. Thus, a prospective buyer needs to learn of the existence and features of the plan, needs to be induced to think through his savings objectives, needs to examine his doubts about equities; in sum, he needs to learn. This learning takes place in the prospective purchaser as a result of his contact with the salesman. Nor is there any other practical way for learning to occur. While the S.E.C. criticizes the salesman, it offers no alternative to him.

The salesman, of course, is paid out of the sales charge, or commission, which is deducted from the investor's payments, both in the case of the contractual plan and the voluntary plan; but no salesman ever sets out deliberately to sell a voluntary plan. A little simple arithmetic would show that he could not possibly afford to.

In the case of the typical $25 a month contractual plan, where 50% of the first twelve payments are deducted for sales load, approximately $6 is paid to the salesman as his commission on a single payment, and $72 on the first twelve payments. This is little enough compensation for the time and effort that goes into the salesman's service to the investor. The S.E.C. Report itself states that the average sale of a contractual plan requires three visits and the expenditure of three to four hours by the salesman, which is not to mention travel time or expense, or the time spent with prospects to whom no sale is made. In the case of the voluntary plan, the total sales load on the first $25 payment on the shares of a typical fund would be $2.13, of which about half or a little more than $1 is the salesman's commission. Even if twelve monthly payments are made during the first year, the total commission will amount to only $12.75.

Salesmen cannot afford to work for that kind of compensation, and the fact is that they don't. The salesman who has no contractual plan to offer endeavors, of course, to make a straight sale of mutual fund shares. For that purpose he seeks out only those people who, he believes, can make a substantial purchase. If he succeeds in making a substantial sale of shares, he may also offer the voluntary plan for share accumulation accounts as an additional serviceas a convenient open account, or even as a plan program for future accumulation. Sometimes, he is disappointed in an effort to make a substantial cash sale and will end up by selling only a voluntary plan.

The contractual plan salesman, on the other hand, is willing to devote his time and effort to explaining his offering and its advantages to a responsible citizen who has a reasonably established income, and who may be convinced that it is to his advantage to use some of it to accumulate future capital. Where the contractual plan is not available, however, most of these people are never approached by a salesman and never have the opportunity to accumulate capital through periodic investment in American business.

We have never been able to get the S.E.C. to realize that there is a greater element of persistency in the contractual plan than there is in the volunary plan. I am told that when the Special Study was released by the S.E.C. in August of 1963, representatives of our Association challenged the S.E.C. staff to make a statistical study of voluntary plans to see whether they could establish the extent of persistency of payments in voluntary plans as contrasted with contractuals. This is something they never did; but by dint of considerable effort we have assembled sufficient statistical information to establish, beyond question, the basic fact to which I referred in relating my personal experiencethat when one sets a goal, he is more likely to achieve it, and when one has no goal, little or nothing is achieved.

I have here a chart which I have designated as Chart A, which shows the entire number of plans in force, both voluntary and contractual, during the three years 1964, 1965 and 1966, for Fundamental Investors, Inc., one of the largest common stock funds, and for Diversified Growth Stock Fund, Inc., one of the best performing of the growth stock funds. In the case of Fundamental, as you will see, the number of accounts in force in each category was not substantially different. The number of payments made on these accounts, however, in each of these three years, was vastly different-eight to ten times as many in the case of contractual plans as in the case of the voluntaries. In the case of Diversified Growth Stock Fund, while there were nearly ten times

as many voluntary plans in force as contractuals, the number of payments made was approximately the same.

It is the number of payments made per account per year, however, which discloses the true character of these two vehicles. In the case of Fundamental, there were approximately 8 payments per year per account on contractual plans, as against 7/10ths to 9/10ths of a payment per account on the voluntaries. In the case of Diversified Growth Stock, the discrepancy was still greater7.6 payments to 8.6 payments on contractuals, as against 6/10ths to 9/10ths on voluntaries.

