ING Direct's New Fund Offering Puzzles Pundits
December 17, 2001
ING Direct's recent announcement that it would begin offering mutual funds has left analysts wondering what exactly the online bank has in mind.
Between ING's Aetna funds and Pilgrim funds, the bank had nearly 60 mutual funds to choose from, yet decided on offering only six. While the bank maintains that it just wants to keep things simple, some analysts think the move might be a test run for a greater initiative down the line.
The fact that ING has begun offering funds through its online bank at all is somewhat contrary to the direction the industry is going, said Scott Cooley, a senior analyst at Morningstar. ING Direct is a strictly online bank that offers bank products with no fees and with generally higher interest rates, but doesn't have actual bank branches. The firm's funds are a new class of no-load shares attached to six ING Aetna funds. The new class, called O-shares, will be sold through a new product called the Orange Investment Account.
Online sales for mutual funds have been fairly unsuccessful across the board compared to what was expected several years ago, Cooley said. Also, with the prolonged down market, investors are increasingly abandoning the do-it-yourself approach and are seeking investment advice more than ever before. ING Direct's new initiative, selling funds online and direct, flies in the face of both trends.
"I don't really expect a large amount of assets to come in from direct online banking customers," said Lee Kowarski, an analyst at kasina an e-business consulting firm based in New York. Not only have online sales been a disappointment for funds, but specifically for bank-sold funds, there are few online success stories. Banks have not done very well selling mutual funds in general, either. Banks market share of fund sales dropped from 19% in 1992 to 10% at the end of 2000, according to Cerulli Associates. As a result, banks have not made selling investment products online a priority, and few have stuck out early initiatives, said Margaret Quinn, senior analyst at the Online Banking Report, an independently published monthly newsletter.
What might be behind ING Direct's new initiative could be the firm's belief that its customer pool of more than 300,000 is different from the norm, said Quinn. Individuals who are willing to do their banking solely online might be more likely to buy mutual funds online, she said. Also, firms are moving toward the notion that they have to offer everything to everyone and be a "one-stop shop" in order to compete, said Cooley.
ING Direct chose to offer six funds because its business strategy revolves around very simple, low cost products, said Tom Deck, president of ING Securities. The six ING Aetna funds include a large-, mid- and small-cap index fund, a bond fund, an international fund and a technology fund, and they offer investors the opportunity of creating a balanced portfolio, he said.
"Our goal is simplifying financial products," said Deck. "Offering thousands of funds is too complicated. We chose six that should capture most investors' needs. We have the ability [to offer more], but it would be inconsistent to offer 50 funds; we have one savings account, one loan offering."
However, investors tend to want more of a selection of mutual funds than savings accounts. The initiative looks to be a trial to see how it works out before making a larger commitment, Cooley said.
"I think they're testing the waters," said Kowarski. "I think they want to see if the funds will take off. They can always expand, but they probably didn't want to add share classes to every one of the funds yet."
That theory is supported by last week's announcement by ING Direct in Canada. Although a separately operated unit, the bank has very similar business strategies to its U.S. counterpart, according to a company spokeswoman. Three years ago, ING Direct in Canada began offering three mutual funds. On Wednesday, the bank announced that it was teaming up with ING Canada to add their funds to the lineup, bringing the total to 22.
"Basically, the investors who were buying our funds wanted more choice," a company spokeswoman said.
According to Deck, the firm has not ruled out adding funds to the lineup in the future if the current six sell well, but the six were chosen very deliberately, and he believes that they will be sufficient.
ING Direct will send out an e-mail to its customers about the funds and will promote the new offering in its newsletter to customers, the spokeswoman said.
It was speculated that Aeltus Investment Management, advisor to the Aetna Funds, was pushing the initiative and wanted the online bank to offer the funds. However, according to Deck, it was the bank that sought out the products.
Coming out with this offering is strange because of the lack of success of getting people buy funds online, and the firm is being somewhat cautious by starting with six, said Cooley, but the bank anticipates success.