Funds Simply Going Where the Action Is

Why are mutual fund companies, the supposed champions of small investors, now tripping over themselves to cater to the better-off?

Greed and fear have a lot to do with it, industry analysts say.

The greed part is simple. Mutual fund companies earn their money from asset-based fees. Thus, the more money an investor has with a fund company, the more profits he or she generates for it.

Example: A fund charging 1.5% a year in management expenses and other fees (a typical amount) will take in $3,750 a year from an investor with $250,000 invested.

The fee total would be just $45 for someone with $3,000 invested.

The high-net-worth market segment is not only more profitable for fund companies--it’s also growing much faster than the population as a whole.

While the total U.S. population is growing about 1% a year, the number of “affluent” households is growing 4% to 6% a year, says William White, practice leader for the Spectrem Group’s affluent market consulting group.

The San Francisco-based research firm defines affluent households as those with annual incomes above $100,000 and/or net worth in excess of $500,000, not counting principal residence.

To be sure, the affluent are still outnumbered by the masses. The affluent account for just 16% of total U.S. households.

But their investment holdings represent 70% to 75% of all financial assets, White said.

“The real boom is at the high end of the high-end market,” he said.

Indeed, there are now nearly 3 million “wealthy” households, those with investable assets of more than $1 million, according to Spectrem. That’s up from 1.6 million in 1990.

That’s where the “fear” element comes in, as far as fund companies are concerned: While mutual funds may have played a large role in creating individual investor wealth, they are at risk of losing those customers to competitors that offer more personalized services, specific advice, and investment selection and management.

A 1996 study by Dalbar, a Boston-based research firm that tracks the financial services industry, found that among Americans with less than $10,000 in investable assets, only about 20% thought they needed personal financial advice.

However, nearly nine out of 10 people with $100,000 or more to invest felt that they needed professional help.

“Once somebody reaches $100,000 [in investable assets], it’s no longer play money,” said Dalbar President Lou Harvey. Tax planning and estate planning, for example, may become critical at that point.

But even with a slew of new services for high-net-worth individuals, many fund companies face a big limitation: Most won’t pick individual stocks for their clients--which is something many of those clients may want, to complement fund portfolios.