In Advertising, Funds and Online Brokerages Play by Different Rules

Have you checked out Fidelity’s Web site recently? On it you’ll find something amusing, and confusing--and perhaps somewhat telling about the challenges facing mutual funds today.

Smack dab in the middle of Fidelity’s home page, in striking letters, is the slogan for a new advertising campaign launched by the company’s discount brokerage unit, Fidelity.com.

“Every Second Counts,” the message reads.

Though it’s tame by online broker standards--for instance, it doesn’t imply you’ll make enough money trading stocks to, say, buy a helicopter or own your own island--it’s as racy a message as Fidelity has ever put out.

Now, on the very same Web page, right next to that slogan, is a big picture of Peter Lynch.

The famed former manager of Fidelity Magellan is the living, breathing logo for Fidelity mutual funds.

He’s also the person who wrote, in his best-selling book “Beating the Street,” that “it pays to be patient” when it comes to investing.

“Time is on your side when you own shares of superior companies,” wrote Lynch, who, in a concurrent Fidelity ad campaign, touts the virtues of long-term investing.

As one analyst put it, “It’s a horrid, horrid mixed message.”

Stephen Cone, president of Fidelity’s personal investments and brokerage group, disagrees.

He says the slogan “Every Second Counts” simply refers to the fact that Fidelity.com is reliable. For instance, it hasn’t experienced the disruptions in service that have plagued other online brokers.

Regardless, Fidelity’s Web site illustrates how much leeway online brokers have in getting out their message--and how little mutual funds have in getting out theirs.

Which is not an unimportant point.

Mutual funds have a couple of big fights on their hands.

One is against the online brokers. “Internet brokers seem to be attracting retail customers away from investing in mutual funds and into individual stocks, especially Internet stocks,” says CIBC analyst Steven Eisman.

The other is against one another. Now that growth in the mutual fund industry has slowed, analysts say, fund companies will have to lure customers away from competing fund companies to maintain or build market share. To win both fights, fund companies may have to resort to more provocative--and more effective--marketing efforts, analysts say.

Geoff Bobroff, an industry consultant in East Greenwich, R.I., says that down the road “you may even start to see negative brand advertising.” Kind of like those old Coke and Pepsi ads.

The problem is, even if fund companies wanted to be more aggressive with their ads, their hands are tied--by the Securities and Exchange Commission and the National Assn. of Securities Dealers, the security industry’s chief self-regulatory body.

“Our industry has been maligned for having creative advertising that’s not fun or funny,” says Steve Moran, director of brand management for the Invesco funds in Denver.

“But fund companies have to go through a lot of the same things that pharmaceutical firms do when advertising drugs like Propecia,” he says, referring to Merck’s new anti-baldness drug.

Commercials for Propecia are loaded with disclaimers that warn the public about the side effects and possible dangers of the very product the ad is meant to promote--as are most ads for mutual funds.

“We have probably 20 pages of guidelines we follow for most of our materials that are distributed externally, including even things like our news announcements that are considered supplemental sales materials,” says Chris Doyle, a spokesman for American Century in Kansas City, Mo.

One fund company, in fact, says it has to negotiate with the NASD now to put a “fee calculator” on its Web site. Why the need for negotiations?

A fee calculator--which lets you determine how much you’d lose to management fees in a given fund--requires you to assume a rate of return for the fund going forward.

And anything on a Web site that does that could be construed by the NASD as implying a future rate of return.

In all fairness, there’s a reason why the SEC and NASD are being tougher on funds.

“The online brokerage firms are communicating a transactional service,” says Marcia Selz, president and chief research director of Marketing Matrix, a Los Angeles-based marketing research firm that specializes in the financial services industry.

In other words, online brokers can argue that they are simply the conduit through which individual investors will make their own decisions on buying and selling securities.

“Mutual fund groups, on the other hand, are communicating their long-term investments,” Selz says.

In other words, they’re actually managing the money for you.

Of course, even if funds were allowed to be racier with their ads--for instance, if they could imply that you could get rich quick--most funds don’t have the numbers to back it up.

Which is the industry’s ultimate problem.

Meanwhile, these racy online broker ads are driving investors’ expectations--including those of fund investors--ever higher, to the consternation of fund companies.

Says Selz: “There’s a halo effect on mutual funds when it comes to these ads.”

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Do you have ideas for topics for this column? Times staff writer Paul J. Lim can be reached at [email protected].