If the Internet is to become a dominant mutual fund distribution channel, it will be accomplished through the establishment of mutual fund supermarkets online, industry observers say.

Mutual fund assets managed online could total $1.2 billion by the year 2003, according to Forrester Research, an Internet consulting group in Cambridge, Mass. But in order to reach that level, the methods of selling mutual funds now prevalent on the Internet will have to change.

Choice is so important that those companies that can copy a fund supermarket and brokerage model on the Internet will be the ones to succeed, according to Forrester in a report, "Net Investing Goes Mainstream," issued in March. But only the largest companies are capable of doing that, Forrester said.

Most online mutual fund sales in the future will be done through some sort of intermediary like a fund supermarket because single fund companies' websites do not offer enough product, Forrester said.

"The buying experience online will be so superior that Net fund supermarkets will become the primary purchase point for mutual fund customers, accelerating the separation of the fund complexes from the customer," the report said.

Online fund supermarkets could shut out online marketing by direct firms through their own websites, said James Punishill, an analyst at Forrester who helped write the report. Those who are not large enough to create their own supermarkets will have to push their funds into existing supermarkets.

But funds should still offer their funds at their websites, said Punishill.

Funds will also have to improve the quality and increase the quantity of advice they provide online for online sales to reach their potential, according to both Forrester and Cerulli Associates, a mutual fund research firm in Boston.

"There is a perception that the online channel is generating phenomenal new account growth," said John Payne, an analyst with Cerulli Associates. "We are basically testing that perception in the marketplace."

So far, in its study of the Internet as a distribution channel, Cerulli has found that most online brokerage accounts have been created by existing brokerage customers. That might not bode well for the directly-sold mutual fund industry, which is betting that better websites and online account access and trading technology alone will attract new assets.

Over half of the 7.3 million online brokerage accounts in existence were started by people who already had traditional brokerage accounts, according to Cerulli research.

The discount brokerage industry has catered to "full-service (brokerage) mal-contents," Payne said. Mainstream investors will not be attracted to making transactions on the Internet unless they are offered more advice than they can currently obtain online, he said.

"At this stage in the game, the Internet cannot deliver the level of highly personal and customized guidance that can be obtained by a financial intermediary," Payne said. Compared to the Internet, financial advisors are the clear winner in delivering financial services, said Payne.

The gap, however, is narrowing in the amount of information being disseminated through the Web and its transaction execution capabilities.

But, advisors still have more access to products, and their advice is much more valuable than the advice being given out over the Internet, said Payne.

Growth of online brokerage accounts has been slowing since 1997, according to Cerulli.

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