Fund Firms Keep Customers by Expanding the Menu

A Premium for Advice

The biggest key to keeping margins high and assets steady at fund companies is customer retention. But while creating a one-stop shopping market for funds certainly helps, fund companies have been actively looking for other ways of minimizing outflows and drawing in new customers.

To that end, the emergence of separately managed accounts will certainly continue to grow in 2003.

Separately managed accounts, with which individuals own a portfolio of stocks that ape a popular fund, help keep big-money customers in house. Because these accounts come with several advantages -- such as finessing the purchase or sale of stocks that best fits your tax picture, as well as the personalized advice on all portfolio management decisions -- the minimum for such accounts is generally in the vicinity of $1 million. And that's money the fund companies don't want to lose.

"Fund companies have been tracking the termination of their accounts," says Don Cassidy, a senior research analyst with Lipper, a Reuters company. "And they've noticed a lot of six-figure accounts leaving."

Moving downscale doesn't mean the need for advice wanes, though. And because more investors seem to be turning to financial planners for help with their portfolio management, fund companies have increased the number of load funds (those that come with a sales charge when purchased or sold). Financial planners generally sell only load funds, because that's how most make their fees. (So-called fee-only planners charge for their time and advice only, and they don't skim their fees from your investments.)

Fidelity Investments and T. Rowe Price, for instance, are two powerhouse fund families that used to sell almost exclusively direct to the investor. Both, though, have recently rolled out an "advisor" class that's sold through financial planners.

Look for smaller fund shops to follow suit in 2003.