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Wirehouses Could Lose Sales Share

Financial industry participants and observers now are debating what was once an article of faith: the importance of wirehouses for mutual fund distribution.

No one suggests that large broker/dealers no longer are a key means of selling mutual funds today. But, some financial services industry observers question whether a combination of factors including the rising use of the Internet for investing, the growing popularity of financial planners and a slowdown of proprietary sales at wirehouses are conspiring to erode the importance of large broker/dealers as a mutual fund distribution channel.

Last week, Merrill Lynch of New York took steps which protect its own prominent role in fund distribution. On Tuesday, the firm announced plans to introduce an online financial service designed for self-directed investors. That service will offer online purchases of both load and no-load funds, a mix wirehouses traditionally have avoided for fear of losing customers to direct sales fund groups. Other new Merrill Lynch services will include an account with a fee based on a percentage of assets under management with which investors can buy and sell mutual funds for no transaction charge. The account offers other services, including advice from a Merrill Lynch salesperson.

"Whether clients want advice and guidance from a skilled financial consultant, convenient, self-directed Internet investing or some combination, they'll get it at Merrill Lynch," David Komansky, chairman and CEO of Merrill Lynch, said in a statement.

Merrill Lynch's moves may prove to be a matter of self-preservation for all wirehouses which rely on income from transaction-oriented business such as mutual fund sales.

Fund sales through broker/dealer distribution are under pressure from factors such as the Internet and an aging customer base, said Sallie L. Krawcheck, associate director of research at Sanford C. Bernstein & Co. of New York, in a speech last month at the Investment Company Institute's general membership meeting.

The success of broker/dealers in fund distribution has been supported by a bull market that has masked potential weaknesses, Krawcheck said. Some mutual fund executives and consultants said Krawcheck's view was overly pessimistic. But, they acknowledged that the mutual fund distribution system has evolved in a way which provides more competition for wirehouses.

"Our distribution has changed dramatically over the last 10 years," said Lawrence Lasser, president and CEO of Putnam Investment Management of Boston, also at the ICI meeting. Sales through banks, financial planners and broker/dealers each now account for about one-third of Putnam's distribution, he said.

"The business is no longer How many of your funds does Merrill Lynch sell?'" Lasser said.

Wirehouses will adapt, potentially reorganizing their businesses into separate advice and transaction-oriented units, Lasser said. That basic view is widely-held.

"The traditional broker high water mark is behind us," said Geoffrey Bobroff of East Greenwich, R.I., a consultant to fund companies. He and others predicted that broker/dealers will move away from transaction-oriented business and rely on pricing based on a percentage of assets under management.

That evolution, however, will not eliminate wirehouses as powerful distributors of mutual funds, according to industry consultants.

Sales of mutual funds through wirehouses are decreasing, said Louis Harvey, president of Dalbar of Boston, a firm which tracks satisfaction with services at mutual fund firms. Harvey minimized the erosion, however.

"What you're saying here is, This whale has a nick,'" Harvey said. Harvey is the former publisher of Mutual Fund Market News. Dalbar sold the publication to Securities Data Publishing in April 1998.

The decrease in wirehouse mutual fund sales is being offset at least in part from sales of money management products through wrap programs and separate accounts, Harvey said.

Any suggestion that wirehouses are not important for mutual fund sales is inconsistent with the behavior of fund companies themselves, said Andrew Guillette, a consultant at Cerulli Associates, a fund consulting firm in Boston. Fund companies strive to get shelf space in wirehouses and are willing to pay for it, Guillette said. Funds recognize that wirehouses are a "powerful but costly distribution channel," Guillette said. Despite the expense, mutual fund companies still covet wirehouse shelf space, Guillette said.

"When you get into a wirehouse, everyone in your firm knows about it," Guillette said.