An Almost-Free Lunch for Those With $50,000

In the past, it wasn’t particularly hard to choose between load or no-load mutual funds. If you needed investment help, you went to a broker and he or she put you into a load portfolio, on which you paid a commission. If you felt comfortable making your own decisions, you bypassed the broker and saved money by going the no-load route.

Now, a couple of brazen no-load companies are threatening to upset the equilibrium--by assuming the broker’s role and giving specific investment advice to shareholders.

The latest company to join this movement is Stein Roe & Farmham. The Chicago-based fund manager earlier this year unveiled an asset-allocation program called Counsellor, which offers ongoing, personalized advice and recommendations.

“In a sense, we function like a broker would, without charging a sales fee,” says Timothy K. Armour, president of the company’s mutual fund division.

There’s no additional cost for this service, but you do have to invest $50,000 or more in Stein Roe mutual funds to participate. So far, the program has attracted $15 million in assets.

Here’s how it works: You contact Stein Roe (800-322-8222) for an information package, which includes a prospectus and 20-question work sheet for determining your objectives, risk/reward profile, time horizon and more. You answer the questions and mail back the response card.

Within two weeks, you get a personal investment profile listing recommended Stein Roe funds to purchase, and in what amounts, as determined by the company’s top investment experts.

There’s no obligation to participate in the program. If you don’t, you still get the free investment profile. If you do, you send in a check for $50,000 or more to buy the appropriate funds.

An investment in Counsellor can’t really be described as free, since investors would pay a small yearly management fee and other expenses on the mutual funds--just as they would on any funds. But there are no incremental costs associated with the program.

Stein Roe’s annual management fee on a $50,000 investment would equal roughly $300, depending on the specific funds chosen. That’s in line with industry averages, if not a bit below.

“We would love to offer this level of service on $1,000 accounts, but we can’t afford to,” says Armour.

Assuming you decide to invest, you would receive monthly account statements with periodic recommendations for adjusting your portfolio, as market conditions or your personal circumstances change.

A typical $50,000 portfolio might hold three to six funds, Armour estimates, and there might be one to four buy/sell recommendations each year.

An account representative would be assigned to answer your questions and handle your transactions. This person would call at least once a quarter to review your situation--and more often if you prefer, says Armour.

Notably, Stein Roe’s account representatives are licensed to sell mutual funds, even though they don’t earn any commissions.

Stein Roe also offers another program, called Counsellor Preferred, which includes the same features with two notable differences.

First, the fund company will automatically make periodic adjustments to your portfolio without waiting for your consent each time. Second, Stein Roe charges an annual fee of up to 1% for this additional service.

Counsellor Preferred is remarkably similar to a program Fidelity Investments (800-544-3455) has had since 1989, with enhancements made last October. Fidelity’s Portfolio Advisory Services is reserved for people willing to invest at least $100,000 in the company’s mutual funds. The fee is up to 1%.

Fidelity’s program, which counts $650 million under management, enjoys an important edge in that there’s a much wider range of funds from which to choose--roughly 190, to Stein Roe’s 16. Fidelity, in other words, can cover investment niches that Stein Roe and most competitors can’t.

Stein Roe does have several highly rated domestic-stock and municipal-bond funds, but it’s thin in the international, single-state municipal and sector areas.

Both Fidelity and Stein Roe emphasize that their programs are driven by asset allocation, not market timing. That means accounts are built around a more or less steady investment core--as determined by each person’s circumstances--with modest portfolio adjustments along the way.

With these programs, Fidelity and Stein Roe aren’t aiming at load-fund competitors as much as they’re gunning for brokerage wrap accounts.

With a wrap account, investors get a customized portfolio of individual stocks or bonds selected and supervised by a professional money manager--in some cases, the same person who runs a particular mutual fund. Most wrap accounts require a $100,000 minimum investment.

A broker helps clients find an appropriate manager and monitors the performance. The broker also serves as intermediary between investor and manager.

All costs--including broker commissions and compensation for the manager--get wrapped into an annual fee that typically runs 2.5% to 3% for equity accounts and 1.25% to 1.75% for bond accounts.

This all-inclusive fee eliminates the danger of “churning,” excessive trading designed to ring up commissions.

Wrap accounts have been around for more than a decade, but they have grown much more popular in the last few years. Fidelity estimates that there’s at least $30 billion invested in wrap programs nationwide--enough for mutual fund companies to sit up and take notice.