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Supermarkets, Though Convenient, Get Costly if You Visit Too Often

October 18, 1998|PAUL J. LIM

It's an unwritten rule: As service-oriented businesses mature, they're supposed to become more convenient for consumers, not less.

After all, when's the last time a shopping mall removed its automated teller machines and food courts? And grocery stores aren't taking out dry-cleaning counters--they're putting them in.

Banks have been the exception to this rule. And now, it seems, mutual fund "supermarkets" might be headed in that direction.

Fund supermarkets allow investors to buy and sell funds offered by hundreds of fund families. That means instead of having to call up Fidelity, Janus and Scudder, for example, to buy into the Fidelity Puritan, Janus Twenty and Scudder Development funds, all you have to do is go to Charles Schwab & Co. Or Jack White. Or one of more than 25 discount brokers that let you invest, cafeteria-style, in myriad funds without paying a one-time sales commission, known as a load, or transaction fee of any kind.

When this concept of one-stop shopping arrived in 1992, it was touted as the ultimate convenience. But ask yourself, "For whom?"

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Don't forget, these supermarkets are set up to be just as convenient for the companies that manage these funds as they are for consumers. Probably more so.

For example, if a fund company wants to pitch a new fund, selling to a cross-section of investors through a big discount brokerage such as Schwab certainly makes it easy.

What fund managers are finding, though, is that these supermarkets are a little too convenient for consumers. That is to say, it's just as easy for fund investors to sell a fund through the supermarkets as it is to buy one.

Indeed, according to Salomon Smith Barney, Invesco's U.S. equity funds saw a net $250-million outflow in August, aided by its supermarket programs. Santa Rosa, Calif.-based research firm Trimtabs.com now believes that only a net $1 billion will flow into equity funds in October.

Paul Merriman, editor of the Fundadvice.com newsletter in Seattle, notes that "as long as there were net inflows, fund companies didn't have to think about this."

But in today's volatile market, inflows are no longer guaranteed. Fund companies must worry about these issues, and fund supermarkets must respond.

Schwab took action a month ago when it announced that it would extend the length of time investors must hold on to OneSource funds to avoid being slapped with a redemption fee. The holding period grew from 90 days to six months.

"This is a very important product for Schwab," said Merriman. "They have to be friends with the mutual funds in the service."

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Recently, when Vanguard Group's brokerage unit announced that it would begin selling 800 no-load, no-transaction-fee funds, much like Schwab, it imposed a one-year holding requirement--double Schwab's--for investors who want to avoid fees.

Over the last two years, "every new agreement with a mutual fund mall has included strong provisions to limit excessive trading," said Alex Stein, a principal with the research group Gomez Advisors in Concord, Mass.

But "they haven't been enforced," Stein added. "In the current market, it's likely that the limitations will be enforced with greater vigor."

Obviously, no brokerage, including online firms like E-Trade Group, will cap the number of times you can buy shares of a fund. But many are likely to enforce limits on how many times you can sell or how many "round trips"--buy and sell cycles--you can make with a single fund. (Many brokerages now cap the number of round trips each year to between three and six.)

Does this mean it's time to avoid the supermarkets? Absolutely not.

After all, how many of you would sell out of a fund more than three to six times a year?

For many investors--especially those who'd prefer to deal with one company rather than several--the supermarkets are still a good deal. One advantage is that instead of receiving separate statements from each of your fund companies, you get a single, consolidated statement through your supermarket.

But for those of you who want the freedom to trade out of a fund quickly, realize that the supermarkets are more likely than ever to enforce their rules.

And if you're deciding which supermarket you want to deal with, selling restrictions--in addition to the number of no-load funds offered and the minimum investments required--ought to be a prime consideration.

Times staff writer Paul J. Lim can be reached by e-mail at paul.lim@latimes.com.

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