X.com Asset Management of Palo Alto, Calif., adviser to the X.com online mutual funds, is asking its shareholders to approve a 260 percent increase to the unitary fee it charges on its online money market fund, the X.com U.S.A. Money Market Fund. X.com is proposing to raise the fund's advisory fee from 0.50 percent to 1.80 percent so that it can cover the costs of extra services it expects to soon make available to its fund shareholders.

X.com expects to introduce unlimited check-writing, a Visa debit card and an e-mail money transfer service that will allow investors to buy and sell items at online auctions. The fund will also change its name to the X.com Money Market Reserve Fund. The proposed changes were disclosed in an SEC filing May 19.

While raising its fee, X.com plans to continue to charge investors another 0.10 percent, which it pays to the fund's sub-adviser, Barclay's Global Fund Advisers of San Francisco. Each of the five X.com mutual funds invest in portfolios managed by Barclay's through a master/feeder portfolio structure. The higher fee will not only pay for the fund's investment advisory services, but also for others of the fund's costs such as transfer agency and accounting. Such an all-inclusive fee is called a unitary fee.

X.com first attracted attention in March 1999, with its claims of providing easy-to-use, low-cost financial services, including banking, financial planning and mutual fund management, online. But offering online services to money fund investors costs money, said Vincent Solitto, a spokesperson for X.com.

"More features equal greater cost," he said. If approved, the new fee is expected to take effect July 21.

The higher unitary fee will apply whether or not individual fund investors opt to use any of the anticipated new services, according to the fund filing. The trade-off is that X.com will not have to charge per-transaction fees, nor will it have to establish minimum account requirements, according to the proxy filing.

The proposed fee increase is part of the new advisory contract X.com is asking its investors to approve. X.com is a newcomer to the online mutual fund arena. It launched the first four of its five funds in November and an international index fund in April. But its parent company, X.com Corporation, completed the acquisition of Confinity, also of Palo Alto, March 30. Confinity is the owner of the eight-month-old PayPal.com website that allows for the instantaneous electronic transfer of money to anyone with an e-mail address. Because of this acquisition, the adviser to the X.com funds had to have a new advisory agreement approved by all of its fund shareholders.

If approved, the X.com money fund's total expense ratio of 1.90 percent will be high in comparison to money market funds which do not sell their shares exclusively to online investors. While X.com has agreed to at least temporarily waive a portion of its fees to reduce the fund's total expenses to 1.50 percent, even at that rate, total fund expenses will still be more than three times those of the average off-line money fund. The average money market fund has a 0.26 percent management fee and a total expense ratio of 0.49 percent, according to Peter Crane, vice president with iMoneyNet of Westborough, Mass., publisher of IBC's Money Fund Report.

But, unlike off-line money funds, online money market funds compete against big online banks such as that of E*TRADE Group of Menlo Park, Calif., according to Crane.

"Everyone is pitching that online is cheaper," said Crane. But special features do carry a considerable cost to offer and administer. "It is quite expensive to have a full service money market fund."

It is difficult to determine just how high mutual fund expenses are for online funds. Since online mutual funds are so new, Lipper of Summit, N.J., has not yet begun tracking their expenses, said a source in the company.

Expenses for online mutual funds do matter, said Monica Chandra, executive vice president for product marketing at Whatifi.com Asset Management of San Francisco. Late last month, Whatifi.com introduced a new group of online index funds which, like the X.com funds, are set up under a master/feeder structure with Barclay's. The Whatifi.com group includes a money market fund which charges a unitary fee of 0.80 percent and through fee waivers will reduce that expense ratio to 0.55 percent. That 55 basis point expense ratio already includes the equivalent 0.10 percent Whatifi.com has, like X.com, agreed to pay Barclay's as the sub-adviser.

"It's a philosophical issue," said Chandra. Whatifi.com wanted to offer cost-effective online funds to young professionals comfortable investing through the Internet, she said. With this mandate, Whatifi.com chose to keep costs low and forego other expenses including a 12b-1 fee, she said.

"The Internet is intended to provide a better experience for customers from start to finish," she said. "Costs can be kept in check."

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