My second chart, which I have designated "B", contains figures comparing persistency of payments in contractual and voluntary plans for Fidelity Capital Fund, a rapidly growing growth stock fund. The statisticians took the first ten contractual plans and the first ten voluntary plans opened in each month of 1961-120 in each category-and showed the actual number of payments made each year through 1966. In the case of voluntary plans, only those which appeared to be intended for use as true accumulation accounts were selected for the study. Not surprisingly, the number of payments made in the first year on contractual plans was identical with the number made in the fifth year, although some of the intervening years had been higher. In the case of voluntaries, the actual number of payments on the 120 accounts declined from 408 in 1961 to 91 in 1966. The figures on payments per account are equally revealing-5.4 per account for contractuals in 1961, rising to 8.5 in 1962, and declining gradually to 5.4 in 1966. In the case of voluntaries, the number of payments per account was 3.4 in 1961, and declined only to 8/10ths in 1966.

My third chart, which I have designated "C", shows the average number of payments per account made from 1956 through 1965 on a sampling of contractual and voluntary plans opened in 1956 for Wellington Fund, one of the largest balanced funds, and for United Accumulative Fund, one of the largest of the stock funds. In these instances, the statisticians also endeavored to designate as voluntary plans only those which appeared to be intended for use as true accumulation accounts. Nevertheless, the data revealed are in all respects similar to those shown on the earlier charts. In the case of Wellington, for instance, payments per contractual plan declined from 8.91 in 1957 to 4.09 in 1965; in the case of voluntaries, the decline was from 4.68 in 1957 to .97 in 1965.

There is no need to belabor this point further. I have here and submit to you a paper prepared by Professor Herbert Arkin, of the Bernard M. Baruch School of Business and Public Administration, entitled "Payment Persistency In Mutual Fund Payment Plans" which analyzes and explains the method of assembling the data set forth on my Chart C. The fact is abundantly clear that the contractual plans and voluntary plans do not serve the same purpose. Whatever the reason and I am myself convinced that it is the establishment of a fixed goal and the payment of sales cost in advance-the fact is that investors in contractual plans make a far better job of pursuing their program of accumulation of capital through periodic investments than do investors involuntary plans: for that purpose the voluntary vehicle is, by and large, a substantial failure.

For some years now the S.E.C. has been propounding another cliché upon which it continues to insist. It says and reiterates that contractual plans and front-end loads are unnecessary because in California, which does not permit the sale of contractual plans, more mutual fund shares are sold per capita than in any other state in the Union. The latter fact is undoubtedly true; the conclusion drawn from it definitely is not.

While I have had no direct experience with California, I am generally familiar with that situation and have reviewed it with other Waddell & Reed representatives who operate in that area.There is no doubt that California has many peculiarities, of which this is one. California, as you must know, has had a tremendous growth of population—from some 10,500,000 in 1950 to some 18,900,000 estimated at July 1, 1966 and probably more today. Despite this huge growth in population, the fact nevertheless is that for the year ended December 31, 1966, mutual fund sales in California amounted to $55.08 per capita, whereas the national average of mutual fund sales was $23.08 per capita. It is also true that California has more mutual fund salesmen per capita than any other state in the country. Just why this is so is easy to understand for those of us in the business, but hard to demonstrate by proof. We know, for instance, that the population of California includes a much larger percentage of persons who are either retired or otherwise have accumulated substantial amounts of capital which they are prepared to invest and need not rely upon current income for their investment capital. I have spoken with the Regional Manager of California for Waddell & Reed,

