Online Stock-Trading Frenzy Bypasses Mutual Funds

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Start the online trading revolution without mutual fund investors.

True to their reputation as cautious, long-term types, fund investors have been slower to buy and sell shares on the Internet than investors who trade in stocks directly.

Many fund shareholders are hooked up to the Net, all right, and they’re visiting funds’ Web sites to look over information and check their accounts. Evidently, they’re just not quite ready to trade on the Web right away.

“In contrast to the popularity of online stock trading, evidence shows that online mutual fund investing has not yet become a mainstream activity,” said the Boston financial consulting firm of Cerulli Associates Inc. in its newsletter The Cerulli Edge.

Cerulli cites studies done in each of the past four years by American Century Investments, a Kansas City, Mo., fund firm that manages $100 billion in assets.

American Century found that 42 percent of the people surveyed in 1999 said they had visited a fund company Web site, compared with 28 percent in ’96. Almost half said they had checked fund prices on the Web; more than a third said they had checked their account balances and downloaded a fund prospectus.

Yet the number of people who said they had bought or sold fund shares online didn’t grow at all. Six percent of the 1999 survey respondents said they had bought funds online, down from 8 percent the previous year and 7 percent in 1997, when the question was first asked. Eight percent said they had sold or redeemed funds online, against 5 percent in ’98 and 8 percent in ’97.

By contrast, 54 percent of those responding to the survey bought consumer items via the Net last year, up from 18 percent three years earlier.

What gives? One seemingly logical explanation would be worries about privacy and security on the Web. But the survey asked people about this, and only 37 percent said they had security or privacy concerns, half the number who cited those misgivings two years earlier.

Thirty eight percent said they had no concerns at all about doing fund transactions on the Internet, up from 11 percent in 1997. Reliability doubts? Only 8 percent said so. Prefer a personal touch? Only 5 percent.

So the explanation seems to be that many fund investors just don’t see any reason to switch to buying and selling on their computer screens from the way they operate now doing business through an adviser or broker, or placing orders through a toll-free telephone line.

Funds normally are priced just once a day, at 4 p.m. New York time. So the only reason for any urgency about getting in a buy or sell order during the day is to stay ahead of the deadline, which varies from one fund to another, for orders to be executed at that day’s closing price.

“You don’t need the speed,” said Russel Kinnel, mutual fund editor at Morningstar Inc., the Chicago-based fund research firm. Even so, said Kinnel, “I still think that one way or another it’s going to happen.”

One indication that he’s right: At Charles Schwab & Co., where many financial planners and individual investors buy and sell funds, about half of all fund transactions are now done online, according to spokesman Morrison Schafroth. That’s only slightly less than the percentage of stock orders that Schwab handles online, he said.

Fund companies have a big incentive to encourage their clientele to use the Web. Each contact with an investor via a telephone service representative costs a typical fund company about $10, while a Web site contact costs about 50 cents, Cerulli said.

“The industry is at a crossroad,” Cerulli’s report concluded. “Fund firms have recognized the Internet as a powerful force affecting change, but they have not yet mapped out a course that harnesses the potential of the new technology.”

Chet Currier is a columnist for Bloomberg News.

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