While the money management business is thriving, there are many challenges facing it. The main ones, in my view, are market uncertainty, intense competition, innovation, and candid communication with investors.

During the 1980s, the entire industry was buoyed by unusually good returns in virtually all market sectors. These returns are unlikely to remain so far above long-term trends, and new investors with unreasonable expectations and limited experience may suffer disappointments.

Moreover, the investment climate that has drained money from banks into stocks and bonds is bound to change at some point, and banks will regain some of these assets.

Global Holdings Encouraged

One way for both investors and investment managers to cushion the impact of a climate change is to have a diversified asset base, especially one including international securities.

Investments abroad have increased sharply in recent years. This is an encouraging development, and one that has benefited T. Rowe price significantly.

Competition is another major challenge. Firms continue to enter the money management business despite the rising costs of doing so, and those already in it are concentrating on the fastest-growing segments, like mutual funds and retirement plans.

Price competition is increasingly in both these areas, and new distribution channels are avidly sought.

Proprietary Funds

After years of interest but relatively little activity, banks and other depository institutions are becoming more active in mutual funds.

Bank proprietary funds generated about $36 billion of net cash flow through September of this year, representing almost 19% of total industry cash flow, according to Strategic Insights, New York.

About 60% of the total was in long-term funds. It's estimated that most of bank-sold funds are still nonproprietary.

Educating investors is another major challenge. An Investment Company Institute study found them to be quite unsophisticated about financial markets.

The combination of low interest rates and rising stock prices has attracted many first-time investors. We have an important responsibility to keep them well informed at all times and to make sure their expectations are reasonable.

Unless the industry does a good job of explaining the risks and potential rewards of investing, it faces the prospect of losing many of the new investors it has attracted.

T. Rowe Price, the Baltimore-based mutual fund company, recently held its annual investment outlook conference in new York. One theme of chairman George J. Collins' speech was growing competition from banks. Excerpts follow.

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