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Thursday, August 12, 1999

Electronic Commerce and the Mutual Fund Industry

Reported by Jason Shank

As electronic commerce becomes universal, financial services firms are utilizing this platform as a way to provide cost-effective, finely tuned, specifically targeted and complex services to their increasingly savvy clientele. An article by industry expert Drew Lapsley, the director of Insource Technology, discusses the advent of Internet presence in the financial services sector and focuses on the mutual fund industry.

Related Links
  • Insource Technology
  • His paper presents a brief review of the market forces at work in the MF industry, followed by a discussion of how both "standard" and exotic technologies are applied to satisfy these niches within the MF segment of the financial services industry. One of the more intriguing points is presented below with a link to the original article.

    The following is a reformatted excerpt from Lapsely's paper which can be downloaded (approximately 4 minutes) in its entirety at Insource Technology.

    In many ways, the mutual fund industry parallels the growth patterns of the Internet. In 1980, there were only a handful of online users, mainly using proprietary dial-up services like CompuServe and academic networks connected to the ArpaNet, the forerunner of today's Internet. Today, depending on whose statistics you choose to believe, there are more than 130 million users online.

    Similarly, there were less than $10 million in mutual funds nationwide. Today, the total amount of money in mutual funds approaches almost $4.5 trillion. One of the effects of this is that the mutual fund industry is now one with which almost all wage-earning Americans who have made any significant plans for retirement are aware of. And over 66 million Americans have invested both their faith and their hard-earned dollars in mutual funds. Even those investors who do not have an ongoing relationship with a mutual fund company have 401(k) and pension funds invested in these areas.

    The distinction between load and no-load funds is important to management companies and to the funds' "buyer". The load fund's primary customer is typically the broker or intermediary, because that is the person who is ultimately responsible for selling the fund to investors. The no-load fund, on the other hand, sees the ultimate end user as the "customer". This dramatically affects and tailors the Internet and World Wide Web offerings of these two sectors of the mutual fund industry.

    In a purely transactional sense, the no-load funds were at the vanguard of developing web sites for sales of product, the "commerce" in electronic commerce to most people. Because the load groups relied on extensive dealer networks of traditional brokers to distribute funds, they were loathe to risk offending their sales force by competing with them on the Internet. This has strong analogies to the computer hardware industry.

    Compaq, for years the leader in hardware sales of PC products, in 1998 saw its market capitalization eclipsed by the newer Dell Computers. Compaq was slow to embrace the Internet as a sales channel, mainly due to the fact that it lacked the ability to re-structure its fulfillment channel to a direct-to-the-public sales model, and also in large part because it relied on a dedicated channel of resellers.

    Dell, on the other hand, embraced the Internet as a medium for sales to the public, with stunningly successful results. We now see Compaq playing catch-up in the electronic commerce milieu.

    The load industry, with its dedicated sales channels, can be seen as the slower to adapt Compaq, with the no-load groups playing the role of Dell. Much as we now see Compaq altering the fabric of its sales channels and strategies, we see the load industry seeking to provide diversified commerce services to shareholders.

    Lapsely's conclusion:
    Like all industries, the mutual fund industry is only beginning to realize the far reaching effects that the Internet will have on the fundamental aspects of its business processes. It is not difficult to see that the evolution of offerings on the Internet within this sector will continue to expand, and these companies will continue to evolve the fundamental way they interact with investors and intermediaries. As on-line investors become more savvy, the industry will be challenged to keep up with increasingly sophisticated demands of the marketplace.

    To date, we have seen the proliferation of information dissemination via fund information centers, the increased use of web sites as sales vehicles, and the reduction of costs through electronically based services which utilize the low marginal cost of information delivery inherent in the World Wide Web model.

    As this evolution occurs, there will be several areas that will be interesting to observe. It will be interesting to see how the load groups will take advantage of this environment while retaining their traditionally strong links to their broker-intermediary base. In the no-load area, creativity will continue to be the name of the game, as companies strive to entice more and more investors within the on-line arena.

    What will they offer next? Will we see the shift of companies from brick and mortar based institutions to solely on-line provision of services? Will the days that a client used a broker to select an investment strategy become obsolete as clients become educated and empowered by the Internet offerings of fund companies?

    It will indeed be fascinating to watch the evolution of the mutual fund industry as it grapples with the fundamentally different business model of one-to-one interaction with shareholders on the Internet. The combination of the costs and information dissemination capabilities of the Internet and the massive client base of mutual fund investors will indeed be a potent vehicle for change and evolution. One thing we can be certain of is that the results of this evolution will redefine the individual investment arena in the coming years. 

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