SCHWAB, FIDELITY SAIL OPPOSITE TACKS: ONE EYEING OUTSIDE MARTS AS THE OTHER PULLS BACK

As Fidelity Investments takes steps that will make it more difficult for some financial advisers to buy many of its most popular mutual funds, rival Charles Schwab Corp. is moving in the opposite direction.

The nation’s biggest online broker plans to distribute its proprietary fund family through other companies’ mutual fund supermarkets. The move would allow customers for the first time to buy Schwab’s funds through supermarkets run by such rivals as Fidelity, Waterhouse Securities Inc. and Datalynx.

Schwab offers 49 mutual funds, including 12 index and 17 money-market funds. Its fund assets exceed $92 billion.

A Schwab spokesman declined to be specific about when the funds would be available through outside supermarkets, but implied an announcement is imminent. “We intend to do it as soon as we can,” says Gregory Gable.

The maneuver comes just as Boston’s Fidelity is pulling its retail funds off the shelves of outside supermarkets aimed at advisers -a move that has some folks scratching their heads.

In a strategy obviously intended to steer advisers to its own supermarket – Institutional FundsNetwork – Fidelity will no longer let advisers not using it as the custodian of their assets buy its retail funds.

Instead, they will be restricted to choosing from the firm’s 39 Advisor Funds, which come with a sales charge of between 3.5% and 5.75% of assets.

Advisers buying through supermarkets now can use both retail funds, most without a sales charge, and adviser funds.

Richard Sincere, a former senior vice president of marketing for Fidelity’s adviser group, calls the move “short-sighted.”

“It’s being done at a time when Fidelity is enjoying success with many of its funds, but the time won’t always be positive,” says Mr. Sincere, now president of Sincere & Co., a mutual fund marketing and distribution firm in Holliston, Mass.

Robert Mazzarella, president of Fidelity’s institutional brokerage group, disputes the notion that the firm is attempting to leverage the improved performance of some of its funds. “We are trying to get clarity across our product lines and their appropriate distribution channels,” he says.

supermart users are different

The rule change doesn’t apply to advisers who use Fidelity’s supermarket, Institutional FundsNetwork. Those advisers will continue to have access to such well-known retail funds as Magellan and Large Cap Stock. But starting Jan. 1, 2000, they will no longer be able to buy Fidelity Advisor Funds.

Financial advisers who don’t use supermarkets – typically those at wirehouses and independent broker-dealers – have been able to buy only Advisor Funds – a policy that isn’t changing.

Fidelity last week sent a two-page letter to hundreds of advisers outlining the change regarding the availability of Fidelity retail funds through institutional supermarkets, which goes into effect on July 1. It also noted that some advisers have benefited unfairly from having access to both Fidelity’s adviser and retail fund families.

“Fidelity’s new fund distribution policies will eliminate these inconsistencies, clarify the distribution of each fund family in the marketplace and better align them with the range of Fidelity customers, both retail and institutional,” wrote Mr. Mazzarella.

Fidelity says the new rule will affect between 50 and 75 advisory firms that regularly buy its retail funds and that the assets involved total $2.5 billion, or 17% of the money invested by registered investment advisers in mutual funds through FundsNetwork and outside supermarkets.

Schwab is likely to bear the brunt. Of its 5,400 advisers, about 2,800 have some of their clients’ money invested in Fidelity retail funds, says Mr. Gable, the Schwab spokesman. He says Fidelity’s strategy “doesn’t make sense,” given advisers’ demand for choice.

“It’s like throwing up the Berlin Wall again,” he says. “Investment managers don’t want to be controlled.”

Tim Grugeon, president of Aris Corp. of America in State College, Pa., which manages $1.2 billion, concedes the move is likely to anger some financial intermediaries. “People resent being forced into doing stuff,” he says.

Even so, some advisers seem unfazed by Fidelity’s announcement. “We believe in having multiple custodial relationships anyway,” says Edd Hyde, president of Radnor Financial Advisors in Wayne, Pa.

For its part, Schwab is actually making it easier for clients to move out of is funds.

Under the current system, customers who want to leave its OneSource supermarket must redeem any shares of Schwab funds the have – possibly incurring a hefty capital gains tax bite in the process. By selling their funds through outside supermarkets, the same customers can easily transfer shares between investment companies.