EDWARD MCCLUNEY IS LOOKING FOR INVESTMENT options. With the stock market off its peak--at the beginning of March, the Nasdaq composite index hit a two-year low--the Arlington, Massachusetts, actor and performing arts instructor is looking for defensive plays and diversification. He hopes to find them shopping at a mutual fund supermarket.
McCluney shops at the Fidelity FundsNetwork, which provides him with a vast array of choices. "In addition to Fidelity funds, I can buy stocks, from Nokia (NYSE: NOK) to Microsoft (Nasdaq: MSFT), at the same Website," he says. "I might put some money into mutual funds from companies besides Fidelity. If the funds are available at Fidelity's Website, that's where I'll buy them."
Today, investors like McCluney can engage in one-stop shopping through dozens of fund supermarkets. The convenience of purchasing multiple vehicles through one phone number or at one Website has enabled many to adopt a seamless and stress-reduced way of building a mutual fund portfolio.
Supermarkets bring ease to making selections among the multitude of funds with different investment styles, objectives, and costs. Says Scott Cooley, a senior analyst at Morningstar Inc. in Chicago: "Some small fund families might not have survived if they couldn't reach investors through supermarkets. Investors gain, too, because they may have access to funds that are sold mainly to institutions. In addition, some top funds have much smaller minimum investments, perhaps $2,500 rather than $25,000, when sold through supermarkets."
Another reason to go to a mutual fund supermarket is you can reduce cumbersome paperwork, which can come in handy when monitoring performance and fees as well as getting prepared for tax season. For example, if you bought a vehicle from the Vanguard, Janus, Dreyfus, and T. Rowe Price families of funds, you would receive four different statements. Through a supermarket, you would receive one consolidated statement. When you sell a fund you have to report a gain or loss; some supermarkets help you to determine your "cost basis," or cost, for tax purposes. You're less likely to overpay your taxes if you have accurate information. "When you're shopping for a supermarket," says Jeff Lyons, executive vice president of mutual funds at Charles Schwab & Co., "look for a supermarket that provides timely tax information to make it easier for investors to prepare their returns."
McCluney is a fan of such convenience. "It's easy, inexpensive, and convenient. I don't have to call a broker for an appointment," he says. "Everything is reported on one statement, which makes it handy for keeping track of my investments. In addition, income tax preparation is much simpler with the annual summary I receive."
A BRIEF HISTORY
The first mutual fund supermarket emerged in the 1980s when discount broker Charles Schwab & Co. introduced its Mutual Fund Marketplace. "You could buy no-load funds from many different families through Schwab," says Chip Roame, managing principal of Tiburon Strategic Advisors, a Tiburon, California-based consulting firm specializing in the financial services industry, "even though you'd pay a discount brokerage commission. [Investors were willing to pay] because you can put together a portfolio of funds from different families by using the same brokerage firm, and everything [was] reported on one statement." (No-load funds are those that you can buy without paying a sales commission to a broker.)
The next milestone came in 1992 with the launch of Schwab OneSource, which offers no-load funds from a variety of mutual fund families at no charge. Such funds are known as no-transaction-fee (NTF) funds: no-loads purchased through a supermarket without any sales commission paid to a broker. All funds, including NTFs, charge annual management fees, however.
Other brokerage firms and mutual fund families have followed Schwab's lead, creating their own mutual fund supermarkets. The basic structure is similar throughout the industry. With NTF funds, the supermarket is paid by the fund family rather than by the investor. The standard fee is 35 basis points (0.35%). Therefore, if you invest $10,000 in an NTF fund through a supermarket, you pay no sales commission while the fund probably pays $35 (0.35% of $10,000) to the supermarket for subaccounting (the process of keeping the customers' accounts, or operating costs).
Carefully check the supermarket you enter, though. Not all mutual fund families are willing or able to pay fees to supermarkets, so that means that not all no-loads are NTF funds. As a result, most supermarkets offer NTF funds as well as those for which you'll pay sales commissions. Vanguard and T. Rowe Price funds, for example, are available through supermarkets but not as NTF funds: Investors must pay a sales commission. (Vanguard and T. Rowe Price have their own supermarkets, primarily for people who invest mainly in those families but would like to add a few outside funds without increasing their paperwork.)
Once you step out of a supermarket's NTF section, fees vary considerably. At Fidelity Funds-Network, for example, investors are usually charged fees when they buy or exchange funds, but not when they sell them. "We have people who come into our network with funds they already own," says Vice President Judith McMichael. "If they merely sell those funds, we won't charge a fee, and that's true if they use the proceeds to buy an NTF fund."
