Welcome to the new millennium!

As the old one drew to a close, consultants and analysts in the mutual fund and technology industries described how on-line technology had already and would continue to transform the mutual fund industry.

"Three to four years ago, if a fund company even had a website, it was a lot like a computer version of their brochure," said Chris Doyle, a spokesperson for American Century of Kansas City, Mo. "There was information about the company and what it offered but that was about it. Today you can check your account balance, link up with news stories and conduct transactions. When you compare how far the telephone came in the past 100 years with how far the Internet has come in the past three or four, you get a better sense of what we are talking about here."

Fund companies' abilities to provide the latest on-line technology will have a huge impact on their future success or failure, said Steven Miyao, a senior vice president with kasina LLC, a mutual fund consulting firm in New York.

"I think web sites will be a primary distribution point for mutual funds," said Miyao. "Even fund companies that distribute through intermediaries will need to have up-to-date web sites because investors are using the web more and it is such an easy tool to use. The fund companies that are not addressing this and are not branding on-line won't be able to provide this channel.

"There is a lot of consolidation going on and part of that is due to the fact that some companies can not afford to make the investment needed to compete."

Besides becoming a vital distribution channel, the Internet is an attractive method of doing business because of the customer loyalty it can generate, Miyao said. Ninety-five percent of on-line brokerage customers conduct all their transactions with the same company. That statistic is not only encouraging fund companies to offer funds on-line, but is also pushing them to diversify into the on-line brokerage business, he said.

The growth of the Internet as a distribution channel will force traditional investor-advisor relationships to change, said Bill Trahant, a senior partner with PricewaterhouseCoopers of New York. Trahant is the co-author of "Business Climate Shifts," a book that outlines how industries are changing as a result of technology.

"The people layer' that is the emphasis of so many businesses, will not be as important as it is today," he said.

While the idea of reducing or eliminating the "people layer" from the mutual fund industry might seem unlikely or undesirable, technology-driven shifts in client-business relationships have already taken place, said Trahant. The automated teller and its ascendance as the standard means of conducting banking transactions is an example of how technology can change consumers' traditional model of a business relationship, he said. Consumers were willing to shift their model of banking transactions because of the ATM's convenience.

Many analysts believe a comparable shift is in store for the fund industry.

"Obviously, the purchase of mutual funds over the web is going to grow," said Russ Kinnel, an analyst with Morningstar of Chicago. "You will see more of the traditional investment centers going away." The Internet and the information found on company websites is eliminating traditional information sources, he said.

Currently, the Internet is used less than 10 percent of the time to conduct fund transactions, according to a survey released earlier this year by American Century.

That seems likely to change soon.

The survey's results reveal the explosion in the number of mutual fund investors who use the Internet as an information tool. Between 1996 and 1999, mutual fund investors using the Internet to conduct research increased from 18 percent to 62 percent, the survey shows.

Also, investors' concerns about on-line privacy and reliability are easing. In 1996, sixty-eight percent of those polled listed privacy issues as their primary concern regarding on-line transactions. Only 15 percent said they had no concerns. In 1999, thirty-seven percent said privacy was a concern while 38 percent said they had no concerns conducting transactions on-line, the survey shows.

The development of wireless devices and hand-held computers like Palm Pilots are going to further expand Internet use, said Miyao.

"In about two years plus, more people will be using hand-held devices to access the Internet than they will computers," said Miyao. "Financial intermediaries will be able to access on-line information instantly anytime and from anywhere."

Much like what the ATM did to consumers' concepts of the banking industry, hand-held devices are going to change users' relationships with the Internet, Miyao said.

"It will essentially change the way we will interact with the Internet because we can use it instantly from any location," he said. "Now the Internet is used sporadically only at work or at home. People still conduct research using more traditional methods when they don't have on-line access. Hand-held devices will change that." Cable modems that operate at 28 times the speed of current modems will give investors access to the Internet 24 hours a day, seven days a week, he said.

Artificial intelligence agents, or computer programs designed to offer advice based on investment history, are another technological advancement that could transform the industry, according to Miyao.

"These tools would help you find a mutual fund based on an asset allocation test that would determine an investor's risk tolerance and preferences," he said. "The advantage is that these agents would be looking for you [doing research] 24 hours a day, seven days a week."

Fund companies will also have a better understanding of their individual clients and their needs as a result of the data they can collect on them from company web sites, Miyao said.

Although new and developing on-line technology is reforming the mutual fund industry, the human element will never be completely eliminated, according to Edward Rosenbaum, vice president and director of research for Lipper of Summit, N.J.

"This is a people business at its heart," he said.

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