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Online-Only Shares Could Force Down Fund Fees

The industry has been slow to embrace e-shares, but they're coming anyway.

Online stock investing couldn't be hotter.

How many readers of

TheStreet.com

are going to pay full freight with a full-service broker when they can make a trade with

Datek

for $9.99?

But the mutual fund industry, for all the dough it has pumped into the Internet, hasn't exactly been a hotbed of innovation in bringing the same pricing efficiencies to online fund sales.

Sure, you can buy all the funds you want online at all the big fund families and the fund supermarkets. But pricing is another matter.

In the alphabet soup that is mutual fund pricing, you can buy A shares and B shares, C shares and D shares. Heck, you can even buy I, O, T, Y and Z shares.

What's missing -- and what is just beginning to create a buzz -- is E shares, as in electronic trading, as in the Web.

And why not e-shares? Why not a special class of shares that would be sold exclusively over the Internet with reduced fees to reflect the reduced costs?

It's not a topic even

Vanguard Group

, the most cheapskate fund company around, is beating the doors down to offer.

"Vanguard's expense ratios are among the lowest in the industry and we have no plans to offer lower-priced e-shares for the foreseeable future," says a Vanguard spokesman.

Fidelity Investments

also says it has no such plans.

But the idea of offering reduced-cost e-shares is starting to gain some altitude in the industry. In an overcrowded business where competitors are constantly trying to differentiate themselves, and in a world where all things seem possible on the Web, you can bet this is going to happen sooner, not later.

Ray Liberatore, an analyst with

Financial Research Corp.

in Boston, says

Jones & Babson

is close to offering an Internet-class of funds through its Web site.

American Century Investments

also is contemplating a similar offering, he said.

"The question is whether the Internet is going to become a channel for distribution in itself," Liberatore says. FRC is betting it will.

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The main reason e-shares are on the way to a fund company near you is that customers are waiting. The concept would appeal to the fastest-growing segment of investors -- online investors -- and to those who don't use brokers.

The idea would be to offer reduced fees for classes of funds sold only on the Web in return for the reduced costs of cutting out all the paper, postage and calls that go with most fund investing. Securities regulators have already signed off on online communications as long as customers agree to receive documents by email.

The big question: Are the savings there?

There are some experiments already underway that should provide some answers. In Canada,

Charles Schwab

(SCH)

recently began offering customers three levels of service -- online, discount and full-service -- each with its own fee schedule, says

Cerulli Associates

, the Boston-based consulting firm. In addition, Schwab has sold a limited number of e-shares for its

S&P 500

fund to institutions and retirement plans, and

E*Trade

offers an e-shares-only

S&P 500

index fund.

Insurers are actually ahead of the fund companies on this score. A number of insurance companies already are selling annuities, which are mutual funds sold in an insurance wrapper, with special e-prices.

Lincoln National Life Insurance

of Fort Wayne, Ind., offers an e-annuity and has a supermarket at

AnnuityNet.com

. Boston-based

Keyport

, a unit of

Liberty Financial

(L) - Get Loews Corporation (L) Report

, also offers an e-annuity.

The last thing mutual fund investors need is more confusion over pricing. But e-shares are on the way -- and this time a new class of funds could actually force mutual fund fees down, which would be a refreshing change.

Steven Syre & Steve Bailey write for the Boston Globe. This column is exclusive to TheStreet.com. At time of publication, they held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy stocks or funds.