Investors In Funds Prefer To Stay Offline
Sydney Morning Herald
Saturday March 16, 2002
Investing online offers few real benefits so far. Christine Long reports.
While many Australians are now happily using the Internet to pay their bills and trade shares, they appear to get cold feet when it comes to investing in a managed fund online.
According to a survey of 4750 Internet users conducted by Sydney Internet research company APT Strategies last year, almost 60 per cent of them had used the Internet to pay their bills in the past 12 months.
This compared with 44 per cent who said they had used more traditional methods.
But when it came to either opening or operating a managed fund, there was a distinct preference for keeping the task offline.
Almost twice as many people chose to open or operate their managed fund offline rather than log onto the Internet, according to the research.
Analysts believe there could be a variety of reasons for this pattern.
Mark Johnston, online brokerage analyst at ACNielsen.consult suggests the Internet is still more likely to appeal to the mindset of the self-directed investor rather than the typical managed fund investor.
The findings may also reflect the way the market is evolving.
As Johnston points out, the people who have bought managed funds online have tended to be the early adopters of online financial services generally.
But the lag may also have something to do with the functionality of the Web sites being offered by fund managers and online brokers.
While banks have had efficiency reasons for pushing customers towards the online alternative, fund managers have had to be careful of encroaching on the turf of their traditional distribution source financial planning networks.
As a result, few have developed the capability to complete the entire buying process online when someone wants to invest in a managed fund.
BT and AMP are two major retail fund managers which offer what is known as ``straight-through processing" on their Web sites and Colonial First State is expected to add that capability to its site in the near future.
As Terry Vandyke, head of non-advisory distribution at BT, explains straight-through processing allows investors to complete the application form online and then transfer money from their bank account via Bpay to make their initial investment.
The advantage of this is it can significantly speed up the investment process. Someone could fill in an online application form and the money will be invested by the next day.
But online investing in managed funds may still not be as convenient as people expect.
Investors using BT's online system, for instance, will still need to print and sign a form in certain situations, such as if they want to have regular investments direct debited from their bank account.
And Vandyke says someone taking a cheque and an application form into one of the BT Investor Centres or its offices could ensure their money is invested the same day which is not possible now with the online system because of the need to use Bpay.
Unfortunately, the process may be even slower if the potential investor chooses to use one of the online brokers.
One investor, who wished not to be named, was amazed when it took about a month to complete the registration process for one of the online brokers.
And once registered, investors still have to complete the buying process offline.
As the APT Strategies figures show, while few people bought or operated a managed fund online, 26 per cent said they had downloaded a prospectus in the past 12 months.
Michael Blomfield, head of CommSec Direct Funds, says investors using its site have the choice of downloading a prospectus or requesting that one is sent to them.
Once they have either downloaded it or received it, they then have to fill in the application form, attach a cheque and send it to the relevant fund manager.
Depending on the post this process could take several days until the money is actually invested.
Where the convenience is more likely to come in is when investors are searching for information on specific managed funds either before or after the buying process.
The major online broker sites such as Commonwealth Securities and TD Waterhouse make it easy to shop at one stop, by offering access to information and prospectuses from a wide choice of funds and managers.
CommSec, for instance, offers access to about 500 funds from about 30 fund managers while the TD Waterhouse range includes a selection of US index managed funds.
And post-sale, Matthew Filkins, general manager of e-business at Colonial First State says its investors can register for its online First Net service.
Using an investor number and a pin this allows them to view the value of their managed fund holdings online, updated with real-time unit prices.
They can also switch between managed funds, organise redemptions, view transactions and access their past two years of tax history statements.
Similarly, online brokers have aimed to add value to their service by providing plenty of help for investors selecting among different managed funds.
They started out by offering access to third-party research from Morningstar, Assirt and InvestorWeb and more recently they have expanded into a range of tools aimed at helping people identify their attitude to risk.
Your Prosperity Web site, for example, helps people to gauge their attitude to risk through a series of statements designed by van Eyk Research.
Once investors have been through the process they are guided into a portfolio of investments that is appropriate for their risk profile.
Although these tools stop short of providing online advice for the investor's specific circumstances, some online broker sites are flagging this as a likely development in the future.
Having seen the potential for asset-based fees to supplement the transaction-based revenue they receive from share traders, online brokers are keen to build the managed fund side of their business.
But they have recognised that growth may be limited unless they can extend their offering to the less sophisticated investor.
For that reason, Peter Duvall, head of advertising and marketing at TD Waterhouse, believes it will eventually make sense for the industry to follow the US lead and provide online advice to investors.
However, he says: ``The whole idea of trying to bring together online advice is still a while off yet for the industry."
In the meantime, online brokers are conscious of the need to maintain their reputation for delivering a cost-effective way to invest in managed funds.
These players revolutionised the retail managed fund industry by offering to rebate 100 per cent of the entry fees on these products.
But retail funds still come with relatively high management expense ratios (MERs) which eat into investors' savings.
As a result, some online brokers such as Merrill Lynch HSBC and Your Prosperity are now offering investors access to lower cost wholesale funds through their Web sites.
The minimum investment on these funds is still about the same as the typical retail fund, but the MERs on the wholesale funds are considerably lower ranging from 0.5 per cent to 1.5 per cent.
However, like the master funds and wrap accounts used by financial planners, these funds can be accessed only if investors are willing to pay an annual administration fee to the Web site provider.
These administration fees range from an additional 0.25 per cent up to 0.65 per cent, depending on the provider and at times the amount of funds invested. In return for this investors receive consolidated reports of their funds management holdings.
As Jim Jacques, director of Merrill Lynch HSBC, says: ``The only [reason to] continue to buy retail is that some funds are only available in a retail version."
In the meantime, people choosing to invest online are probably going to
continue to benefit more from the cost savings and information available than
the high-speed convenience.
WHERE NET USERS TOOK THEIR FINANCIAL TASKS IN THE PAST 12 MONTHS
% online % offline
Applying for a home loan 8.9 19.4
Buying shares 17.6 16.4
Selling shares 15.8 12.4
Open/operating an investment fund 6.9 10.0
Open/operating a managed fund 5.5 10.9
Open/operating a superannuation fund 5.1 15.0
Downloading a prospectus 26.9 6.0
Buying insurance 12.2 26.6
Lodging a tax return 14.7 33.3
© 2002 Sydney Morning Herald