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Mutual Fund Internet Use, Sales Will Grow, Schwab Executive Predicts

Jeffrey Lyons, senior vice president of mutual funds for Charles Schwab & Co., of San Francisco, recently spoke to Mutual Fund Market News reporter Mike Garrity about trends in fund distribution and product development. Lyons is one of the speakers on those topics at the Investment Company Institute's Tax & Accounting Conference beginning today in San Diego, Calif. An edited account of their conversation follows.

MFMN: How do you think fund distribution will change in the next three years?

Lyons: I think there are a number of things that are happening in terms of mutual fund distribution. One is there seems to be this blurring between load and no-load. You see the various wirehouses creating asset-based programs where they're including more and more no-load fund companies. You hear a lot of things about fund companies considering whether they want to go from no-load to load. You have the load companies who are creating more classes of shares to compete in various distribution channels and creating shares that can be bought at NAV. I think you'll continue to see that.

I think overall too, we're already seeing a slowing of new fund development. You're seeing more and more this year funds merging or closing because it is a tough competitive environment.

MFMN: Do you think the number of fund companies will decrease because of competition?

Lyons: I don't think so. Certainly you see a lot of banks or insurance companies buying asset management firms but there doesn't seem to be a lot of fund companies actually going away. They may be part of a different corporate structure.

With things like supermarkets and companies being able to be niche players, I think you'll constantly see portfolio managers breaking away and creating their own firms.

I would also say that from a fund distribution standpoint, the Internet is going to change things. You've already seen fund companies creating shares that are electronic-only. They're using the Internet and e-mail more creatively to communicate with their shareholders or promote themselves. I think that will continue to have an impact over the coming years.

MFMN: Will the growing use of the Internet cause a change in distribution, products or pricing?

Lyons: I think you'll see products priced specifically for different kinds of channels. Does that mean products distributed for other channels are going to go down? I don't think that necessarily is going to be the impact. But I do see that there will be more creative ways for fund companies to communicate with their shareholders. I think you're going to see more and more firms looking at ways to eliminate paper, which can help reduce expenses, and then pass that reduction on to more cost-effective products or to investors.

MFMN: Will everyone sell their products in every channel, load and no-load, with advice becoming the way firms differentiate the way they price their products?

Lyons: I'm not sure that a lot of the fund companies are going to be omnipresent in all different channels. A lot of load fund companies are going to continue to have channel conflict issues where it is just not feasible for them to go no-load in supermarkets or over the Internet. I think a lot of those companies are going to continue to look at the full commission broker network as their primary mode of distribution.

MFMN: Invesco announced recently that it soon would make it possible for shareholders to open accounts online. Is that a significant event?

Lyons: I think, overall, more and more firms are going to offer their customers easy access either to open their accounts or add money to their accounts. I think that's a beginning of a trend. Certainly you can do that at Schwab and some other broker/dealers. I think you will see more and more fund companies understanding the need to respond to customer demand to do more and more things over the Web.

At Schwab, in just our mutual fund business, we're doing about half of our transactions electronically.

MFMN: Is that a plateau or will Internet use for fund purchases continue to grow?

Lyons: It's going to continue to increase. The trend is continuing.

MFMN: Are new products such as separate accounts and exchange-traded index funds going to become prominent or is the mutual fund here to stay as the investment product of choice?

Lyons: I think for most investors, mutual funds will continue to be the vehicle of choice. Although net flows are down from the heights back in 1997, people are continuing to buy mutual funds. It's a great mechanism for people to get diversification and professional management.