Inc., who estimates that approximately 75% of the mutual fund shares sold under his jurisdiction in that state are sold to retired people. Then, too, we know that the mutual fund idea has been much more widely accepted for a longer period by securities dealers and salesmen than in any other state of the countrynotably in some of the conservative states of the east where many large investment houses delayed for years in perceiving the advantages of mutual fund investment for their customers. In addition, there is one mutual fund, Insurance Securities, Inc., which accounts for a substantial volume of mutual fund sales in California, but in a very special form of sales medium. Finally, I understand from reliable sources that because of the early closing of the securities markets on the California time scale, salesmen have a much larger part of their active day to devote to the sale of mutual fund shares than in any other part of the country. Perhaps these bits of common knowledge that we in the mutual fund business possess do not fully explain the California situation, but neither does the California situation itself give any indication that a prohibition of contractual plans would produce the same result in any other part of the country. In actual fact, the exact opposite was the case. In the only other states where contractual plan sales were not permitted, sales of mutual funds per capita have been far below the national average of $23.08. Thus, in 1966, per capita sales of mutual funds in Illinois were $18.23, in Wisconsin $16.59, and in Ohio only $15.17.

I looked up these figures to have them ready for this hearing, but they came as no surprise to me. They are no surprise because I know, of my own knowledge and experience, that there are many, many thousands of persons in Ohio who would benefit from investment in equities through a contractual plan and who have never been approached by one of my salesmen or a salesman for any other fund sponsor, because they had the feeling that these people could not afford to make a substantial purchase of mutual funds outright and the salesman could not afford to sell them small payment voluntary plans. Now that Ohio has been opened to contractual plans, I have the fullest assurance-in fact the deepest conviction— that thousands, and perhaps hundreds of thousands, of these people will be offered the advantage of which they have been so long deprived-the opportunity to own a stake in the capital and business of this great country of ours, and to acquire it in the way they acquire most things in our commercial life and free economythrough devotion of regular periodic payments over a period of years. This is what the contractual plan has to offer them; this is something they can get no other way; this is why the contractual plan must not be destroyed.

TABLE A.-COMPARISON OF PAYMENT PERSISTENCY-CONTRACTUAL PLANS VERSUS VOLUNTARY PLANS, 1964-66

(1) The above statistics were furnished by the First National Bank of Jersey City, N.J. (for voluntary plans) and by the First Pennsylvania Banking & Trust Co., Philadelphia, Pa. (for contractual plans).

(2) The statistics presented represent all contractual plans in force and all voluntary plans in force during the years 1964, 1965, and 1966 using shares of Fundamental Investors, Inc. and Diversified Growth Stock Fund, Inc. (3) The statistics clearly illustrate that payments under the contractual form of monthly investing are substantially superior in regularity to those under the voluntary basis.

Note: See the following table:

TABLE B.-COMPARISON OF PAYMENT PERSISTENCY-CONTRACTUAL PLANS VERSUS VOLUNTARY FIDELITY CAPITAL FUND (120 ACCOUNTS REPRESENTED IN YEAR 1961)

1961

1962.

1963.

1964.

1965.

1966.

648 1,010

895

817

701
648

296694

408

1

438

207

144

106

91

SCHEDULE B.-NUMBER OF PAYMENTS MADE PER ACCOUNT (PER YEAR)

Year

181063

11

17

10

TABLE C.-PAYMENTS MADE BY A SAMPLE OF CONTRACTUAL AND VOLUNTARY PLAN PARTICIPANTS INITIATING PLANS IN 1956 FOR WELLINGTON FUND, INC., AND UNITED ACCUMULATIVE FUND

It is to be noted that since the participants initiated at various times during 1956, few will have made the complete number of payments during that year and thus it is to be expected that there would be fewer payments in 1956 than in 1957. Each payment here represents an actual payment made regardless of the fact that in some cases for contractual plans several "unit" payments may have been made at once.

STATEMENT OF THOMAS J. HERBERT

Mr. Chairman and members of the committee, my name is Thomas J. Herbert and I am President of Financial Programs, Inc., the principal underwriter and investment supervisor of Financial Industrial Fund, Inc., and a member and director of the Association of Mutual Fund Plan Sponsors.

My business career includes twenty-two years of commercial banking and sixteen years in the mutual fund industry. During my banking years I participated in that industry's educational activities, serving as head of the Investments faculty of the Stonier Graduate School of Banking conducted by the American Bankers Association and Rutgers University.

