Small and medium-sized firms are using outside vendors to handle shareholders' calls more than ever before, but firms need to monitor vendors to ensure they are getting a high level of customer service and to avoid glitches that can produce disgruntled shareholders and redemptions, said industry executives.

Small- and medium-size funds are out-sourcing their shareholder services more because they want to focus on the money management side of their businesses, not back office duties, said Louis Harvey, CEO of Dalbar, a mutual fund consulting and research firm in Boston. Dalbar is the former publisher of this newsletter.

"Management's attention doesn't have to be focused on day-to-day issues that the service center deals with," Harvey said.

But moving to outsourcing shareholders' calls is not always an easy conversion, according to Maura Collernan, head of shareholder services for Domini Social Investments of New York. Her firm underwent that transfer three months ago, she said. When all of the shareholder services were handled in-house, Collernan and her associates could answer most of the shareholders' questions because they were onsite and understood many aspects of the business, Collernan said. They became familiar with certain clients' voices because those clients called in regularly, she said.

Some clients reacted negatively to the conversion, she said. And the conversion required a change in software used for shareholder services to meet the specifications set by the vendor, Collernan said. The new software provides more information about the holdings in each shareholder's account, but is not as easy to navigate as the firm's former software, she said.

Still, there have been no major problems with the conversion and many of the minor problems will take time to work out, she said.

Any time a firm outsources its call center, it should expect some initial glitches and even some shareholder redemptions, said Stephen Beard, president and CEO of Stephen Beard and Associates, a call center consultant in Tampa, Fla.

A tight labor market has reduced the tenure of the average call center representative, which has made it difficult for call centers to put experienced representatives on fund companies' phones, he said.

The average length of time a call center representative will work for a vendor is between 18 to 30 months, Beard said. The prevalence of inexperienced representatives is one of the challenges in providing strong customer service, he said.

Before a fund company hires an outside vendor, it should find out what kind of training program the vendor provides new representatives, he said. Some of the more common problems associated with outsourcing shareholders' calls can be addressed by setting up lines of communication between the fund and the call center, said Beard.

"I would make a point of assigning a liaison and make sure the person made drop-ins and read reports on queue waits and abandonment rates of calls," he said. "I would also make sure that person listened to randomly- selected taped calls."

Funds should include quantified goals in any contract they enter into with a call center vendor and have provisions that allow them to nullify the contract if those goals are not met, Beard said.

Contracts should also require the vendor to assign a certain number of veteran representatives to the fund company's phones and a company should always reserve the right to move a representative off its phones, Beard said. All contracts should require the vendor to add representatives to a fund's phones if call volume demands it, he said. Funds should also take steps to develop loyalty among call center representatives, he said. Simple gestures like offering awards or buying lunch for call center representatives can go a long way towards obtaining better customer service, he said.

"Most fund groups don't do the extraordinary things," Beard said. "Measure the costs and if it's relatively inexpensive to endear the reps to your group, just do it. We recommend that someone from the fund group comes to know the reps by name. When [a fund representative] interacts with the vendor, they can point out certain reps that do well and that develops loyalty."

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