DIRECT HIT: FUNDS FLOW THE OTHER WAY; MARKET SHARE PETERING OFFERS MORE EVIDENCE OF PLANNERS’ POWER

Numbers don’t lie.

The percentage of mutual funds sold directly through the mail or via toll-free numbers has declined every year in this decade, leaving no-load fund firms relying more than ever on advisers and retirement plans to preserve their market share.

Just 18% of fund sales were made directly to investors in 1998, down from a peak of 33% in 1990, according to estimates from Financial Research Corp., the Boston-based fund-industry research firm.

At the same time, the share of the market enjoyed by no-load firms has remained at around 40% throughout the decade.

How are these direct marketers keeping their heads above water? No secret. They’ve been tapping fee-based investment advisers, retirement plan sponsors and the mutual-fund supermarkets offered by discount brokerages like Charles Schwab Corp., Fidelity Investments and others.

Of course, some individual investors are buying funds through the supermarkets — and FRC lumps them in with the advisers and 401(k) plans — but the trend is unmistakable. Overwhelmed by thousands of funds and challenged for time, people want investment advice, and more are seeking it.

“Nothing in (the data) surprises me,” says Ed Clarke, vice president at J.P. Morgan & Co. Inc. in charge of mutual fund sales to advisers. “Clearly, the marketplace has been evolving this way over the last several years. We tend to think (the numbers) will continue in that vein.”

So does FRC analyst Tom Tyson, who says his firm believes direct sales will drop to 15% of total fund sales within the next few years and stay at that level.

That explains, then, why no-load fund firms have put together conferences to draw advisers and hired armies of wholesalers to market to them. But most of these firms are training their marketing guns on the largest adviser practices — ones with $100 million or more under supervision.

Many of those advisers classify themselves as “wealth managers,” declaring themselves client fiduciaries and offering increasingly affluent investors not only investment advice, but estate- and tax-planning guidance, too.

The fund firms’ focus on wealth managers isn’t misplaced, since they belong to the fastest growing segment of the adviser marketplace — now controlling about $336 billion of the $1.6 trillion FRC estimates is overseen by independent advisers. They also are prized by mutual fund firms because they often are perceived as more patient investors than other advisers.

One sign of the heightened competition: For the first time, this year there are two elite conferences scheduled for the wealth management crowd: one in May sponsored by J.P. Morgan — which has hosted these invitation-only gatherings the past two years — and the other in June by Undiscovered Managers, a new fund firm out of Dallas.

Increasingly, however, these high-end advisers want investment options that aren’t available to their clients directly — either funds sold only to advisers on a quasi-institutional basis or special low-priced shares of mass-marketed funds available only to them.

Companies from Bankers Trust New York Corp. and J.P. Morgan to more retail-oriented names like Schwab and Strong Capital Management are doing just that. And it’s a warning signal to no-load fund firms that are counting on high-end advisers to fuel much of their growth: Don’t expect them to keep buying funds available to the retail investor universe, particularly as more products tailored just to them become available.

“I think clients see all these funds marketed through an 800 number and say (to the adviser), `Why do I need you? This is something I can get directly on my own,’ ” says Sidney Blum, whose Northbrook, Ill., advisory, Successful Financial Solutions, oversees $60 million. “(Clients) like the fact that there are institutional funds they couldn’t get their hands on before.”

Adds Craig Litman of Larkspur, Calif.-based Litman/Gregory & Co. LLC, which supervises $500 million: “I don’t think there’s any doubt about it — advisers are looking for any way they can add value.”

In addition to the exclusivity, advisers point to the lower fees and smaller fund sizes that can make the portfolio less prone to performance-inhibiting asset bloat.

Undiscovered Managers is a case in point. Launched last year by former Merrill Lynch & Co. executive Mark Hurley and now managing about $100 million, it sells specialized products only through advisers. One is a fund co-managed by University of Chicago behavioral finance guru Richard Thaler, based on precepts of market psychology.

“Advisers are really institutional investors,” Mr. Hurley argues. “They are looking for product that isn’t mass retail…institutional, separate-account management, repackaged as mutual funds. You’ve got to figure out who’s the client if you’re the mutual fund company.”

Indeed, some of the no-load fund firms with years of experience dealing with advisers are narrowing their focus to target specific types, typically the wealth managers.

For example, Montgomery Asset Management LLC in San Francisco exited the separately-managed-accounts business late last year. It now plans to expand on the approach it took last summer when it created a special, lower-priced version of its top-rated International Fund just for advisers. (Assets in the adviser version now are approaching $100 million).

more adviser-only funds

Special adviser versions of other Montgomery Funds will be out later this year, says Mark Geist, Montgomery’s president.

“We all (in the fund industry) see the adviser market as continuing to grow in importance,” Mr. Geist says. “We all experienced the negative side as to how some of them managed money. Many of us have reconsidered our focus.”

Likewise, Menomonee Falls, Wis.-based Strong Capital Management, moving ahead in its adviser efforts after the surprise firing of intermediary sales chief Don Tyler, plans to debut institutionally priced shares of its top funds. This also is a stab at the wealth-management crowd, says Randy Henze, vice president of intermediary services for Strong, which runs $32 billion.

“Over time,” predicts Mr. Hurley of Undiscovered Managers, “advisers won’t want to sell products that can’t be sold other than through them.”