Start-Up Makes Mutual Funds Easy for Small Investor--Maybe Too Easy

As the decade draws to a close, mutual fund companies face two big challenges.

The first is to find some way to foster greater loyalty among their shareholders. In 1999, fund companies found investors to be far less patient with stock funds than ever before, redeeming 40% more money than they did in 1998. The second challenge is to find or cultivate the next generation of mutual fund investors, especially now that funds have tapped much of the upper and middle classes.

One Irvine company, SaveDaily.com, thinks it has a solution to the industry’s second problem. But in the process it could end up exacerbating the first--which underscores the straits many fund companies find themselves in as 2000 approaches.

Until recently, fund companies didn’t have to worry about retaining their customers or finding new ones because, until a few years ago, the firms were flush with cash. Americans, emboldened by the 1990s bull market, shoveled money into stocks via mutual funds at record levels throughout the decade.

“We just sat back and opened the mailbags,” says Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.

But the so-called easy money has been made. So fund companies find themselves back where they were at the start of the ‘90s, wondering where their next batch of customers will come from.

An obvious place to look is at young and lower-income households that don’t invest in funds in part because they can’t afford the $2,000-plus minimum initial investments that many funds require. Many companies already recognize this. For instance, nearly a third of all funds now allow you to invest as little as $50 a month, provided you agree to invest $50 a month for a few years, or until your account grows to a particular size.

But the reality is that many households can’t--either emotionally or financially--commit to $50 a month for the next several years, says Eric Solis.

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Which is where SaveDaily, Solis’ start-up, believes it comes in.

Last month, this Web-based investment advisory firm began allowing clients to invest as little as $5 at a time into mutual funds--without imposing a requirement for additional contributions.

The way it works: Once you sign up for membership (which costs $9.95 a year, though the company says it will waive the fee for your first year), you can contribute as little as $5 at a time, whenever you want, to the account without paying any sales commissions.

Because no fund company in its right mind would want to handle the bookkeeping and back-office expenses for such tiny accounts, SaveDaily makes it easier for them by aggregating little accounts into one big omnibus account. Currently, SaveDaily investors can direct their money into one of three funds: Berger New Generation, Berger Balanced and the ING Money Market fund. (Solis says the list of participating funds and fund companies will grow.)

This “opens the door for more people to mutual funds,” says Sally Carleton, a spokeswoman for Denver-based Berger Associates, adding that Berger is committed to working with small investors. (All Berger funds, for instance, allow investors to open accounts for as little as $100 a month, so long as they agree to invest $100 a month until the account grows to $2,000.)

But there’s another way to invest through SaveDaily. The company has been garnering headlines because of its agreements with more than 60 online retailers (including well-known names such as Barnesandnoble.com, CDNow and 1-800-Flowers) to rebate SaveDaily customers who shop at those sites. SaveDaily in turn invests the rebates for the consumer into a mutual fund.

For instance, let’s say you buy a $100 piece of luggage through Sharper Image’s Web site. Under SaveDaily’s agreement with the retailer, 7% of your purchase’s value will be rebated. (Actually, 10% is rebated, but SaveDaily pockets 3%. Company officials say this income helps the firm subsidize the costs of maintaining records for tiny accounts. Rebates and fees vary from retailer to retailer.)

“In essence, they’ve kind of reversed what we’re seeing,” Carleton says. “Whereas a lot of mutual funds hand out all kinds of perks to get people to invest, this company is providing the mutual fund as the perk for shoppers.”

But doesn’t this trivialize what funds are all about? Doesn’t this reinforce the notion that a fund isn’t a serious, meaningful, long-term financial relationship, but rather a commodity to be bought and sold much like a $100 piece of luggage?

“It absolutely does,” consultant Bobroff says. So, too, do all the giveaways and gimmicks that other fund companies now offer to investors to attract assets--everything from free Palm Pilots to frequent-flier miles. After all, gimmicks or freebies may solve the short-term problem of attracting new investors. But instead of solving the long-term need to promote loyalty among fund shareholders, it may have the opposite effect.

For his part, Solis says “people need to focus a lot less on the ‘what’ question 1/8what fund to buy 3/8 and a heck of a lot more on the ‘why’ 1/8why should I invest? 3/8.”

“Does it really matter if I buy fund A, B or C, if they’re all doing the same thing?” he asks.

For most fund companies, you’d better believe it matters. And ultimately, it should matter to fund investors too.

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Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.