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June 14, 1999 01:00 AM

MUTUAL DECISION: FUNDS MUST GET ONLINE OR BE UNPLUGGED

Christine Williamson
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    Cannibalize yourself or be eaten.

    That's the advice from the young Turks of the electronic commerce world to mutual fund companies worried about their traditional sales channels if fund sales over the Internet really take off.

    Said Richard Owen, vice president of the Dell Online division of Dell Computer Corp.: "The Internet is a huge threat to the largest, current (mutual fund) leaders with the largest pools of assets. . . . The Net changes the nature of the game. New entrants will keep the pressure on. You must reinvent yourself to survive."

    And to Meg Whitman, president and chief executive officer of eBay Inc., the Internet represents the biggest change in business and society since the Industrial Revolution, a change that fund companies had better take seriously or suffer the consequences.

    Mutual fund companies have reacted to the growth of e-commerce in different ways:

    * Fidelity Investments, Boston, is spending $200 million on technology in 1999 and anticipates spending more every year thereafter. Robert L. Reynolds, president of Fidelity Investments Institutional Retirement Group, said: "I cannot emphasize enough how much the Net will change everything we do at Fidelity."

    * Putnam Investments, Boston, is working on ways to use the Net to pair technology with human interaction to support its family of broker-sold funds, said Louis Kuo, managing director and head of corporate marketing. The company intends to move its Web site beyond library functions and investment decision-making tools to allow brokers to personalize client accounts.

    * T. Rowe Price Associates Inc., Baltimore, with direct-sold funds, is attuned to client reaction to the Net innovations it has introduced, said Joanne Healy, vice president and manager of interactive services. "We are trying to serve the maximum number of customers in what is kind of an impossible race, led by Fidelity and Schwab. I'm amazed at what other companies do. I'd love to have the luxury of supporting all the experimental stuff, but I don't. ... We definitely don't have a tech-driven strategy. Ours is customer-driven. Our strategy is to look to what customers want most and give them the most value," she said.

    * American Century Investments, Kansas City, Mo., has a single Web site with added functionality and customization to serve its three primary fund distribution channels -- 401(k) plans, direct retail sales and third-party intermediaries, said Mary Witwer, vice president of electronic commerce.

    * Startup mutual fund company LMI Capital Management LLC, Pasadena, Calif., is targeting financial advisers and the best way to reach them is via the Net. LMI's no-load fund family is the Worldwide Index Funds. "Advisers like to get data via the Internet, as well as access customer account information. E-mail is the perfect medium of communication. They don't like a lot of mail and phone calls; they don't respond to the same kind of tactics that you use with brokers. We concluded that we shouldn't go after this market without strong Internet capabilities," said Keith Pipes, managing director.

    Changing markets

    As Fidelity's Mr. Reynolds stated, the whole way mutual fund companies do business is changing fast as new ways of using the Internet evolve.

    The phenomenon of the mutual fund "portal" already has changed the way mutual funds are bought and sold and will continue to have a major impact, said Mark Naber, managing director of consulting at Optima Group Inc., Fairfield, Conn.

    A portal is a single gate through which a consumer can buy anything from mutual funds to wedding presents on sites that span multiple retailers.

    "People tend to go to the portals for one-stop shopping, objective screening of data on funds from performance analysis to manager information to portfolio holdings. There's a consolidated statement. Why would I go directly to any one company when I can get all the funds, all the data and all the decision-making tools I want through a single port?" Mr. Naber said. Going forward, "Whoever controls the e-port (portal to the Internet) has the only contact with the customer. The customer's loyalty is increasingly going to be to the portal, not the mutual fund company," he said.

    And that will affect many mutual fund companies, most acutely, direct-sold fund families such as T. Rowe Price, the Vanguard Group and American Century, Mr. Naber predicted.

    Direct-sold companies traditionally relied on a big advertising budget, strategies to bolster brand awareness and breadth of investment management product to attract and retain retail investors.

    In the virtual world of the Net those strategies are irrelevant, Mr. Naber said. Savvy investors already use sophisticated, objective tools that screen reams of data and boil it down to the best-performer in any asset class. Breadth of product in a fund family becomes unimportant as portfolios are composed of funds from multiple families. Advertising and fund branding strategies won't influence investors who make investment decisions based on Net data research.

    Losing margin

    And for the privilege of losing the client relationship to an e-portal, the mutual fund company will lose a lot of margin, Mr. Naber pointed out. Because fund companies typically pay between 25 and 35 basis points to be included within someone else's fund network, profits will shrink.

    The degree to which e-commerce will overtake the fund industry is the real debating point. No one will make predictions. "For anyone working in e-commerce, there's all this tremendously cool stuff going on. It's the potential that we're all betting on," said Ms. Healy.

    But Avi Nachmany, a consultant at Strategic Insight Inc., New York, has a different view. Of investors who will buy funds over the Net, he said: "You're talking about a relatively small segment with a relatively small amount of money with relatively little significance in a $6 trillion industry. Everyone is seeking simplicity, an assurance of return and to be empowered by the use of technology. But I don't see it. I think more people will go back to another human being, like an adviser, for validation about their investment decisions."

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