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Mid-Sized Companies Take On Supermarkets


Small to mid-sized fund companies, concerned about their investors migrating to large mutual fund supermarkets, are providing wrap programs in order to conserve assets.

Smaller fund firms find it difficult to match the numbers of funds Schwab, Fidelity and other companies offer through their supermarkets. But, through wrap programs, these firms can offer investors funds from other families. And, they can provide investment advice, for a fee, which supermarkets do not offer.

Wrap programs have been growing in popularity, said Andrew Guillette, a consultant at Cerulli Associates of Boston, a mutual fund research and advisory firm. There are currently 55 fund companies providing 68 wrap programs with a total of $82.5 billion of assets under management, according to Cerulli's Wrap Report, published last month. There has been more than a 50-percent increase in wrap programs over the past four to five years, said Guillette.

The advice is what sets the wrap programs apart, said David Haywood, an analyst for Financial Research Corporation of Boston.

Neuberger Berman's new wrap program, which offers 60 funds, and advice, was introduced on July 16, said Stanley Egener, president of Neuberger Berman Management.

The program, called the Fund Advisory Service, began as a pilot program about a year and a half ago with some of the firm's high-net-worth clients - those with assets of $100,000 and up, said Egener. The clients were looking for financial advice about Neuberger's funds and then requested access to funds from other families through the advisory service, Egener said.

The funds in the program have at least three-star ratings from Morningstar, Egener said. They represent eight classes, in both equity and fixed-income.

The advisory service is a "fund wrap program" and not a supermarket because it is for high-net worth customers who work with advisors, said Patrick Byrne, vice president of retail sales and director of the program at Neuberger Berman.

Neuberger Berman is marketing the program, which costs investors 50 basis points annually, in a direct mailing to 14,000 eligible clients after Labor Day, Byrne said.

Neuberger Berman's program provides a good alternative to the larger supermarkets because it narrows choices for clients, Egener said. Each client works with a registered investment advisor, and the firm provides asset allocation models and comprehensive statements, he said.

"I don't think it's necessary to have so many funds," Egener said. "I think you can offer three to four carefully chosen mutual funds in each category. There's information overload now. People want to sift through all the choices, and we have done that research for them."

There will be fewer companies offering supermarkets in the future, since there are already plenty of them and they are costly to set up, said Guillette of Cerulli.

But, USAA of Houston, Texas, which markets to active and retired U.S. service personnel, has recently started a full-fledged supermarket. The USAA Fund Marketplace, introduced last June, currently offers 4,900 funds, which the firm's customers can buy when they open a brokerage account, said Tom Honeycutt, a firm spokesperson.

In January, the firm will begin to aggressively market the supermarket through direct mail to its client base of military employees, Honeycutt said.

The firm, which has $28 billion in assets under management, has been able to start a supermarket with a wide selection of funds, despite the company's size, because it already had set up a discount brokerage in 1983. With that infrastructure in place, the barriers of setting up a supermarket were considerably reduced, said Honeycutt.