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Funds balk at Net dealings
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June 1, 2000: 8:04 a.m. ET
Firms offer Web sites, but few use them to set up accounts, accept payments
By Morningstar's Dan Culloton
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CHICAGO (morningstar.com) - Roberta Meyer researches her mutual funds, checks her balances and talks with fund families online. But when she opens an account or buys more shares, the Miami resident still writes a check and drops it at a discount brokerage on her way to the high school where she teaches.
"That's the thing in this day and age that I find the most convenient," said the 57-year-old Meyer. "If they're going to make (online transactions) more difficult than picking up the phone and calling the representative, why do it?"
The e-commerce revolution, which has made buying everything from plane tickets to sofas as easy as a mouse click, has yet to conquer the mutual fund industry. According to various estimates, fewer than 10 percent of fund investors bought and sold shares online last year, partly because they tend to be more cautious, but also because most of them still can't invest online the way they shop online.
 At most mutual fund firms, opening an account online means signing an application that you have downloaded and printed out and then using "snail mail." Even online brokerages such as Charles Schwab and so-called interactive mutual-fund firms such as MetaMarkets and StockJungle.com make investors push a little paper before they can open accounts.
Most fund investors use the Web to research, download reports and prospectuses, ask questions, and check balances. But a handful of firms such as Denver-based Invesco, Lincoln, Mass.-based Quant Funds, and Marsico Capital Management, also of Denver, are betting people are ready to do more, and have started letting investors open accounts via paperless online applications.
"It's not going to take very long before the majority of the funds we represent are offering this," said Mim Allison, president of Milwaukee-based Sunstone Financial Group, a transfer agent and shareholder services business that offers online transaction software to its clients, including Marsico.
 Fewer than 1 million people, or about 1.2 percent of all fund shareholders, used mutual fund company Web sites to open accounts last year, estimates Cerulli Associates, a Boston-based financial services consulting firm.
Technology is not to blame for holding back fund families and their investors. The hardware and software for true online transactions is commonplace, said Louis Harvey, president of Dalbar, a Boston-based consulting firm for the mutual-fund industry.
Investment companies have treaded warily because they fear some investors won't honor electronic contracts or will manipulate them for fraud. "The issue for the industry is if you don't have the person's signature on file and on a piece of paper, did they open an account?" said Sunstone's Allison. "Are (fund companies) willing to take the risk that there are a couple of fund shareholders who might want to defraud the fund?"
State laws governing electronic documents vary, and the Securities and Exchange Commission has been silent on the issue. This has bred confusion as to whether electronic records satisfy legal requirements that documents be in writing or signed, and impeded fund families' e-commerce efforts, the Investment Company Institute, a fund trade group, has told various government and legislative panels.
Your virtual John Hancock not required
The firms that offer complete online applications don't ask investors to scan their cursive John Hancocks into their computers. Rather, the firms gather bits of confidential information, such as Social Security numbers, bank account names, account numbers and bank routing numbers. That gets people in the funds they want at the share prices prevailing when they apply, even though the transactions, which typically occur over the Automated Clearing House system that financial institutions use to ship money electronically, take a few days to clear.
The firms often follow up with phone calls, e-mail messages, or letters, and require redemptions to go back to the same banks that sent in the money. They also limit their liability by capping daily online share purchases. Quant Funds, for example, restricts initial online buys to $10,000.
Many fund firms are watching how virtual applications work out. There also is legislation pending in Congress that would formally give electronic signatures the legal weight of ink and paper. If it becomes law, more fund firms would give cyber contracts a try, said Sunstone's Allison.
Still, it's unlikely a new law will get most people to invest through fund Web sites, said John Payne, a consultant with Cerulli Associates. "It doesn't present a huge advantage over the current method of getting an investor to purchase a fund."
Most fund firms won't offer totally online applications until the larger firms --Fidelity, Janus, Vanguard, Scudder Kemper, or T. Rowe Price -- do so. Once that happens, Jon Pauley, Invesco's vice president of e-commerce, predicts people will warm to virtual applications. Since Invesco began offering them in October, 90 percent of the 35,000 accounts opened through the company's Web site have used the online form. "It's one of those self-fulfilling prophecies," Pauley said.
Of course, some investors, such as Meyer, the Miami teacher, may need more convincing. "They need to be more responsive to customer comments and e-mail, because that sets the tone for the whole thing," she said. 
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