Average investors warm up to the Web

The Internet came in handy in mid-April for taxpayers who scrambled at the last minute to shelter some income into individual retirement accounts.

Without the option of logging onto their home computers and going online, some late filers would have missed the deadline - and the chance to lower their tax bill.

"In IRA season, we saw a huge spike in setting up IRA accounts online," notes David McCalley, vice president of electronic commerce for Kansas City-based American Century Investments.

Like more than half of mutual-fund companies, American Century has a website where shareholders can look up their accounts, explore investment options, transact business, and even get investment advice - all with the click of a mouse.

Though the market downturn may have slowed it somewhat lately, activity on mutual-fund websites has been soaring.

Altogether, US investors had about $7 trillion in 250 million mutual-fund accounts at the end of the year 2000. They want to track that money, sometimes buy more shares or switch money from one fund to another, and at other times redeem shares. The Web gives many of these investors a convenient tool beyond mail and phone lines to conduct business.

"Mutual-fund investors have gotten a lot more comfortable using the Internet for transactions," says Tracey Esherick, executive vice president, online brokerage for Fidelity, the giant Boston-based mutual-fund firm. "Over the past two years, we have seen tremendous growth."

Two years ago, 30 percent of mutual-fund trades between various Fidelity funds were done online. Today it is 60 percent, she reckons.

At American Century, customers visit the site 1.5 million times a month, and traffic has been growing 50 percent a year. Mr. McCalley speaks of his efforts to make his website "as simple as possible to use."

Fidelity, with nearly 10 times as much assets under management overall as American Century, has $298 billion just in accounts that are online.

The Web has brought something else to Americans. It has "democratized" investment. Whereas investors some years back got most of their information on stocks, bonds, and other investments from brokers, financial planners, or other experts, they can now go online and find much of the same information.

"It's another channel," says Dennis Ceru, an expert at TowerGroup, a Boston consulting firm.

Indeed, there is considerable competition between Web masters at various mutual-fund groups to provide the best, the most complete site.

McCalley admits to occasionally reviewing the websites of other fund groups to see what the competition offers investors. Without the financial resources of Fidelity, Charles Schwab, or Vanguard, he must choose the features that his research shows American Century customers prize the most and skip some features such as sports news, cars, and weather.

A survey a year ago by the Investment Company Institute (ICI), the mutual-fund industry's trade association in Washington, found that 68 percent of US households owning mutual funds were using the Internet and nearly half of these visited websites maintained by a mutual-fund company.

Use of these sites was especially prevalent among shareholders owning "direct marketed" funds. People who bought funds from a salesperson or through an employer-sponsored retirement plan, such as a 40l(k) plan, were less likely to visit the websites. Of no surprise, younger investors use the Web more often than older investors.

One goal of the mutual fund companies in developing their websites is to move toward "a paperless environment," notes Sandra West, the ICI's director of market-policy research. They would like investors to use the Web to buy and sell funds, receive confirmations of transactions, get quarterly reports or a fund prospectus, and pick up sales material.

"There is some education process going on here," she says.

Many investors, though, visit financial websites primarily to check out the value of their portfolios. They could look in the next day's newspaper for the net asset value of their funds, but a website will add up the results for them.

One trend in major mutual-fund groups or other large financial firms is what the experts call "aggregation." The website provides not only information on the investor's mutual funds, but also possibly on his or her brokerage account, retirement account, credit-card balances, loans and mortgages, frequent-flyer miles, travel reservations, and bank checking- and savings-account balances.

TowerGroup notes that about 2.5 percent of Internet banking households were using account aggregation at the end of 2000. By 2005, this participation will grow to 15 percent, the firm predicts.

Many consumers hesitate to use account aggregation out of concern for privacy and security. And sometimes setting up the system can be aggravating.

Another trend in financial websites is to make them more and more like a "portal" - a door to the Internet with rafts of information being offered.

Yodlee, a Redwood City, Calif., firm that powers the aggregation system for dozens of major financial firms, also offers online avenues to e-mail, news, and thousands of websites.

Meanwhile, mutual-fund sites seem to be constantly enlarging their services. McCalley of American Century, for instance, says he is adding online redemptions, quarterly statements, transaction confirmations, and change of address.

The firm also maintains "one-on-one" chat rooms where investors can ask an American Century representative questions on their investments or financial plans and get an immediate response. This, he says, supercedes e-mails. The firm has about a dozen reps manning the advisory service, usually chatting with two or three investors at one time.

Fidelity has an online Fund Evaluator, with which a busy investor can conduct a customized search of more than 4,100 mutual funds available through Fidelity's mutual-fund supermarket, based on 13 different criteria. The $900 billion firm also offers access to news reports from Dow Jones, Reuters, and SmartMoney.com.

In addition, it is now feasible, although not common, for an investor to manage his account at Fidelity with a voice-activated nationwide wireless system, OnStar, while driving to work. Some 85,000 people can access their Fidelity accounts with a handheld computer and certain Internet-ready telephones. They can also do business from an airplane through Inflightonline.com.

Study: Internet encourages employees to trade more

When employees at two major corporations were first allowed to move assets within their 401(k) retirement plans on the Web, they jumped at the opportunity.

After some 18 months, they traded, mostly between mutual funds, about twice as much as when they could only trade cost free within their portfolio by telephone or mail. Moreover, portfolio turnover rose by more than 50 percent.

"Put a casino near people, and they will gamble," jokes Andrew Metrick, a finance professor at The Wharton School in Philadelphia. He and two other economists, James Choi and David Laibson of Harvard University, examined the trading of more than 60,000 participants in the two 401(k) plans.

But the extra trading - about once every 10 months or so on average - didn't do most employees much good. On average, their portfolios underperformed those of investors who did not trade.

Trading on the Web tended to involve smaller amounts than that conducted by phone. And, as might be expected, young, male, and wealthy participants were more likely to trade on the Web.

(c) Copyright 2001. The Christian Science Monitor