WASHINGTON - Financial services firms which fail to find ways to distribute their products and services on the Internet will have their market shares eroded by newcomers, Internet executives warned mutual fund executives last week.

The Internet executives spoke at the annual meeting here of the Investment Company Institute. The industry's use of the Internet was a major topic of conversation at the conference.

How financial services companies use the Internet will go a long way towards determining their success, top executives from Internet companies said.

"If you're a winner today, I think you've got to reinvent yourself," said Richard Owen, vice president of Dell Computer Corp. of Round Rock, Tex.

As much as 40 percent of commerce will be conducted on the Internet in the next few years, said Meg Whitman, president and CEO of eBay, the Internet auction company of San Jose, Calif. Companies which now sell their products and services exclusively through stores must use the Internet to build parallel distribution, even if it means temporarily eroding the profitabilty of some of these companies, Whitman said.

"You've got to do it to yourself before somebody does it to you," Whitman said.

Newcomers to an industry who distribute through the Internet are prepared to undercut the prices of established firms in order to build market share, said Whitman and other Internet company executives. These Internet distributors will also compile customer lists from the Internet which will provide valuable information for future sales. That competitive pressure will drive change in the financial services industry, the Internet executives said.

"The web is a giant threat to the financial services industry," said Jay S. Walker, founder of priceline.com, an Internet company in Stamford, Conn.

John J. Brennan, chairman and CEO of the Vanguard Group of Malvern, Pa., and ICI's chairman, who also addressed the conference, warned mutual fund executives against complacency in any aspect of their businesses. More than 1,600 mutual fund company executives and vendors who serve the industry attended the conference.

The ascendance of the Internet was not lost on mutual fund executives. Robert Pozen, president and CEO of Fidelity Management & Research of Boston, said the Internet and a second factor, growing investor demand for advice, are creating two separate trends in financial services.

Do-it-yourself investors are heading online in increasing numbers, Pozen said. About 75 percent of the trades investors place through Fidelity's discount broker/dealer are now being made online, he said. Nevertheless, mutual fund transactions online have grown more slowly than securities transactions, Pozen said. That is a result of a growing demand for more investment advice, he said.

While the Internet is attracting direct investors, "clearly there is this huge appetite that's going the other way," Pozen said.

"These (trends) are actually both going on at the same time," Pozen said.

The Internet actually is helping to provide advice in that the medium enables firms to supply investors large quantities of information, Pozen said. It also allows firms to disseminate to investors calculators and other devices they can use to determine their investment needs and how best to meet them.

Within three to four years, Internet access essentially will be universal, said Walker of priceline.com. Firms' degrees of success will depend on their ability to use the Internet to solve investors' problems, he said.

"It's really about technology almost never," Walker said.

While he said that the Internet will be important for companies in the future, Peter Lynch, vice chairman at Fidelity and former portfolio manager of the Magellan Fund, expressed skepticism about the valuations of public Internet companies as a class.

"This is a very irrational-priced industry," Lynch said in the conference's keynote address. Lynch, who talked about the importance of knowing the fundamental facts about a company before investing, also decried day-trading of securities as dangerous.

"That's gambling," Lynch said. "That's not investing. You get the same result at a casino except there is a lot more paperwork" with day-trading.

Brennan, in his remarks, also was critical of day-trading.

"Substantial efforts are being made to seduce investors" into becoming day-traders, Brennan said. The investment diversification of mutual funds provides protection against the investment risks of day-trading, Brennan said.

In a report earlier this year, the investment banking firm of Putnam, Lovell, de Guardiola & Thornton of San Francisco said that direct securities investing appeared to be cutting into the growth of mutual funds. Brennan said such assessments are not accurate. Households are continuing to shift away from directly holding securities to investing in mutual funds, Brennan said.

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