Sunday, May 18, 1997

Innovations drastically alter fund distribution channels

By DAISY MAXEY / Dow Jones News Service

WASHINGTON (Dow Jones News) - Innovations like the Internet and third-party mutual fund ratings are dramatically altering the way mutual funds are distributed, industry experts said Friday.

When it comes to mutual fund distribution, the Internet, fee-based advice and choice are in. Traditional advertising techniques are out.

Even after 10 years of an extraordinary market, seven out of 10 investors buy their mutual funds with assistance, said Avi Nachmany, executive vice president of Strategic Insight, at the annual general membership meeting of the Investment Company Institute.

Of those who bought long-term funds through consultant-assisted distribution in 1996, 27 percent bought through wirehouses; 37 percent went through regional brokers, planners or independent firms; 16 percent bought through insurance agents; 13 percent bought through banks; and 7 percent made purchases through registered investment advisers, Nachmany said.

Three out of 10 investors bought their funds directly. Of those, roughly 80 percent bought through the management company and 20 percent went through marketplaces like Fidelity's and Schwab's, Nachmany said. The role of the marketplace is clearly rising, he said.

John P. McGonigle, senior vice president of Charles Schwab & Co.'s Mutual Fund Marketplace, said investors are increasingly seeking full-service distribution. In the past four calendar quarters, net flows into Schwab-sold mutual funds was just under $24 billion, he said, with about half of that going into third-party funds.

Of the $11.5 billion that went into third-party funds, 45 percent came from fee-based registered investment advisers who use Schwab's back-office services, about 40 percent came from retail self-directed customers and the remaining 15 percent came from other clients, largely retirement plans, McGonigle said.

Customers may seek a variety of services when looking for investments, from information, advice or World Wide Web access to a telephone conversation or a meeting with a representative.

"Increasingly, it's difficult to segment and compartmentalize these customers because they are evolving and dynamic," McGonigle said, "and the winning distribution companies will be the ones that effectively learn how to serve these customers well as they evolve and change from day to day."

Robert A. Leo, senior vice president and director of broker/dealer sales for Massachusetts Financial Services Co., agrees. "In our world of increasing competition and strategic alliances, it is no longer enough to have a good fund and a good story," he said.

McGonigle said he is also seeing a trend toward fee-based advice. "Increasingly, as the skeptical, educated, informed Baby Boomers are the ones that are seeking advice, they are going to increasingly demand to pay for their advice in this way," he said. Schwab's experience with its registered investment advisers suggests that the fee-based model "favors index funds and disciplined funds that are true to an investment style" since advisers try allocate assets in a total portfolio, he said.

McGonigle said he expects the Internet to grow dramatically as a tool for independent retail investors.

The trend toward investing and saving has been accelerated by three catalysts - the amount of information available today, a positive equity market and third-party endorsements from people like Chicago fund researcher Morningstar Inc. and The Wall Street Journal, according to Lawrence S. Kash, vice chairman of distribution for the Dreyfus Corp.