For most of the 1990s, no-load mutual funds had no trouble selling directly to individual investors. But that was during a raging bull market. These days, mutual fund companies' phones have gone quiet, and the money has stopped rolling in. As a result, some companies have decided that the best way to attract new investors is to pay brokers and advisors to bring them in.
The latest mutual fund company to back off no-load funds is Invesco Funds Group of Denver. The company will close its 30 no-load funds to new investment on March 1. Credit Suisse Asset Management shut down its no-load offerings in late 2001.
Since 2000, the ranks of companies that have stopped selling directly to investors or that have expanded their advisor-class share offerings have swollen to include Zurich Scudder, T. Rowe Price, Janus, Strong Capital Management, Liberty Funds and American Century. Fidelity Investments started bulking up its intermediary-sold funds several years ago.
Charles Meloro, vice president of Emerald Advisers', a Lancaster, Pa.-based money manager, says the reason for the shift is simple. “Mutual fund companies are admitting, ‘People aren't calling me. They are in a panic. How else am I going to get any product in front of the retail investor?’ Well, the only way to do it is for the broker to get paid.”
The move to advisor sales may also help fund companies meet the changing demands of consumers. Fund executives believe that investors will continue to seek more advice. The growing complexity of the aging baby-boomers' financial needs is one reason. As that generation continues to inch closer to retirement, more and more will seek guidance about where they should put their life savings.
“As people get wealthier, they get less comfortable in managing their own money,” says Bill Glavin, president of Scudder's U.S. retail business.
A Big Payoff
It works too. Consider that Invesco only raised $15 million in new assets from selling directly to retail investors through November of 2001; that compares to the $200 million in new assets brought to the fund company by financial intermediaries. And Strong, which used to cater directly to individuals, raised more than half of its new assets via financial advisors in the first 11 months of 2001.
Jim Tambone, co-president of Liberty Funds Distributor, says that there are simply more opportunities in the load-fund arena. “The traditional intermediary market is significantly larger than the traditional direct market,” says Tambone, whose company bought the no-load Acorn fund family in November 2000 and switched it to load.
Since the Liberty Acorn funds have gone load, the company has doubled its sales. In 1998 and 1999, sales were not more than $1 billion a year. Tambone says sales for the first 10 months of 2000 (before Acorn was bought) were about $1.25 billion. For 2001, Tambone says sales were set to come in at more than $2.25 billion.
Still, “I wouldn't ring a death knell for the no-load industry, that's for sure,” says Scott Cooley, editor of Morningstar Mutual Funds.
But even the top players in directly-marketed funds are bulking up on advisor products. T. Rowe Price, which has about 80 retail funds, launched its advisor class in March 2000 and, not surprisingly, is currently looking to expand its third-party distribution channels.
Janus, traditionally a direct-to-investor fund company, introduced its advisor series in August 2000. A spokeswoman says Janus has seen a greater interest in its advisor series lately. She says its advisor funds are not traditional load funds since investors are not charged an up-front or back-end fee, but a 12b-1 fee.
Out of Fidelity's 300 funds, only 50 are load funds, but a spokesman says the fund company has been expanding its advisor line over the last few years.
Vanguard, of course, is the exception. The company, famously anti-faddish, has only no-load funds and doesn't plan to adopt advisor-class funds soon.
Liberty's Tambone says that while no decision has been made, the company is going to look at its traditionally direct-to-consumer Stein Roe fund family to “reassess our business strategies.”
“I do believe there is a trend and it will last as long as the opportunity is greater for one side than the other,” Tambone says. Until that changes, more fund companies will be looking for more brokers.