New Service Ups Ante in Fund Industry

Customer service has become a big competitive tool for mutual fund companies as they seek to lure--and retain--individual investors.

Now Fidelity Investments plans to raise the bar another notch as it launches a natural-language voice-recognition system for its customers in coming months.

The Fidelity service, apparently the most advanced of its kind in the investment business, will allow customers to make simple commands such as “Give me my account balance” or “Buy $10,000 worth of Fidelity Puritan” without ever talking to a person.

Investors also will be able to obtain quotes, review orders, change personal identification numbers and more.

“The system listens for key words or phrases to find out what you want,” said Judith McMichael, a Fidelity vice president in charge of automated telephone services.

It’s an enhanced version of a more basic voice-recognition service that Boston-based Fidelity, the largest U.S. fund company, trotted out earlier this year.

If adopted by other fund groups--as is likely in the copycat investment business--voice recognition promises to add a new dimension of convenience.

Fidelity says its natural-language application is both intelligent, versatile and easy to use. The system prompts users to supply missing information, and it can understand various American dialects and accents.

Fidelity’s system is the latest in a long string of shareholder-services improvements that have helped bring the industry its massive customer base--now totaling 62 million Americans, according to the Investment Company Institute, the industry’s chief trade group.

Early offerings were toll-free telephone numbers, account switching by phone, check writing and automatic-investment options.

More recently, many fund companies have unveiled easier-to-understand prospectuses, interactive Web sites and account statements that feature personalized rates of return and tax analyses.

Although many investors naturally prefer to talk to a person rather than use an automated service, McMichael said Fidelity already handles 75% of its calls in an automated manner.

Nonetheless, she said, “we still encourage people to talk with our shareholder reps for complex transactions. Voice recognition is designed for quotes and simple trades.”

Some fund investors, unhappy with operating expenses that seem only to rise, may question whether service innovations are worth the cost--given that shareholders often foot the bill.

But experts say such service enhancements aren’t the main source of rising fund expenses. General management fees and marketing costs have much bigger impacts.

Management fees for the average fund have risen 0.2 percentage point to 0.7% of assets annually since the 1940s, according to a 1997 study by fund tracker Morningstar Inc. of Chicago. While that doesn’t sound like much, it represents a 40% increase--even as the industry’s assets have ballooned.

Also, more than half of all funds now charge so-called 12b-1 fees, which made their debut in the early 1980s. Fund companies use the money to promote their portfolios in the hope of attracting more shareholders and achieving economies of scale.

Yet in many cases, the money merely goes to pay brokers for selling a fund. Federal law caps 12b-1 fees at 0.75% of fund assets per year, but they essentially can hit 1% if a related “‘service” charge is thrown in.

Shareholder-services outlays, meanwhile, rarely account for more than one-third of a fund’s operating expenses and usually are much less.

What’s more, Peter di Teresa, associate editor of the Morningstar FundInvestor newsletter in Chicago, notes that some service innovations help companies cut costs, rather than inflate them. He cites American Century Mutual Funds and its powerful document-imaging database for investor records.

Web sites also are helping firms keep a lid on shareholder services costs that otherwise would be deducted from fund assets, reducing investors’ returns.

As investors download prospectuses and find answers to their questions without human intervention, that saves printing, postage and personnel costs.

Brian Mattes, a vice president for the Vanguard Group in Valley Forge, Pa., estimates that the company could save its shareholders $40 million in postage costs alone if everyone downloaded their semiannual and annual fund reports from Vanguard’s Web site.

“Delivering services over the Internet is where we’re looking to provide savings,” Mattes said.

Voice recognition promises similar efficiencies, said Fidelity’s McMichael, because it’s easier and cheaper to route incoming calls to an automated service on busy days than to bring in additional staff.

If you’re curious about just how much your fund costs to operate, check either the fee table in a fund’s prospectus or “Statement of Operations” in the annual report.

But you are likely to find comparison shopping a challenge, since fund companies vary in how they disclose expenses.