Mutual fund companies are not only grappling with how much to invest in developing their websites but also how much to spend on online advertising and marketing to drive traffic to their sites.

Mutual fund companies are allocating a very small percentage of their advertising budgets to online advertising, say technology consultants. Paid Internet advertising comes in several forms. There are, of course, the rectangular banners that flash at the top of search engines like Yahoo! and websites like Bloomberg and Morningstar.Net. But there are also the less overt marketing partnerships that fund companies and brokerages strike with Internet service providers like America Online or with websites aimed at particular demographic groups, that have personal finance sections.

Of course Internet brokerages are spending the most on Internet advertising since their success depends on how much money they can attract through the Web.

But the Internet is only one distribution channel for mutual fund companies, and until companies map out their online strategies and institute them, they will surely be cautious on how much to spend on online advertising and marketing.

A recent survey by Mainspring Communications of Cambridge, Mass. found that fund companies that are selling through brokers are not buying Internet advertising. However, direct-sell companies that do have a large online presence are advertising online. But, most are allocating a meager one percent of their advertising budgets to the Internet medium.

Fund companies may be tiptoeing into Internet advertising because it operates differently than television or print advertising. The cost is calculated differently because of the medium, and because people do not react to Internet advertising the same way they do to television advertising.

The difference between online and traditional advertising is that online advertising must deliver more than just a branding message, technology consultants say.

"It's more about living your brand than branding," said Bill Doyle, director of money and technology strategies at Forrester Research, a consulting firm that specializes in technology, also in Cambridge, Mass. Doyle says this means that good online advertising provides an experience which supports claims made in a company's advertising.

"(You should) actually deliver the goods," Doyle said. "Live for what you stand for (in the ads)."

For example, Merrill Lynch frequently claims that its research is the best available. To convey that the company's claim has substance, a surfer should be able to gain access to Merrill Lynch research through links on its online advertisements, Doyle said.

The cost of banner ads is calculated in blocks of 1,000, and ranges from $25 to $75 per 1,000 impressions, according to Jeffrey Silverman, a business and finance specialist at DoubleClick, an online advertising firm in New York City. An impression is a one-time viewing of an advertisement by an individual.

But banner ads are not the most effective way to spend online dollars, says Doyle of Forrester. Many people have learned to block - by programming browsers to screen out - such banner advertising. Besides, banner ads seem to be turning off surfers and ever fewer people are clicking on the ads, he said.

Research by Forrester has found that the best online marketing tools are partnerships that are struck on a per-performance basis, meaning that fund companies pay only for results. This type of deal can be less expensive and more effective than exclusive marketing contracts that cost a lot but do not hinge on performance.

For instance, a fund company can place a link in the personal finance section of a niche website, say a website for women, and every time someone follows the link to the fund company and opens an account with the fund company, the niche site will receive a payment. The operator of the website may also get paid if the visitor just fills out an application. Traffic between the two sites is easy to track in most cases, Doyle said.

Less effective are marketing partnerships that involve exclusive contracts for large lump sums that are unrelated to performance, says Doyle. Last year, AOL struck million-dollar deals with a handful of online brokerages, giving them exclusive rights to prominent display of their names and links to their sites in its personal finance section. Doyle doubts that approach is as productive for the brokerages as making arrangements with individual websites on a performance basis.

It is important for mutual fund companies to be creative with banner advertising and find better ways to draw potential investors, said Silverman of DoubleClick. For instance, fund companies can pay certain websites and search engines to display their ads when a surfer types in a given company's ticker symbol.

For instance, if a surfer types in the ticker symbol for IBM, a fund company's banner might appear suggesting that the surfer look into the company's technology funds. Further, fund companies can customize their ads to correspond with the particular companies about which surfers might be seeking information. In such an ad, the fund company might not only suggest the surfer consider its technology funds but it might also advertise that a specific fund is invested in a particular company, for example IBM.

Silverman agrees that besides banner advertising, online relationships with websites and online services are the most effective tools in Internet marketing even though few companies are using them to their best advantage.

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