May 29, 2000
WASHINGTON - The Internet has made it easy for investors to buy stocks, bonds and mutual funds for themselves directly, but the Internet has not undermined the importance of investment advice from mutual fund companies and their distributors, said executives speaking at the Investment Company Institute's annual general meeting here earlier this month.
In fact, the Internet has only raised the standards for advice and has made investors all the more willing to pay for quality advice, speakers said.
"Advice is becoming much more important to investors, as the number of investment alternatives - common stocks, funds, annuity products, exchange-traded funds, index funds and new synthetic investments - has exploded," said William Lyons, president and chief operating officer of American Century Investments of Kansas City, Mo. "The expansion of choice drives the need for advice. Data and information about all of these products has exploded, making investors much more sophisticated" and demanding of advice, at least at a basic level over the Internet, Lyons said.
One-third of all U.S. financial service firms now offer free investment advice over the Internet, and by the end of this year, that will grow by another 50 percent, to more than 83 percent of all U.S. financial service firms offering free online advice, said John Rekenthaler, research director of Morningstar of Chicago.
However, the growth of free, online advice has in no way eliminated the need for personal, face-to-face, fee-based advice from a fund company and its distributors, speakers said.
If anything, the widespread availability of rudimentary information and advice over the Internet has empowered investors to ask more difficult questions of their financial planners, speakers said. And the existence of better-educated investors has dramatically raised the bar on the type of advice these investors expect from their fund companies and distributors, speakers said.
In fact, the availability of basic advice online has made it more apparent to "the great mass of people that they have not been served by advice," Rekenthaler said. Free, online advice is only driving up their curiosity for quality, personalized investment plans, Rekenthaler said.
"Because consumers have more need for advice than ever before, financial advisors will still rule the roost," Rekenthaler said. "Online advice will simply fill the gap and push advisors to adapt their roles" to answer more difficult and comprehensive questions about investors' entire financial lives, he said.
"Advice is the high ground, the place where a financial firm can still differentiate itself," Lyons said.
"We are not interested in competing in the commoditized, transactional, online part of the business, when the relationship side is working so well," said Arthur Grant, president of Cadaret, Grant & Co., a broker/dealer in Syracuse, N.Y. Grant said his firm's revenues have increased 20 percent a year for the past five years, and topped 30 percent in 1999.
"Our income has been strong during all this noise about e-trading and investors who want to do it themselves," Grant said.
Advice will become so important that even the Department of Labor will permit plan sponsors of 401(k) and other types of defined contribution plans to provide true advice, rather than what is now defined as "education," said David Sturms, a partner with Vedder, Price, Kaufman & Kammholz of Washington, D.C.