I also authored the textbook "Investments" used for many years by the American Institute of Banking.

In the mutual fund field I have been associated with three sponsor firms, serving one of them as Executive Vice President and two of them as President.

I have great interest and familiarity with selling practices in our industry and I am concerned with the qualifications, recruiting, training and supervision of salesmen.

On page 22 of the Securities and Exchange Commission's Report on The Public Policy Implications of Investment Company Growth, there is the following statement: "The front-end load provides incentives responsible for undesirable high-pressure selling practices." This is an unsupported assertion by the Commission for which there is no foundation either in fact or in the Commission's Report.

In the body of the Report itself the point at issue is covered in the brief section captioned "The Sales Environment", which appears at pages 233-235. No effort is made in that section to support such a sweeping assertion. Instead, there is a repetition of certain conclusions, stated in some fifteen pages of the Special Study of Securities Markets, published August 8, 1963. The statements in that document also failed to substantiate the broad assertion quoted above.

In all of the voluminous material submitted by the S.E.C., both now and in 1963, there is no definition of "high-pressure selling practices." Instead, there is a delineation of sales techniques common to the distribution of goods and services of every kind in our free economy. These basic techniques are taught to salesmen at every level, from newsboys to sales managers of the large corporations. The only and erroneous, conclusion that can be drawn from the examples cited by the S.E.C. is that selling of any kind is necessarily "high-pressure.”

Furthermore, it seems quite apparent that neither the Commission nor the staff of the Special Study has made a comprehensive examination of current sales practices in our business or of our system of recruiting, training and supervising salesmen. Instead, there are extensive quotation for antiquated samples of sales training literature said to have been used at one time by certain plan sponsor companies. Even at the time of the Special Study, there never was any inquiry as to how extensive the use of these materials was or to what degree they were translated into actual selling practices.

The Commission has not only failed to update its study, but it has also failed to take into account the more rigid requirements for the qualification and supervision of salesmen that have been instituted by the N.A.S.D. and the Commission itself and adopted by all of the companies in our business since the Special Study was compiled.

After reviewing a preliminary proof of the current Report, the Association of Mutual Fund Plan Sponsors challenged the conclusions which, in our opinion, were based on wholly inadequate foundations. Thereafter, the Commission wrote into this Report, at pages 234-235, that "the findings of the Special Study were not based on isolated instances of dubious conduct but mainly on sales training materials and sample sales presentations"-and that "the current material may no longer contain items such as those cited by the Special Study." Yet the inadequately documented conclusions are repeated and emphasized in this latest Report.

These conclusions are expressed in a manner that involves a serious double defect. Not only is the Special Study quoted as establishing that undesirable sales practices then existed "to an unfortunate degree," whereas neither the degree nor the actual existence of such practices was established at all; but the Special Study and the Commission itself proceed further to the conclusion contained in the quotation with which I began this statement-that the front-end load itself is responsible for the undesirable selling practices that are supposed to exist. There is no logical basis for that conclusion.

If selling practices have been as offensive as the S.E.C. would have you believe, there should have been a substantial volume of complaints over the years to the S.E.C., to the National Association of Securities Dealers, and to the state regulatory authorities. The fact is, however, that there has been a remarkable lack of such complaints. On page 161 of the Special Study the admission was made that: "Public complaints, an important source of information in connection with abuses in the sale or securities other than mutual funds, have provided fewer leads to the detection of improper mutual fund selling practices."

With respect to the S.E.C., aside from the four disciplinary proceedings mentioned in the Special Study-of which we have heard nothing since we have no information as to complaints filed with the Commission. One might speculate that if there had been any considerable volume of complaints, or any at all, we would have heard about them long before this.

The State Securities Administrators find no such volume of complaints, as is evident from a group of letters we have received from a number of these Administrators which I offer for the record of these proceedings. Here is a sampling from these letters: