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Advice Is Said to Drive Fund Distribution


BOSTON - The widespread demand for advice among investors is shaping mutual fund distribution, and putting financial intermediaries and other third-parties who offer advice in commanding positions, according to several speakers at a conference here last week.

That is bad news for the companies who believe they will be able to successfully sell their funds directly to investors over the Internet.

"The power is leaving the manufacturer," said Neil Bathon, president of Financial Research Corp. of Boston at the conference, "Marketing Mutual Funds to Financial Intermediaries," sponsored by International Business Communications, a conference organizer based in Southborough, Mass.

The demand for guidance has opened the door for third- party companies - such as Morningstar of Chicago and Financial Engines of Palo Alto, Calif., - which provide advice. And these companies are taking business away from direct-sales companies, according to Bathon.

The ascent of these third-parties also gives credence to the notion that the financial intermediary is the channel of the future. Morningstar and Financial Engines are both offering online advice to 401(k) plan participants. Discount broker Charles Schwab & Co. of San Francisco is also expanding the types of services that it offers investment advisors who use its institutional brokerage. It has created a new institutional web site and is dedicating a team of institutional service representatives to advisor clients. In the past, only high-net-worth, self-directed investors were offered that service.

Because of the importance being placed on brokers and advisors, fund fee pricing will be controlled more by the salesperson who sells funds to investors than by the fund companies who create the funds, conference speakers said. Funds must be ready to offer a wide range of pricing options to satisfy intermediaries - from brokers who want to charge up-front sales charges to advisors who want to charge annual fees, speakers said.

"Pricing at the point of distribution is really what's going to happen," said Peter Moran, chief marketing officer for Turner Investment Partners of Berwyn, Pa.

Mid- and small-sized fund companies are not going to be able to distribute their funds directly much longer, Moran said. Even the largest direct-selling companies, such as Janus of Denver, Colo., are branching out into other distribution channels besides the direct one. Janus is selling to fee-based advisors through supermarkets and to broker/dealers through wrap programs, Moran said.

"I don't see the no-load channel being a long-term option," Moran said.

Moran does believe that the Internet will mostly be used to service shareholders or to as a marketing vehicle rather than as a sales channel .