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As Investors Lean Toward Advisors, American Century Shifts Marketing

Investing: Direct seller of mutual funds is joining other firms in opening the door to professional financial planners.

February 25, 2001|From Bloomberg News

American Century Investments, home of some of the nation's most popular mutual funds, plans to start marketing some of its funds through investment advisors.

American Century plans to begin offering "Class C" shares for some of its funds that will carry a fee to cover annual commissions for the investment advisors who sell them.

The Kansas City, Mo.-based firm, the fifth-largest direct seller of mutual funds with $100 billion under management, is the latest fund group to tap the increasing reliance of U.S. investors on professional financial planners.

"The world is shifting to advice and guidance and channels that can provide those, so direct marketers are under pressure to gain access to those outlets," said Andrew Guillette, managing director at Cerulli Associates Inc., a Boston-based financial services consulting firm.

For the Record
Los Angeles Times Tuesday February 27, 2001 Home Edition Business Part C Page 3 Financial Desk 1 inches; 35 words Type of Material: Correction
Mutual funds--A story in Sunday's Business section incorrectly reported which firm manages mutual funds Investment Co. of America, Income Fund of America, Washington Mutual Investors and EuroPacific Growth. They are managed by American Funds.

American Century has filed to sell C shares for just one fund--American Century Target Maturities Trust Series 2030, which is expected to be available for sale June 1. The firm expects to file to sell C shares of other bond and stock funds by the end of the month, said David Larrabee, senior vice president of investment advisor sales.

American Century's offerings include Income Fund of America, EuroPacific Growth, Investment Co. of America and Washington Mutual Investors--all among the biggest U.S. mutual funds.

Fund groups such as American Century that have traditionally relied on direct sales to investors have been shifting their marketing approach.

Last year, Invesco Funds Group, the eighth-largest direct seller of mutual funds, added C shares to 27 of its funds. At the beginning of this year, Zurich Scudder Investments, then the seventh-largest direct seller, began offering its formerly no-load Scudder mutual funds through financial intermediaries only. The funds remain available on a no-load basis to people who bought them before the change.

Investors are moving away from the direct channel in part because those whom the bull market has enriched want help deciding how to protect their wealth, Guillette said. At the same time, investors have become more comfortable paying fees than commissions, he said.

Direct sales of mutual funds fell to 18% of total sales in 1999--the latest period for which figures are available--down from 23% in 1990, said the Investment Company Institute, the mutual fund industry trade association.

No-load funds such as American Century's are already available to investors with fee-based accounts, in which an advisor will charge an annual fee, typically 1% of assets, to pick stocks, bonds or mutual funds for an investor.

By offering C shares, American Century funds will become an option for traditional accounts, where brokers charge a commission for each transaction.

Investors with those accounts can select A, B or C shares. With A shares, the investor pays the advisor an up-front commission. With B shares, the fund company pays the investment advisor an up-front commission, which is financed through higher fund expenses, and the investor may pay a sales charge when shares are redeemed.

With C shares, the investment advisor gets an annual commission--a so-called level load--also financed through higher expenses.

That fee-like approach has gained in popularity. Sales of C shares as a percentage of total fund sales by advisors in traditional accounts have been rising over the last few years, even though the higher expenses can result in lower returns than from A shares over long periods of time.

In the case of American Century Target Maturities Trust Series 2030, direct investors pay a management fee of 0.59%. Buyers of the C shares will be assessed the same management fee, plus a fee of 0.75% to finance the broker's commission, for a total expense ratio of 1.34%.

The average commission on a level-load bond fund is 0.81%, according to Lipper Inc.

Target Maturities Trust Series 2030 will invest primarily in U.S. Treasury zero-coupon bonds. Its performance is intended to track the zero-coupon Treasury bond maturing in 2030.

Offering C shares is a way for a direct marketer like American Century to gain access to investment advisors without causing what Guillette calls "channel conflict."

If, for example, American Century attempted to offer A or B shares while continuing to offer its funds on a no-load basis, brokers "would be less comfortable" about selling the product and taking a commission on a sale, Larrabee said.

According to Cerulli Associates's Guillette, selling C shares is "kind of a crafty way to please both sides."

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