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Funds Mull Entry to Online Trading

Once viewed as a fad fueled by a curious new medium called the Internet, online securities trading has now become standard practice for many financial services firms. A growing number of mutual fund advisers are wondering where they can fit into the changing landscape.

At least one fund group is rumored to be seriously considering starting a proprietary discount brokerage services unit with full online trading capabilities. Other fund advisers are watching, thinking about how they too can grab a piece of the online action or, defensively, prevent shareholders from turning to competitors who do offer online trading. Funds distributed through intermediary sales channels are torn between introducing trading services for investors, which could alienate selling brokers, and responding to the needs of their shareholders.

Funds that have lost market share to other financial service firms with online trading hope to retain customers by introducing a variety of online brokerage services, according to analysts.

The demand for online financial service offerings is being fed in large part by investors who are becoming comfortable with the medium. They feel empowered by making investment decisions for their 401(k) plans and have become accustomed to the immediacy of online trading. In addition, service providers hoping to lure new clients are offering access to research and other tools at their online trading sites.

"Mutual funds are looking at this discount brokerage window," said Drew Lapsley, director of the New York office of Insource Technologies, a technology consulting firm based in Houston. "They want to be the one-stop shop. They're realizing the client already sees them as a safe place."

Online trading volume shot up in the fourth quarter of 1998, along with the overall market share of trades handled online. An estimated one in seven equity trades, or almost 14 percent of all trades, is now being executed online, according to figures recently released by Credit Suisse First Boston, which tracks the online trading industry. By comparison, 153,000 trades, or 8.8 percent of all trades, were conducted online in the fourth quarter of 1997.

In the fourth quarter, an average of 340,000 trades per day were being executed via the Internet. Online powerhouse Charles Schwab & Co. of San Francisco alone processed nearly one-third of those online trades, followed by Waterhouse Securities of New York which handled over 12 percent of the total.

Analysts are predicting even greater growth over the next two years. By the end of 2000, a total of 4.3 million households will be investing online, according to a report entitled "Winning the eBrokerage Shouting Match" released last month by Forrester Research. That represents an increase of 1.9 million households over the 2.4 million households investing via the Internet during 1998.

Ken Clemmer, a researcher with Forrester Research in Cambridge, Mass., also believes the online financial services industry is poised for another quantum leap as the demographics of the online investor continue to change. While early online traders were viewed as speculative day traders, the emerging online investor is more likely to take a longer-term view.

Right now the most common type of cyber-investor is the "aggressive affluent" the approximately 28 percent of investors with Internet access who have a net worth of $320,000, typically trade 10 times per year and are willing to take some risks. But most future growth will come from conservative investors focusing on retirement and looking to preserve their asset base, according to the Forrester report.

"The mainstream audience is about to pick up on this medium," Clemmer said.

While some companies continue to debate whether they should offer online brokerage, they may be missing the boat. Forrester predicts that firms that are not up and running by the end of this year will be too late, and they will lose assets as clients flock to firms who make their online services easy to use, convenient and affordable.

In the mutual fund arena, firms such as Fidelity Investments of Boston and T. Rowe Price Associates of Baltimore, Md., were the early leaders in establishing brokerage units that go beyond mutual fund sales. Others have been slowly building their brokerage services and adding online capabilities. The Vanguard Group of Valley Forge, Pa., launched Vanguard Brokerage Services in 1983, but it did not add online stock trading until December.

Other fund advisers, citing pressure to expand service offerings, have in the past few years created brokerage platforms that now include online trading of stocks, bonds, and other products such as options. In the fall of 1996, Scudder Kemper Investments of New York introduced its Scudder Brokerage Services which, earlier this year, changed its name to Scudder Financial Services.