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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 18, 2000 PERSPECTIVE By Geoffrey Smith Is "the End of Mutual-Fund Dominance" Approaching? Hardly. Predictions that the Web financial-services revolution will knock the vast fund industry for a loop are greatly exaggerated
Their innovations have brought us to the point where one of the country's top technology consulting companies has come out with a startling prediction. Forrester Research, in Cambridge, Mass., says alternative investing methods now on the Web will result in "the end of mutual-fund dominance." Forrester predicts that over the next decade, more than $1 trillion will exit mutual funds, and new investing methods will capture half of all new assets. GROWING LIKE WEEDS. It's not going to happen. Pundits have been predicting the demise of mutual funds for years. Sure, the industry's problems have some investors eager for reform. But fund companies have shown an uncanny ability to respond to competitive threats and have grown like weeds as a result. Besides, the numbers don't support Forrester's claim. The mutual-fund industry has more than $7 trillion in assets. While the industry's growth will probably slow from its 21.4% average annual clip during the 1990s, the loss of a mere $1 trillion over the next decade would hardly put a dent in the industry's overflowing coffers. Even at a 10% growth rate, it would still reach $18 trillion in 10 years. Optimism about alternative online-investing products isn't entirely unfounded. As Forrester points out, financial-services dot-coms provide a growing variety of ways for investors to manage their money: *Web sites such as ShareBuilder and GEFN.com let investors buy individual stocks for as little as $20 a month. *Netfolio and FOLIO have investors, in effect, build their own mutual funds by picking a basket of stocks. *myMoneyPro.com and RunMoney give investors with at least $50,000 access to professional money managers at low rates, about 1.75% of assets under management. *Numerous small Web sites run by self-styled experts offer individual investors advice on where to find good stocks. Some of these "experts" are simply frauds, but others are investing veterans. All of these trends have the potential to create significant niche markets. The Netfolio/FOLIO model may hold the most promise. It could catch on with more investors if the system is adopted by enterprising online-brokerage firms eager to expand their offerings. It could also get a boost if, as Forrester expects, the technology is adopted by 401(k) plans. Consider, too, that online brokers are making it much easier to manage money through a brokerage account by supplying increasingly sophisticated tools for analyzing stocks and evaluating portfolios. Account aggregation, still in its infancy, holds enormous potential, as well. Investors can use the technology to view assets held in different institutions and perform computerized analysis of the holdings -- even on a cell phone or personal digital assistant. Add these up, and the online threat to mutual funds is undoubtedly real. But the fund industry can, and will, play the same game. When Merrill Lynch introduced its revolutionary cash-management account in the 1970s, the fund industry started letting investors write checks against their money-market assets. More recently, when brokerage firms started coming out with investment vehicles such as exchange-traded funds, some mutual-fund companies quickly jumped into the fray with offerings of their own. If any of the new online-investing strategies turn out to be big business, you can bet the fund industry will be there, too. What are you views on alternatives to mutual funds available on the Web? Send me an e-mail: geoff_smith@businessweek.com.  Smith covers a wide variety of topics, including personal finance issues, from Business Week's Boston bureau  | | |
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