A mutual fund is sold, not bought, the old saying goes. To that end, it should come as no surprise that some funds are trying to lure new investors and retain existing ones by offering everything from credit cards to free weekends at beach and ski resorts.
In fact, many funds, especially direct-sold groups, have sought alliances with other companies and organizations to either offer added incentive to purchase their funds or create a stronger appeal to a select group of investors.
Distribution through affinity groups may develop a stronger tie to a fund, but it is not likely to attract a huge flow of assets, according to industry observers. Nevertheless, firms like Fidelity Investments, Zurich Scudder and SunAmerica have developed affiliations with non-financial organizations and companies in an effort to sell or enhance their product offerings.
Fidelity launched just such a program with American Express four years ago. The program allows Fidelity investors to receive either a gold or platinum AmEx card that automatically pays their card balances on a monthly basis out of their Fidelity accounts. Investors must have a minimum of $5,000 in either a brokerage, savings or money market account, said Jim Griffin, a spokesperson with the company.
The program also allows Fidelity to aggregate investors' statements on to the AmEx bill, consolidating all of their accounts onto one statement, he said. The annual fee AmEx charges all of its other card holders is waived for participating Fidelity clients.
Good For Us, Good For You
The partnership is good for Fidelity because it gives its clients additional services with the automatic bill paying and aggregated account statements, Griffin said. And it's good for AmEx because it allows them to market to thousands of Fidelity's clients, he said. "We are able to provide customers with added services that, to our knowledge, no other firms offer their clients," he said. While the service is not going to attract new assets to Fidelity, it does help retain clients, Griffin said. "The bill pay service is a sticky service," he said. "When customers use it, they really like it."
Other smaller fund groups like Baron Funds of New York have offered similar promotions as a way to create a stronger tie between investors and their funds. The fund group offers discounts to certain companies in which its funds invest including Sotheby's and Vail Resorts. The company's "Cool Deals" program offers investors discounts when they patronize companies that are part of the promotion. The offer is intended to increase shareholders' knowledge of their funds' underlying investments while encouraging them to patronize the businesses that they indirectly own, according to the company.
Promotional offerings that pair consumer product companies with investment managers have had somewhat limited success enhancing fund sales because they are counter-intuitive to how investors buy funds, said Dennis Dolego, director of research for the Optima Group of Fairfield, Conn. "Generally, the determination to invest should be made on the product's suitability and its intrinsic value, meaning performance," he said. "I think the public is hesitant to make investment decisions based on a promotional value."
However, that has not stopped some consumer product firms from crossing over into the investment management business by leveraging their brand name. For instance, AMR Corp., the parent company to American Airlines, launched American AAdvantage Funds in 1987. AMR Investments, the funds' advisor, initially ran the firm's pension funds before the company decided to offer a retail family of funds. AMR manages 15 no-load AAdvantage funds that include a series of index, value and bond funds.
The AAdvantage funds offer three different share classes: institutional, retirement and a share class that allows retail investors to accrue mileage on American Airlines. The mileage share class credits shareholders on a monthly basis with one mile for every $10 held in an AAdvantage fund.
In total, the AAdvantage funds hold approximately $14.3 billion in assets, $2 billion of which is held in the mileage class, according to Terry McKinney, a company spokeswoman.
The mileage class, which is technically a separate set of funds, was developed as a way to provide an added incentive to invest in the funds, she said. It was never intended to attract assets, but it helps retain them, McKinney said. "I think the mileage program insulates some of the assets," she said.
Still, since launching in 1994, the program has had moderate success. Most of the AAdvantage funds are sold direct, with the exception of the money market funds, which are sold through TD Waterhouse and SW Securities. Nearly half of the $2 billion held in the mileage program comes from the money market accounts, while the direct-sold funds have generated the other half of the assets.