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By Kathleen Day
Washington Post Staff Writer
Sunday, August 23, 1998; Page H3

Three years ago the use of the Internet to transact mutual fund business was rare. Today most major funds either have interactive Internet sites for customers or are scrambling to create them to keep up with investors' growing appetite for managing finances in cyberspace.

"It's becoming a basic service, one that consumers expect," said Stan Lepeak, of Meta Group Inc., a technology consulting and market research company based in Stamford, Conn. He pointed out that the current issue of SmartMoney magazine includes for the first time, in its yearly rating of top mutual funds, a category evaluating the convenience and comprehensiveness of each fund's online services.

The explosion in online services has the potential to provide consumers with more information about funds and with more control over their accounts. Fidelity Investments of Boston, the largest mutual fund family, has been a leader in providing online services, according to fund analysts. Customers and prospective customers can access 28,000 pages of information, including fund prospectuses, fund managers' backgrounds, fund performance and comparisons to benchmarks such as the Standard & Poor's 500-stock index.

Customers can go online to sell shares in a fund or to reapportion their money among funds. Completing transactions online provides investors with convenience and more control over their money, but it also puts more responsibility on their shoulders, said Lepeak. "If you screw up and transfer money to the wrong account, it's your fault," he said, adding that a fund company can electronically track the keystrokes a customers makes to prove how, when and by whom a transaction was ordered.

"And it makes it easier for an investor to have a knee-jerk reaction and sell in a down market," he said.

Online transactions do have limitations, though. An investor can't open an account online. First of all, debit cards – which act like a check by taking money directly from a person's bank account – aren't being used yet because all the "kinks haven't been worked out," said Geoff Bobroff, president of Brobroff Consultants Inc. in East Greenwich, R.I. And customers cannot open an account with a charge card because federal regulations bar consumers from opening new accounts on credit, he said.

In addition, funds must have a customer's signature on file to open an account. But new customers can download a sign-up form from most interactive World Wide Web sites, making it easier to fill out and mail in with a check, said Tom Gannon, manager of customer marketing for the T. Rowe Price family of mutual "We're trying to change the way our customers use our services." – ‚Stephen Killeen, senior vice president of interactive services, Fidelity Investments funds, which launched its interactive site in April 1997. Consumers are catching on. T. Rowe Price won't release details, but Gannon said the industry trend is that use of such services doubles every six to 12 months.

When Fidelity started its interactive Web site in January 1997, it had about 30,000 visits a month. Today, the site has 9 million visits a month, said Stephen Killeen, senior vice president of interactive services at Fidelity, who said that 17 percent of Fidelity's mutual fund transactions are made online.

"We're trying to change the way our customers use our services," he says. Fidelity would like customers to do basic research on funds via the Internet and then use Fidelity's telephone crew to answer more complicated questions.

Funds have good reason to steer customers to the Internet, according to mutual fund analysts. Creating an online service is costly, but fund analysts say that over the long term it should save money on providing information and executing trades.

The cost of providing legally required information or executing trades on the Internet is "well under $1," said Lepeak. The same services by phone or mail cost "anywhere from $1.50 to over $6," depending on the transaction and what overhead costs are included, he said.

"Whether funds will pass that savings along remains to be seen," he said, noting that banks often charge customers to use automated teller machines even though they cost much less than employing a human teller does.

But Michael Gazala, senior analyst at Forrester Research Inc., a technology research firm in Cambridge, Mass., said interactive sites may help consumers demand that the savings be passed on by allowing them to shop around and compare.

Another benefit for funds is that they can collect more information about investors online, both by asking questions directly about investment goals and by keeping track electronically of how a consumer uses the site.

Financial service providers have only begun to scratch the surface of potential Internet investment, Gazala said. A recent Forrester survey showed that only 13 percent of consumers who are online have used the Internet to buy stocks and bonds or mutual funds. The research company estimates that 4.5 million online investment accounts for mutual funds or stocks and bonds will grow to 5.3 million by the end of the year and to 14.4 million by 2002.

Mutual fund industry analysts caution that, despite the advantages of using the Internet for fund investing, investors should be aware that problems could arise. For example, if a customer agrees to receive required disclosure information electronically, what happens if the customer says that e-mail disclosure was never received?

Some funds are cautious about moving onto the Internet. The Harbor Funds family of funds in Toledo, Ohio, for example, is testing an interactive Web site with "a handful of clients to see how it goes," said Harbor spokesman Sam Allen. "It's a complicated matter. We really want to make sure this is the most economical way to communicate," he said.

Many investors are cautious, too. They "want to talk to a real person," Brobroff said. But for those willing to try, he said, the Internet is a convenient way for investors "to do their homework.