Mutual Funds Issue Warnings to Customers : Finance: ‘Enlightened self-interest’ prompts managers in this industry that is enjoying enormous success to educate shareholders on the inherent risks.

NEW YORK —  Imagine a restaurant chain spending big money to warn you of the health hazards posed by the high-fat dishes it serves.

Or a car manufacturer publishing information in grisly detail on the dangers of a highway crash.

Or a bank going out of its way to alert you to the debt perils posed by its credit cards.

Unlikely as such visions may be, something very much like that is taking place these days in the booming mutual-fund business.

In an industry that is enjoying enormous success, fund managers and sponsors are spending a lot of time and effort warning their current and prospective customers about the risks inherent in their products--in educational brochures, in letters to shareholders, even in some of their advertising.

With stock funds, the subject is most often the question of an “overvalued” market; with bond funds, the threat of falling net asset values should interest rates rise.

With funds of every description, there is the standard warning that federal deposit insurance doesn’t apply.

The situation has even reached the point of urgings from fund industry leaders that government regulators be given more money and manpower to ride herd on them.

What’s behind this behavior? Are fund executives somehow kinder, gentler and more caring than other types of business managers?

Surely not. The situation arises from a mixture of politics and prudence, with a healthy measure of bottom-line sense thrown in.

“It’s probably a good case of enlightened self-interest,” says Brian Mattes, vice president for corporate communications at the Vanguard Group, a big fund family in Valley Forge, Pa.

“We make nothing by bringing somebody in and having them get whacked right away,” Mattes observes.

“We don’t like the way the markets look right now, and I guess people are looking to us to tell them that.”

In the midst of all its successes, the fund business finds itself in a tricky position. Its very popularity has brought extra scrutiny, from economic and investment analysts, from the press, and from Congress.

Memories are still fresh of scandals in another financial-services industry, the savings and loans. So the scouts are out in earnest searching for any early signs of trouble in the fund business.

In that climate, it’s only natural for industry leaders to take an upfront position on questions like risk. That kind of thinking is reinforced by some even more practical considerations.

“Mutual funds have a strong interest in seeing to it that fund shareholders have realistic expectations about their investments,” Matthew Fink, president of the Investment Company Institute, said in congressional testimony last summer.

“Industry compensation is based on assets under management, rather than transaction fees, and shareholders can redeem their shares at any time.”

“It’s good business,” says Steve Norwitz at T. Rowe Price Associates, which is running advertising that focuses on the subject of risk-adjusted performance.

“It costs us about $300 to get a new investor, and we usually have to keep them a couple of years before we make any money on them.”

Whatever the motivation for it, many analysts applaud all the attention that has been directed at mutual-fund risk. If bear markets or similar misfortunes should strike, reasonably attentive investors won’t be able to claim they weren’t given any warning.

“We certainly can’t know ahead of time whether a fund-led bear market would be any better or worse than previous bear markets,” observed Don Phillips, publisher of the Morningstar Mutual Funds advisory service.

“What is assured, however, is that it would be the most closely scrutinized downturn in history,” he said.

“Funds have put out a great product, marketed it effectively, and have snatched away their competing industries’ customers,” Phillips said. “That’s not a problem--that’s progress.”