Tampa, Fla. -- Fidelity President Robert C. Pozen calls the mutual fund industry "one of the great growth stories of the 20th century," but he does not believe that it will continue to be in the next century.

As a result, Pozen told industry officials at the National Investment Company Service Assocation operations conference here last week that the greatest challenge they face is lowering investor expectations after years of great market returns.

Investors have come to expect 20 percent returns year after year which is out of line with the historical returns, he said.

"We've got to bring down their expectations, otherwise we're going to have a lot of unhappy customers," Pozen said.

Besides because of the bull market, the mutual fund industry has been successful because of the transition from defined benefit plans to defined contribution plans as the most popular retirement plans offered by employers, Pozen said.

"The mutual fund industry has been very quick to provide all those services," Pozen said. And, it is doing a better job than banks or insurance companies.

Another reason for the success of mutual funds has been the proliferation of funds, Pozen said. There are more mutual funds than stocks listed on the New York Stock Exchange, he said. Further, the popularity of tax-managed products like variable annuities that use mutual funds within an insurance product, has buoyed the mutual fund industry.

While Pozen said fund supermarkets are one of the most important recent developments in the fund industry, he was less enthusiastic about developments in the Internet.

There is too much information found online and it gives people the faulty impression they can find investment answers on the Internet, he said.

"You have more and more people who figure they can do it," he said. "They're confusing volume of information with significance of information."

Consolidation is likely to continue in the industry as middle- and small-sized companies get squeezed out by the top ten players who hold most of the industry's assets, Pozen said.

"The people who get squeezed are the people in the middle because it's very expensive to own their own distribution channel," he said.

While consolidation will continue, niche money managers will flourish by using fund supermarkets, he said.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.