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Advantages of Web Threaten to Create Disconnect Between Brokers, Investors

May 23, 1999|PAUL J. LIM

The Internet is a good thing, right? For individual investors, maybe. For mutual fund companies, maybe not.

One could argue that in many ways, the Web has had a net negative effect on the fund industry thus far.

Think about it. The Internet fosters a do-it-yourself attitude. Sure, that might be good for so-called direct-marketed fund companies. These are no-load fund outfits such as T. Rowe Price and Janus that sell directly to consumers without the help of brokers.

But if it fosters too much do-it-yourselfism, the Internet is likely to drive some investors, or at least a portion of their assets, away from professionally managed funds and straight into the arms of individual stocks and online brokers. There's growing evidence that this is already occurring.

The Internet also bombards us with a constant stream of information. The more information we have, the more likely we are to act on it, the argument goes, which means the greater the likelihood that we'll trade funds based on short-term performance. And that's bad news for fund companies.

Finally, more and more investors are actually buying and selling fund shares via the Web, fund companies including Charles Schwab, T. Rowe Price and Fidelity Investments report. That's not necessarily great news for fund companies, though, because many investors are making those transactions not directly through fund companies, but via online brokers.

According to a recent Forrester Research study, slightly less than a third of all online brokerage account assets today, or $128 billion, are invested in mutual funds.

By 2003, that is expected to grow dramatically as more and more investors, seeking convenience, are likely to buy and sell fund shares through fund supermarkets, such as Schwab or E-Trade.

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The net effect: "Fund companies will lose direct relationships with customers," the Forrester study concludes.

"If you don't think of [the Internet] as a threat, then there's a problem with how you're defining the word 'threat,' " Jay Walker, the founder of Priceline.com told members of the Investment Company Institute, the fund industry's chief trade group, last week at its annual conference in Washington.

Of course, the very same medium that is helping to cause this "disintermediation" between funds and their shareholders--the Internet--could be used to forge new types of relationships with shareholders.

Yet fund companies appear, thus far, to be wasting this valuable tool.

Have you checked out most fund company Web sites recently? They just tell you the basics, if that: They tell you who they are, provide a list of what funds they run, tell you where you can write to get more information on them and when their offices are open and show you how to download an application.

We can get all that stuff right now through brochures sent through the U.S. Postal Service.

True, there are exceptions. For instance, Fidelity and Vanguard Group are increasingly using their Web sites to educate shareholders and to exchange information with them.

Fidelity, in fact, will begin conducting the first of a series of online interactive chat sessions with fund managers next week.

"What better way to build relationships than to bring fund managers together with investors?" says Tracy Curvey, senior vice president in charge of marketing and development for Fidelity's personal investments and brokerage group.

Yet one has to wonder why more isn't being done along these lines. For instance, why aren't fund companies using their Web sites to, say, give investors updates as to what a fund owns in a given week or month?

Says Forrester Research analyst James Punishill: "Nobody's come even close to differentiating themselves with their Web sites" or taking full advantage of the technology.

When asked if any fund companies are distinguishing themselves for utilizing the Net to the fullest, Meg Whitman, chief executive of the online auction site EBay, told the ICI membership, "The winner is not yet identified."

In other words, no one. At least not yet.

"Finding new ways to use the Net is a priority issue for us," said Michelle Smith, director of the Mutual Fund Education Alliance, the direct-sold fund industry's association.

It should be, whether fund companies use the Net to sell, advertise, inform, educate, advise or something entirely different.

It's kind of like television. A couple of generations ago, in the early days of the medium, television was viewed as a potentially powerful educational tool. Yet few took full advantage of the educational benefits of television, focusing on its entertainment value instead.

Similarly, fund companies have an opportunity to bond with us--get to know us better, gain our loyalty and preserve their market share--by using the Internet in innovative ways.

Yet right now many fund companies seem content to use this powerful medium to do the same things they do via the phone or mail, which is unfortunate.

The industry could be missing a golden opportunity to help us (by educating us and informing us about new developments with our funds), to help themselves, and to stay relevant.

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Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.

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