At Fidelity's supermarket, the lowest fee ($75) is reserved for online trades. You'll pay more if you trade by Touch-Tone phone and will be hit with even more charges if you gain assistance from a sales rep. "We also charge a fee if funds are bought and sold within 180 days," says McMichael, "even if you buy an NTF fund. We want to discourage such short-term trading, which drives up fund costs for all investors." Other supermarkets may charge fees as low as $20 for certain types of transactions (see table).
shopping for super markets You have thousands of vehicles to choose from when you patronize mutual fund supermarkets. The table below shows the number of no-load funds that you can purchase with or without transaction fees, and how much each supermarket charges for such transactions. No-loads No-loads Funds Funds Without With Minimum Transaction Transaction Transaction Fund Supermarket Fees Fees Fees CSFBDirect Fund Center 1,000 2,321 $35 (formerly DLJDirect) Dreyfus Lion Account 944 8,000 35 Fidelity FundsNetwork 1,151 1,378 75 NDB [National Discount 886 2,117 20 Brokers] Mutual Fund Center Schwab Mutual Fund 1,974 1,038 35 Marketplace Siebert FundExchange 1,293 1,353 35 T. Rowe Price 896 2,071 35 Mutual Fund GaTeway TD Waterhouse 1,448 1,064 24 Mutual Fund Network USAA Fund Marketplace 600 597 40 Vanguard FundAccess 940 1,700 35 Phone Fund Supermarket Number Website CSFBDirect Fund Center 800-825-5873 www.csfbdirect.com (formerly DLJDirect) Dreyfus Lion Account 800-843-5466 www.dreyfus.com Fidelity FundsNetwork 800-544-6666 www.fidelity.com NDB [National Discount 800-888-3999 www.ndb.com Brokers] Mutual Fund Center Schwab Mutual Fund 800-435-4000 www.schwab.com Marketplace Siebert FundExchange 800-872-0444 www.msiebert.com T. Rowe Price 800-638-5660 www.troweprice.com Mutual Fund GaTeway TD Waterhouse 800-934-4448 www.tdwaterhouse.com Mutual Fund Network USAA Fund Marketplace 800-531-8144 www.usaa.com Vanguard FundAccess 800-992-8327 www.vanguard.com
Therefore, if you're looking to pare down your paperwork and you decide to buy an NTF fund, you might as well buy it from a supermarket. But what if you want a no-loader that's available through supermarkets on a transaction fee (TF) basis?
* Buy the no-loader directly from the fund family, paying neither a sales load nor a sales commission. In this scenario, however, you'll get a separate statement from the fund family.
* Buy it from a supermarket, paying a one-time sales charge, perhaps $20 to $75. Then the supermarket statement will include your investment in this fund.
"There's a tradeoff," says Roame, "between cost and convenience. Especially if you plan to hold the fund for many years, it may be worthwhile to pay the transaction fee in return for consolidated reporting." Indeed, any other stocks and bonds you buy through that brokerage firm may be included in the consolidated report as well.
In addition to NTF funds and TF no-load funds, there's still another class of funds that may be on display at the supermarket: load funds. Such funds are sold through brokers who collect a commission upfront, each year, or both. Generally, do-it-yourself investors prefer no-load, to save the expense, but some load funds are especially appealling, so supermarkets may keep them in stock.
What's more, many supermarkets will help you decide which funds to select for your diversified portfolio. "[Fidelity offers] a fund evaluator," says McMichael, "that allows investors to establish certain criteria they want in a fired, then screen our entire network for the funds that meet those criteria."
If you think you'd like to do your fund shopping in a supermarket, how can you choose among them? "Good supermarkets will label funds as NTF or TF," says Roame. "In addition, they'll limit NTF funds to the share class with the lowest expense ratio. Otherwise, a fund family can increase the expenses it charges on an NTF fund to make up for the fee it pays the broker. Investors would pay no brokerage fee, but pay higher expenses each year they own the fund."
Therefore, pay attention to cost and fund selection as well as service. "Investors will want to know whether supermarkets have phone reps available at all times," says Roame, "and whether there are extensive online capabilities." Remember, filling up your cart at a supermarket won't do you much good if you run into problems at the checkout counter.
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|Title Annotation:||fund investing|
|Author:||KORN, DONALD JAY|
|Article Type:||Industry Overview|
|Date:||May 1, 2001|
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