Supermarket Blues - rating discount brokerages

Kiplinger's Personal Finance Magazine, August, 1999 by Steven T. Goldberg

One-stop shops for mutual funds are suffering from growing pains.

Mutual fund supermarkets seem as good an idea as, well, supermarkets. You do all your fund shopping under one roof and get statements and tax information from one source instead of many. And no more wiring money from one fund company to another.

But seven years after Charles Schwab started the first fund supermarket at the discount brokerage that bears his name, the disadvantages of supermarkets are apparent, too.

* Funds available at supermarkets without transaction fees typically carry higher expense ratios than other funds.

* Online brokerages that also serve as fund supermarkets are so overwhelmed with stock traders that they can be difficult to contact by phone.

* Incidental fees are a nuisance at many supermarkets, and infuriating at a few.

* Many supermarkets still don't tell you the cost basis of investments you make with them. That's vital information when it comes time to sell and pay taxes, and difficult to determine on your own without special software.

In sum, you may end up wishing you'd never opted for one-stop shopping. And maybe you shouldn't. If you have less than $10,000, it's easier to invest directly with one or two fund families. Odds are you'll get better personal service over the phone when you need it, and you'll avoid some of the aggravating fees that sneak in among the supermarket aisles.

We put 22 of the supermarkets under the microscope and ranked them on the criteria that are critical to most investors: breadth of fund offerings, transaction costs and ease of contact when you need them. We also quizzed them about special services and extra costs they impose. The table on page 85 contains the rankings.

Four supermarkets are standouts. As we'll explain, Scudder Preferred Investment Plus, National Discount Brokers, DLJdirect and Muriel Siebert & Co. FundExchange provide the best combination of selection, cost and access while avoiding some of the frequent irritations.

In conjunction with the table, evaluate the fund supermarkets by asking the following questions.

WHAT ARE MY CHOICES?

The funds found in most supermarkets can be divided into three categories: no-load funds that come with no transaction fee (NTF funds, for short), no-load funds for which you pay a transaction fee and broker-sold funds that charge a sales fee. The vast amount of money invested through supermarkets goes into the first category, and it is there that you should shop the hardest.

In terms of NTF offerings, Scudder wins hands down--2,600 funds in its catalog are NTF no-loads, including those of Fidelity and Vanguard, which are otherwise available without transaction fees only in their own fund supermarkets. Otherwise, the range of available NTF funds runs from York (1,825) to Strong (90). Strong, by the way, makes a virtue of its limited selection--its own funds and the likes of Acorn, Baron, Marsico, Oakmark and Warburg-Pincus, among others--by saying the fund marketplace has become too crowded and confusing.

One downside of NTF funds is that you pay indirectly for what you get. Each year supermarkets charge funds on their NTF lists as much as 0.35% of assets invested for the privilege. To absorb the expense, funds have to have sizable expense ratios, and Morningstar reports that the typical NTF fund has expenses 0.32 percentage point higher than funds that are not involved in NTF deals.

So what's an investor to do? Consider paying the transaction fee if it means getting a similar no-load fund with a lower expense ratio. Remember, you cannot accurately forecast a fund's total return, but you can predict what you will not earn because it's taken out in expenses.

National Discount Brokers offers the most no-load funds with transaction fees (2,575), and Discover Brokerage, the fewest (150)--that is, excluding Scudder, Strong and York, which avoid such transaction-fee funds altogether.

WHAT WILL IT COST ME?

Whether it is cost-effective to pay transaction fees depends, of course, on the fees themselves. We determined the cost of paying a transaction fee to purchase both $5,000 and $50,000 worth of shares online, added the fees and ranked the supermarkets on the total amount. Again, National Discount Brokers wins the gold medal by charging $20 for either transaction. In fact, all but the most expensive fund supermarkets levy only one fee for purchases of all sizes, and that figure is typically between $24 and $35.

On the other hand, Bidwell, Bull & Bear and Charles Schwab Mutual Fund Marketplace charge significantly more for a $50,000 trade ($99.85, $102.40 and $119.20, respectively) than for a $5,000 transaction. Our bottom-of-the-barrel cost rankings for those three outlets reflect the higher fees. Fidelity Funds Network charges a flat $75 for either size buy, but Fidelity doesn't charge a commission when you sell a fund.

There's another element to the cost equation--the way some supermarkets nickel-and-dime you until the dollars add up. American Century Brokerage FundChoice, Bush Burns Securities, Dreyfus Lion and Fidelity FundsNetwork levy account-inactivity fees (Fidelity charges every three months, the others once a year). Annual charges to maintain IRA accounts are common, and Schwab, Dreyfus, Scudder and Strong charge annual fees if your balance dips below their thresholds. Bidwell adds a $1.25 postage-and-handling fee to each transaction, and Dreyfus charges $2.50 for transaction-fee trades.