Just as the megastores of Home Depot and Lowe's have come to dominate the home-improvement market, and those of Circuit City and Best Buy the market for electronics, so is the supermarket concept coming to tower over the sale of mutual funds.
A mutual-fund supermarket is a brokerage, increasingly an Internet brokerage, where consumers can buy and sell thousands of funds in one location and receive a consolidated statement of their transactions. Traditionally, investors have purchased fund shares directly from the fund companies, either by mail or through a conventional brokerage.
Pioneered by discount brokers Charles Schwab & Co. and Fidelity Investments in 1992, mutual-fund supermarkets now account for more than $250 billion in assets, according to industry analysts. That's a small slice of the $5.5 trillion total for the industry. But eight years ago, the money flowing through such supermarkets was negligible.
The growing share of business for fund supermarkets is good news for consumers, experts say, because it is spurring more competition.
Many supermarket funds can be traded without a transaction charge, just as if an investor had gone directly to the fund itself, said Andrew Guillette, a consultant at Cerulli Associates Inc., a Boston-based research and consulting firm. These are known as non-transaction-fee, or NTF, funds.
Funds traded without a transaction fee instead pay a charge to the supermarket based on the money the supermarket brings to the fund. But supermarket customers can also buy funds that charge a transaction fee, though all activity with the fund still is consolidated on one statement from Fidelity, Schwab, Jack White Co. or other discount brokers.
Supermarkets grew out of consumer demand for one-stop shopping, greater choice and less paperwork.
Professional financial consultants, known as registered investment advisers, also are heavy users of the supermarkets. "Both individuals and advisers are equally important to the supermarket marketplace," Guillette said.
Supermarkets are mostly the domain of discount brokers. Industry founders Schwab and Fidelity still lead the pack, with nearly 95 percent of the business. Jack White is a distant third, analysts say. The rest of the market is made up of a handful of other, much smaller players.
Full-service brokers such as Merrill Lynch & Co. and Smith Barney also have supermarkets, but customers typically can access them only if they have an asset management account, or wrap account, with the firm. Such accounts typically carry annual fees and other charges.
But as consumer interest in discount supermarkets grows, so will the number of players.
"Now there are scores of groups moving for that space," said Russ Kinnel, mutual fund editor for Morningstar, a Chicago-based company that tracks the fund industry. He said he hopes that the increased competition will lower fee funds charge shareholders. He notes that mutual fund expenses so far have not fallen as much as the cost of buying and selling securities.
The recent announcement by Merrill Lynch, the nation's largest retail broker, that it will offer online trading in December has many in the supermarket industry watching whether the firm will launch a discount supermarket. A Merrill spokesman would not comment, saying it's too early for the company to release details of its online venture.
Kinnel, however, feels confident that consumers will see "a great epic battle shaping up" between the traditional brokers and the discount brokers over mutual fund supermarket sales. In all likelihood, that will mean that each side will come to resemble the other.
Discount providers are offering more and more services to consumers, and the traditional full-service brokers will begin to offer more no-frills, discount products, such as low-cost buying and selling of securities.
"Supermarkets will have to differentiate themselves by quality of service and what they offer," said Michael Evans, an analyst with Financial Research Corp. in Boston.
Supermarkets such as Fidelity's already provide shoppers with questionnaires and other tools to help them choose the right fund, based on such factors as their tolerance for risk, their tax status and how long they plan to hold the investment.
The blurring of the line between discount and full-service brokers is inevitable as consumers continue to demand low-cost services but also seek more help in choosing investments.
"People will still seek advice because there's so much choice," Evans said.
The Internet is helping to spur supermarket growth, but growth was steady even before the Internet explosion, said Matt Sadler, senior vice president of Fidelity's supermarket.
Supermarkets aren't without critics. John Bogle, founder of Vanguard Group Inc., which pioneered low-cost index mutual funds, says customers who don't buy funds through supermarkets are subsidizing those who do--by absorbing the fee the fund pays to the them.
But analysts say that's not necessarily true. Part of the payment a no-transaction-fee fund makes to a supermarket is for assuming the responsibility for bookkeeping and other paperwork on a customer's account, and often the rates charged for these services by Schwab and others is less than the fund would typically pay.
But T. Rowe Price Investment Services Inc. in Baltimore, which offers its own family of funds, won't pay a discount broker to be included in its no-transaction-fee supermarket.
"We prefer to maintain a direct relationship with customers," said T. Rowe Price spokesman Steven E. Norwitz. "When you go through a no-transaction-fee program, you lose that."
The Mega-Stores of Fund Sales
These are the top three mutual-fund supermarkets by asset size, but other discount brokers also offer this kind of service.
Minimum investment: $2,500
Funds with no transaction fee: 1,100
Total in supermarket funds: $129.1 billion
Minimum investment: $2,500
Funds with no transaction fee:
Total in supermarket funds: $109.9 billion (excludes Fidelity funds)
Minimum investment: $1,000
Funds with no transaction fee: 1,400
Total in supermarket funds:
$5 billion (estimate)
*Brokerage account also required
SOURCE: The companies, Financial Research Corp.