A trio of industry heavyweights have heightened the buzz that distribution is eclipsing money management as the key to mutual fund success.
Before a packed crowd at the Investment Company Institute's general membership meeting in Washington last week, Charles R. Schwab, founder of Charles Schwab & Co.; Edward C. Johnson 3rd, chief executive of FMR Corp., parent of Fidelity Investments; and John L. Steffens, executive vice president for Merrill Lynch & Co., discussed their companies' strategies.
Not surprisingly, Mr. Johnson, who presides over the nation's largest mutual fund company, declared that increasing competition would divide the business into giants and niche players. But with a dollop of false modesty, he placed Fidelity in the niche category. The giants, he said, were such full-service brokerages as Merrill Lynch, which enjoy a "near oligopoly" in the retail business.
He also professed that sellers of mutual funds have advantages over fund managers. "It's like the difference between making movies and distributing them," Mr. Johnson said. "The best place to be is in the distribution business, given that you have access to everybody else's pictures."
The panel of three said that although good performance still matters, it is rapidly becoming a prerequisite for success rather than the distinguishing factor that assures it.
All three companies, meanwhile, are pouring capital into technology to enhance their distribution.
Merrill Lynch, the country's largest brokerage, will spend more than $900 million on technology this year alone, Mr. Steffens said. Fidelity will make more than $500 million in capital investments, overwhelmingly in technology, Mr. Johnson said.
Mr. Schwab said his company plans a $100 million technology investment this year, largely to exploit the Internet as a low-cost distribution channel.
Indeed, Mr. Schwab said his company would likely begin accepting electronic cash for purchases on its World Wide Web site later this year, or early next year. And he predicted that electronic distribution could "represent 30% to 40% of the orders over the next four or five years."
But Merrill Lynch's Mr. Steffens suggested that technology, in general, and the Internet, specifically, may be deepening customers' confusion rather than solving their investment problems.
Merrill Lynch & Co., he said, will use technology to help brokers deliver investors from "information overload."
Borrowing a phrase from the Internet, Mr. Steffens said, "we see. . . our financial consultants as the ultimate search-engines."