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Netstock Ups Ante On Supermarkets

Netstock Direct, a Bellevue, Wash. company that helps people buy stocks online through direct investment plans, is now enabling people to buy no-load mutual funds through its website with no transaction fees.

Direct investment plans are programs in which investors buy shares of company stock directly from a company without going through a broker. Using that model of direct investing, Netstock introduced last month what it says is an improvement on mutual fund supermarkets. The company hopes eventually to enable fund companies to sell and service their funds exclusively online.

INVESCO Funds Group of Denver, Colo., SAFECO Mutual Funds of Seattle, Wash., Credit Suisse Asset Management of New York, and Stein Roe Mutual Funds of Chicago are currently using the site to distribute prospectuses and marketing materials and to sell a limited selection of their funds.

The selection is very limited because fund companies want to test just a few funds in the novel distribution channel, said a spokesperson for Netstock. Between the four companies involved in the program, there are about a dozen funds offered. By comparison, fund supermarkets generally offer thousands of funds.

Waiving the transaction fee is nothing new. Fund supermarkets sell funds both with and without transaction fees. However, Netstock officials say that their distribution model has at least two advantages over supermarkets - funds sold are held in the investor's name, and fund companies pay less than if they were selling through a supermarket. Netstock officials declined to disclose the price differentials or the fees they charge.

"We are excited by the new distribution potential of offering direct enrollment in Stein Roe funds through (the Netstock) site," said Thomas Butch, president of Stein Roe Mutual Funds, in a statement.

When funds are sold through a fund supermarket, fund companies have no idea who their investors are since the funds are held in the broker's name. For direct-sell fund companies, knowing their customers is vital for marketing purposes and maintaining long-term relationships.

Netstock officials tell fund companies that the type of investors that is buying funds through its site - those investing through direct investment plans - are likely to be buy-and-hold investors. That is because these people tend to dollar-cost-average, said Mark Davis, founder and chairman of Netstock Direct.

But, many fund supermarket investors act like day-traders, moving in and out of funds trying to time the market, and that is disruptive for fund companies who seek stability, said Davis.

"What a mutual fund is receiving from us is a long-term investment client," Davis said.

Fund supermarkets do discourage quick turnover of their no-transaction fee funds. Both Fidelity and Schwab charge investors a redemption fee if they hold onto a fund for less than 180 days. E*Trade charges a transaction fee for those who hold onto funds less than 90 days. Netstock itself does not charge fees for quick redemptions because it does not own the funds whereas conventional supermarkets do. However, the funds traded through Netstock are free to charge fees for redemptions made within certain periods.

One drawback of Netstock is that it does not offer investors some services that fund supermarkets do. For example, Netstock provides none of the market research that most fund supermarkets make readily available to their customers. And when investors buy funds through Netstock, they do not receive consolidated statements as they would from a fund supermarket.

With this no-frills approach, Netstock hopes that it will be able to change the way fund companies sell their funds through the Internet. Davis is hoping that fund groups will create special classes of funds that are exclusively sold and serviced through the Internet which have lower fees than regular fund classes. None of the fund companies currently selling through Netstock have created such special classes.

There is, however, at least one such fund, the E*Trade S&P 500 Index Fund, not sold through Netstock, and other funds families are following suit. Such funds require that shareholders receive all their mailings, such as statements and annual reports electronically, which cuts down on printing and mailings costs. Davis said he would like to sell E*Trade's fund through Netstock.

Netstock also claims to save investors money since it charges fund companies less to have their funds put on its shelves. Davis would not reveal how much his company charges, but he did say that a fee is charged for each new investor and that this acquisition fee is the lowest in the industry. He said it was only a small percentage of the fee fund supermarkets charge fund companies.