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Load Funds Consider Online No-Load Shares


As the mutual fund industry increases its focus on meeting a variety of investors' needs, load firms are facing the challenge of how to offer the convenience of direct online sales without threatening the relationships they have with intermediaries, according to fund executives and analysts.

It is generally assumed that direct sales channels like the Internet pose a threat to financial intermediaries, said Steve Cummings, director of research for Financial Research Corporation of Boston. Most load funds are hesitant to offer a no-load fund or share class because they do not want to make any move that would be perceived by intermediaries as a threat to their role, Cummings said.

"It's a pent-up and long-entertained presumption that it's just death to make such a move, but the Internet just changes everything and more firms will do it and the first time that a well-known, larger firm does, it will mark a turning point," he said.

GE Financial of New York is one of the few, if not the only, load firms to begin offering a no-load class, said Cummings. In February, it announced it would offer no-load shares of its funds directly, online. The move raised some concerns among the firm's brokers that the direct sales would cut into their sales, but the firm allayed initial concerns by explaining its strategy of increasing its name recognition by offering the no-load funds, said Tim Benedict, a spokesperson for GE Funds.

Long before it launched the no-load share class, the firm explained its strategy to brokers and advisors, he said. The launch of the shares coincided with the firm's move into the retail market, he said. GE Funds wanted to offer investors the most convenient method of purchasing its funds, Benedict said.

"We assured [the intermediaries] that this doesn't mean that we are no longer committed to them," he said. "We were reassuring them that this is a move to create better awareness of our funds."

The intermediaries primarily questioned why customers would want to buy more expensive funds from an adviser when they could just as easily purchase a no-load version online, Benedict said. The firm's intermediaries include Paine Webber Group of New York, AG Edwards of St. Louis, Mo. and Chase Securities of New York.

The funds are also sold online on the GE Financial Network. The funds' website conveys the message that the value of advisors is the guidance they provide, Benedict said. It does so by only providing basic information and steering investors to advisors for analysis.

In any case, there is little crossover between self-directed investors who buy shares online without an advisor and those who seek advice, Benedict said.

Since February, when shares became available directly, sales have been "robust," Benedict said. He declined to disclose sales figures.

Other firms are likely to follow GE's lead, said Cummings.