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Funds Raise Minimums to Lower Costs


In a seemingly counterintuitive move, the mutual fund industry has been raising the minimums needed to open an account, rather than lowering them to snag new investors.

Data from Morningstar of Chicago shows that the number of funds requiring minimums of $1,000 fell nearly 10% between Dec. 1999 and March 2002. And from 1997 to 2001, 719 funds raised their minimums, while only 521 lowered them.

Savings may be the chief reason - it costs the same for an investment company to manage a $20 account as it does a $200,000 account. However, the change is hurting planners with younger or less-affluent clients.

Planners Pinched

"We've noticed a trend," said Sheryl Garrett, a fee-only planner in Shawnee, Kan., with a strong commitment to a middle-class clientele. "Low-minimum funds are becoming harder to find," especially the no-load funds essential for a fee-only practice.

Also becoming rarer are firms willing to manage Education IRAs and Simple IRAs, Garrett said. "They told me it was too much paperwork for too little money," she said, although she would be willing to accept fees to offset the administrative work until the accounts reached a certain size.

Garrett said this problem could hit even planners with high-net-worth clients. "They could send their adult children to you," she said. "What are you going to do with a recent college grad with little to invest - and you don't want to disappoint his parents?"

Even commission-based planners, who typically can better cater to lower-income investors, are feeling the pinch.

"A lot of our reps have voiced concern," said Carlo Bidone, a senior account executive at Investacorp in Miami Lakes, Fla. "We try to keep our minimums low; we have a lot of smaller clients," Bidone said.

Some reps have been handling some clients virtually for free, recommending no-load funds to them, just to maintain their business. Bidone was especially concerned because he said firms like his are important to small investors, since wirehouses are usually dismissive of them.

Elitist Move?

But Don Phillips, managing director of Morningstar, defended the actions taken by the funds. Although expressing sympathy for small investors, he said higher minimums could be a good thing.

"The funds are responding to the market and recognizing it costs the same to service big and small accounts. This is not an elitist move," Phillips said.

Recalling one small account at a no-minimum fund, Phillips said, "The investor would call up and want to transfer pennies from one fund to another because of an upcoming G7 meeting."

Phillips stressed that there are options for smaller investors. Some funds will waive minimums for investors who agree to deposit $50 directly out of each paycheck, he noted. "They're willing to meet you halfway," he said.

Garrett said she starts out some smaller clients in a TIAA-CREF index fund, and diversifies when the account gets large enough. TIAA-CREF of New York, Janus of Denver and T. Rowe Price of Baltimore typically have served small accounts with a reasonable service fee. She also mentioned a service called ShareBuilder, which allows small investors to buy into individual stocks and funds with no minimums and no inactivity fees.