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The Big Boys Finally Say `Yes' To No Loads


Finance: MUTUAL FUNDS

THE BIG BOYS FINALLY SAY `YES' TO NO-LOADS

It's almost as if Coca-Cola had started pushing Pepsi on the side. The biggest Wall Street brokerage firms, for years the champions of mutual funds loaded with pricey sales charges, are about to dive into the no-load world.

Smith Barney Inc., the nation's second-largest broker, plans to offer an array of no-load funds next year alongside the regular lineup of load funds. Merrill Lynch & Co. is expected to trot out a similar plan, but officials there insist no decision has been made. And Prudential Securities Inc. rolled out a no-load plan in early September.

More brokers are sure to jump in, and their moves could reshape the mutual-fund industry, fusing load and no-load funds into one giant marketplace, with investors the big beneficiaries. Up-front loads, paid at the time of purchase, have already come down from 8.5% in the early 1980s to the 4%-to-5% range and will drop further. "Back-end" loads, paid if funds are sold before preset times, should fall, too. That doesn't mean an investor will be able to buy no-loads through a full-service broker without paying anything. Instead of a hefty load, investors will pay the broker a small annual fee based on the value of his funds.

ONE-STOP SHOPPING. Several trends are forcing the giant brokers to revamp. Investors are resisting sales charges. According to industry figures, no-load or "direct-marketed" funds grabbed 45% of sales last year, up from 31% in 1988. "The public has been told by the media that paying loads is a dumb thing," says analyst Guy Moszkowski of Sanford C. Bernstein & Co. Indeed, the evidence shows that paying a load doesn't necessarily deliver better performance.

Discount brokers are also adding to the popularity of no-load funds. Discounters such as Charles Schwab,

Fidelity Brokerage Services, and Jack White offer one-stop shopping, making hundreds of no-load funds accessible with one phone call and consolidating all reporting on one statement. Investors may pay only a small transaction fee, or sometimes, no fee at all. The discounters can offer fee-less investing because the fund companies pay them about 0.25% a year on the assets they bring in.

This centralized fund mart has been a huge success. Before, investing in five no-load funds run by five companies meant five phone numbers, five accounts, and a blizzard of paper. Schwab, with its Mutual Fund Marketplace, pioneered the idea. It now has $46.5 billion in assets (chart). Fidelity Funds Network, which offers its own and others' funds, has $20 billion. Jack White, the next largest, has $3 billion.

The big brokerage firms are fighting on two fronts to get the no-load business. Smith Barney and others plan to offer the no-loads as part of "wrap" programs. These mutual-fund wrap plans waive the loads but levy an annual asset-based fee, likely between 1% and 2%, for such services as selecting funds, monitoring performance, and providing reports. Neil Bathon, president of Financial Research Corp., says asset-based fees remove a potential conflict-of-interest. With loads, brokers may be tempted to select the funds which pay them the most. With asset-based fees, there's no such allure.

NEW OPPORTUNITY. The other strategy is to get existing and new clients to move their no-load funds into a central account that the brokerage firm will manage for a fee--the amount of which has not yet been determined. "Many come to us with funds purchased elsewhere, and we have to be able to give them advice," says Jay Mandelbaum, Smith Barney's director of retail marketing.

Discount brokers don't provide advice on which funds to buy, but thousands of independent investment advisers do, utilizing the discounters' mutual-fund networks. Says Timothy F. McCarthy, Schwab's executive vice-president in charge of mutual funds: "The full-service firms won't be able to compete with our advisers, who have lower costs."

As the major brokers turn toward no-loads, the big load-fund companies, like Alliance Capital, Franklin, and Putnam, will have to offer no-loads, too. "We'll get a crack at investors who would never consider a load fund," says Greg Johnson, president of Franklin/Templeton Distributors Inc. Alliance and Putnam now provide funds without loads to professionally managed accounts. William N. Shiebler, senior managing director of Putnam Cos., says companies like his will eventually sell direct to do-it-yourselfers, too. But, he adds, "most people will want advice."

It will take some time to see if the big brokerages can capture a big chunk of the no-load business. But no matter who prevails in the mutual-fund melee, the investor wins.By Jeffrey M. Laderman in New York


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