Internet start-up Whatifi Financial, recently recapitalized with an influx of $8 million in venture capital from CIBC Capital Partners and Shawmut Capital Partners, has a clear mandate: making mutual funds cheap by using the Internet. The plan is ambitious and well-intentioned, but does the equation really add up?

While Web-based interaction and technology have held the allure of widespread market reach and flesh-free customer servicing, making the whole package work is another matter. Whatifi worships the e-gods, apparently neglecting some of the realities of operating mutual funds.

"If you look at our model, given the fact that we are an all electronic company, what would be unprofitable for a regular mutual fund company is very profitable for us," explained Monica Chandra, vice president of product marketing. "We've made sure that we've leveraged the medium as well as possible."

The San Francisco-based firm may be able to reduce manually-operated call centers and eliminate the physical collection and storage of signatures and the delivery of paper prospectuses and statements. Nonetheless, most critics don't cite cost considerations before bringing up other aspects of running a fund; there are still elements of back-office operations which whatifi apparently has not taken into consideration.

According to a source close to a transfer agent that has spoken with Whatifi, the firm is virtually turning a blind eye to compliance issues.

A source from another transfer agent commented that whatifi "acts as if it can operate without any internal back-office people. They act like somehow, magically, the Internet is going to, 'poof,' make all these issues disappear."

Whatifi presently uses Bisys for its administration, with SunGard handling shareholder services. These services don't come cheaply, especially with only few shareholders. While Chandra admitted that whatifi doesn't have many, she was unwilling to part with numbers until absolutely necessary. She now refers to last fall's well-publicized introduction as a "soft launch."

The firm plans on expanding distribution by private labeling its product through insurers, banks, credit card companies, and other financial services affiliates. Chandra said whatifi is near making an announcement of a relationship with a "large banking partner."

The ploy is the only thing that will buoy the firm, which is dead-set on the direct sales model. Elsewhere in the industry, that model has lost currency now that it is widely recognized that the direct market is tapped. Again, this broadly accepted notion seems to be news to whatifi.

"I think it's no secret in this marketplace that marketing directly to investors is a way of making money," said Chandra. "We are now beginning to work with financial partners, other institutions that are able to get to a mass market like this."

The fact of the matter is that whatifi has a very egalitarian operating concept, distilling investing down to the raw basics and making it accessible to people with little more than lint in their pockets. Furthermore, by welcoming the small, incremental investor, the firm is reaching out to a crowd that otherwise may get the cold shoulder.

"Virtally all the fund groups have abandoned the small investor, or the small monthly investor," said Louis Stanasolovich, a registered investment advisor with Legend Financial Advisors in Pittsburgh, Pennsylvania. "We financial planners, as a group, don't want clients with $10,000, $5,000, or $25,000 even."

While Stanasolovich thought whatifi was a good idea in principle, he voiced concern about the regulatory and compliance issues faced by a mutual fund. Furthermore, whatifi is a registered investment advisor instructing clients on the best portfolio composed exclusively of the firm's five products.

"Anybody who does that, I think there's a conflict of interest," said Stanasolovich.

 

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