Personal Business: Mutual Funds
SHOULD YOU BUY YOUR NO-LOAD FROM A TITAN?
It all started with a press release on July 20, 1992. That day, the king of discount brokerages, Charles Schwab, said it was eliminating transaction fees on the sale of mutual funds from 10 no-load companies. A year later, Schwab had amassed $4 billion in the program and announced plans to expand to 200 funds. The same month, mutual-fund giant Fidelity Investments returned fire, launching a no-transaction-fee program that added eight fund families to a lineup dominated by its own no-loads.
The media battle has only intensified since then. On May 9, Fidelity added 198 funds from 10 families and upgraded its auxiliary literature on investments. "We've tried to take a good idea and improve on it by offering more top-performing funds," says Roger Servison, managing director of Fidelity Investments. On May 16, Schwab began offering 86 more funds from 16 families to its institutional clients. And investors can expect more announcements to come. "This hasn't been played out completely yet," says Charles Schwab.
SUBTLE DIFFERENCES. Fidelity's FundsNetwork now includes 327 funds for no transaction fee plus 1,600 for a sales charge. Schwab's no-transaction-fee OneSource plan is up to 254 funds, although nearly 500 more funds are available for a fee. But despite all the advertising hoopla, does one industry titan's no-fee program have it over the other? Both serve investors well--not simply because they waive transaction fees but because they make it easier to manage a portfolio of funds from different families. Both offer a single statement, one phone number to call, an easy way to switch among funds, and cash-management accounts.
Freed from a barrage of statements from different funds, investors with sizable holdings can concentrate on creating a diversified portfolio and monitoring it, says Don Phillips, vice-president of Morningstar, the Chicago fund-rating and research service. All you do is fill out a transfer form and let the brokerages take care of consolidating the funds you already own--even if they're not in the program--into one account. But don't sign on thinking you can trade at will for free: Both Schwab and Fidelity start charging transaction fees after the fourth short-term redemption (from any fund held less than six months) in your account in a 12-month period.
The differences in the two programs tend to be subtle. First, they do not share the same fund lineup. Schwab's no-fee list includes some excellent companies, such as INVESCO Funds Group and Twentieth Century, that have not joined with Fidelity because they view it as a rival. Fidelity has a potential conflict of interest in that it sells its own no-load funds side-by-side with its competitors'. But there is no sign that Fidelity pushes its funds over those of other groups, and 31 fund families have proved willing to overlook the possible conflict.
For obvious reasons, Fidelity does not permit Schwab to offer its funds for no-transaction fee. "For me, that is the biggest difference between the two programs," says Avi Nachmany, an analyst with Strategic Insight, a mutual fund research and consulting firm in New York. "If you want to have part of your portfolio managed by Fidelity, you can't get it for no-fee through OneSource." However, Fidelity only offers 86 of its 202 funds without a transaction fee, so if you want to buy one of its low-loads, you still must pay around a 3% sales charge.
As far as customer service goes, both Schwab and Fidelity have 24-hour 800 numbers, trading via computer, and a wealth of materials to help you make selections, some of them for a small charge. Fidelity, however, has just brought out a performance directory for mutual funds that is more user-friendly than Schwab's. With it, Fidelity has created an Investment Planner workbook that explains how to invest across asset classes to minimize risk and meet long-term goals. Fidelity also offers software on investing in overseas markets, retirement planning and asset allocation. But Schwab believes investors don't need all these glossy materials and software packages. "They are just making investing more complicated," says Hugo Quackenbush, senior vice-president at Charles Schwab. "You don't need software to tell you how much you can have in equities."
LOCATION, LOCATION. Both Schwab and Fidelity have offices replete with trained representatives, free materials, and computers that provide historical data and current share prices. Fidelity, however, has only 77 branches, while Schwab operates 202. Fidelity seeks "quality and not quantity" in its investor centers, says Servison, but if you like to do business face-to-face, you should see which company has an office located near you.
Indeed, Schwab's and Fidelity's programs are so similar and so good that choosing between them is the least of your worries, says Nachmany. "Both satisfy a wide range of financial needs, and most fund companies will eventually be on both programs," he predicts.
But you may not want to be in either. Phillips points out that many people could use the advice of a full-service broker or a financial planner, which they will have to pay for. And even for people who want to stick to no-loads, the programs have their limitations. The fund families pay the two brokerages .25% of assets a year to maintain the accounts. So when you buy a fund through Fidelity or Schwab, you give up a direct relationship with the funds. Although you still receive the legally required mailings, such as the annual reports, you may miss out on the shareholder newsletters. Also, if you want to move part of your portfolio into cash, you are limited to using Schwab and Fidelity money market funds, neither of which have the top-performing funds in this category.
Another drawback is that several of the largest and most respected fund companies haven't signed onto either no-fee program. Such holdouts as Scudder, Vanguard, and T. Rowe Price want to maintain customer loyalty and feel Fidelity and Schwab make it too easy for people to hop from family to family. But they may have to come around. "We're watching this closely," says Steven Norwitz, vice-president at T. Rowe Price. "We haven't ruled it out forever."
Of course, while the no-fee programs leave out many top-performing funds, Schwab and Fidelity offer excellent lineups with good choices in all asset classes. Investors may find it easier to choose among hundreds instead of thousands of funds. "A way of limiting the number of funds and screening down to a more manageable search can be a blessing," says Phillips. Other seeming limitations are not so bad, either. For one thing, most people are glad to be rid of all the mailings from separate funds.
HOMEWORK REQUIRED. When choosing a fund, first decide on the asset category, says Maria Crawford Scott, editor of the AAII Journal of the American Association of Individual Investors. Then study the ones with the best long-term records. If one of the funds is included in the no-fee program, great. If not, you can probably still get it through Schwab and Fidelity. You just have to pay the fee--around $30 for a $5,000 no-load investment at Schwab, and $57.50 for a comparable purchase at Fidelity. Discount brokerages Jack White, Muriel Siebert, and Waterhouse Securities also have no-transaction fee programs. But these smaller companies don't have all the extras that the two giants offer.
For now, there is no clear victor in this contest between industry giants--except for the individual investor who can reap the benefits of their ever-improving programs. Let the battle rage on.
-- Sells 327 no-fee funds from 32 families including Fidelity.
-- 77 branch offices.
-- $20 annual fee is waived for brokerage account IRAs in mutual funds of
more than $5,000.
-- Offers asset allocation tools, fund performance directory, and reports
from Lipper and Morningstar ($4.95 each); also software on retirement
planning and international investing.
-- For investing less than $10,000 in an outside fund, the fee is $17.50
plus 0.8% of assets or a $28 minimum.
CHARLES SCHWAB'S ONESOURCE
-- Offers 254 funds from 27 families with no transaction fees.
-- 202 branch offices.
-- $22 annual fee is waived for all individual retirement accounts of more
-- Offers free quarterly mutual fund performance guide and quarterly "select" list of top-performing funds. Morningstar reports and on-line data are available for a fee.
EFor funds not in program, the fee for purchases of less than $15,000 is 0.6% of assets or a minimum of $29.
DATA: COMPANY REPORTSTABLE: BROKERAGES SELLING NO-FEE FUNDS
Company Number Minimum
of Funds Investment*
CHARLES SCHWAB 254 NONE
FIDELITY INVESTMENTS 327 NONE
JACK WHITE 377 $250
MURIEL SIEBERT 327 $5,000
WATERHOUSE SECURITIES 150 NONE
*Individual funds may have minimums DATA: BUSINESS WEEK
Amey Stone EDITED BY AMY DUNKIN