Distribution Channels for Mutual Funds: Understanding Shareholder

Distribution Channelsfor Mutual Funds:

UnderstandingShareholder Choices

Research Report/Summer 1994

Distribution Channelsfor Mutual Funds:

UnderstandingShareholder Choices

Research Report/Summer 1994

Copyright ©1994 Investment Company Institute

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 1: Current Use of Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Use of Channels to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Use of Channels to Purchase Nonfund Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Use of Channels for Total Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Chapter 2: Channel Use Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Patterns in Channel Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Channel Used to Purchase First Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Channel Used to Purchase Most Recent Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Channel to Be Used to Purchase Next Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Chapter 3: Motivations for Channel Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Principles of Motivation Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Full-service Broker Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Discount Broker Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Insurance Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Bank Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Financial Planner Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Direct Market Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Chapter 4: Profile of Channel Users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Demographic and Financial Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Current Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Recent Mutual Fund Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Investment Information Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Distribution Channels for Mutual Funds:Understanding Shareholder Choices

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Chapter 5: Single-channel and Multichannel Users . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Channels Through Which Single-channel and Multichannel Users Own Funds . . . . . . . . . . . . . . . . . 48Future Use of Channels to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Demographic and Financial Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Current Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Views on Saving and Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Investment Information Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Single-channel Users Who Were Multichannel Users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Chapter 6: Segmentation of Shareholder Investment Channel Needs . . . . . . . . . . . . . . . . . 57

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Principles of Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Confident Guidance-Oriented Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Adviser-Dependent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Fee-Sensitive Independent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Cautious Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Uninvolved Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Appendix A: Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Appendix B: Detailed Tabulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77


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List of Figures

Executive Summary

FIGURE 1 Use of Channels for Mutual Fund Investment and Total Investment Activity . . . . . . . . . . . . . . . . 3

FIGURE 2 Number of Channels Used to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

FIGURE 3 Distribution of Mutual Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

FIGURE 4 Number of Funds Owned by Channel Users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FIGURE 5 Repeat Channel Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FIGURE 6 Anticipated Channel Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

FIGURE 7 Channels Used to Purchase Mutual Funds Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

FIGURE 8 Respondents’ Key Demographic and Financial Characteristics According to theChannel from Which They Purchased Their Most Recent Fund . . . . . . . . . . . . . . . . . . . . . . . 7

FIGURE 9 Respondents Planning to Purchase Their Next Fund from the Direct Market Channel . . . . . . . . . . . 8

FIGURE 10 The Shift from Multichannel Use to Single-channel Use . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

FIGURE 11 Primary Reason for Using Channels to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . 9

FIGURE 12 Respondents’ Perceptions of the Channels They Use to Purchase Mutual Funds . . . . . . . . . . . . . 10

FIGURE 13 Primary Source of Investment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Chapter 1: Current Use of Channels

FIGURE 14 Channels Used to Purchase Mutual Funds Currently Owned . . . . . . . . . . . . . . . . . . . . . . . . 13

FIGURE 15 Use of Single and Multiple Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

FIGURE 16 Incidence of Ownership of Mutual Funds Purchased from Other Channels . . . . . . . . . . . . . . . . 15

FIGURE 17 Mutual Fund Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

FIGURE 18 Use of Mutual Fund Channel to Purchase Nonfund Investments . . . . . . . . . . . . . . . . . . . . . . 16

FIGURE 19 Channels Other than Mutual Fund Channel Used to Purchase Nonfund Investments . . . . . . . . . . . 17

FIGURE 20 Household Financial Assets per Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Chapter 2: Channel Use Over Time

FIGURE 21 Channel Used to Purchase First Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FIGURE 22 Comparison of Channels Currently Used and Ever Used to Purchase Mutual Funds . . . . . . . . . . . 22

FIGURE 23 Patterns in Number of Channels Used to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . 23

FIGURE 24 Channel Used to Purchase First Mutual Fund Among Channel Users . . . . . . . . . . . . . . . . . . . 23

FIGURE 25 Channel Used to Purchase Most Recent Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 24


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FIGURE 26 Channel Used to Purchase Most Recent Mutual Fund Among Channel Users . . . . . . . . . . . . . . . 25

FIGURE 27 First and Most Recent Type of Mutual Fund(s) Purchased . . . . . . . . . . . . . . . . . . . . . . . . . 25

FIGURE 28 Year in Which First and Most Recent Fund(s) Were Purchased . . . . . . . . . . . . . . . . . . . . . . 26

FIGURE 29 Channel to Be Used to Purchase Next Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

FIGURE 30 Channel to Be Used to Purchase Next Mutual Fund Among Channel Users . . . . . . . . . . . . . . . . 27

FIGURE 31 Channels Never to Be Used Again to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . 28

FIGURE 32 Reasons for No Longer Using Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Chapter 3: Motivations for Channel Use

FIGURE 33 Respondents’ Perception of the Availability of Mutual FundInformation from the Channels They Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

FIGURE 34 Primary Reason for Using the Full-service BrokerChannel to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

FIGURE 35 Perceptions of the Full-service Broker Channel for the Purchase of Mutual Funds . . . . . . . . . . . . 31

FIGURE 36 Primary Reason for Using the Discount Broker Channel to Purchase Mutual Funds . . . . . . . . . . . 32

FIGURE 37 Perceptions of the Discount Broker Channel for the Purchase of Mutual Funds . . . . . . . . . . . . . . 32

FIGURE 38 Primary Reason for Using the Insurance Channel to Purchase Mutual Funds . . . . . . . . . . . . . . . 33

FIGURE 39 Perceptions of the Insurance Channel for the Purchase of Mutual Funds . . . . . . . . . . . . . . . . . 33

FIGURE 40 Primary Reason for Using the Bank Channel to Purchase Mutual Funds . . . . . . . . . . . . . . . . . 34

FIGURE 41 Perceptions of the Bank Channel for the Purchase of Mutual Funds . . . . . . . . . . . . . . . . . . . . 34

FIGURE 42 Primary Reason for Using the Financial Planner Channel to Purchase Mutual Funds . . . . . . . . . . . 35

FIGURE 43 Perceptions of the Financial Planner Channel for the Purchase of Mutual Funds . . . . . . . . . . . . . 36

FIGURE 44 Primary Reason for Using the Direct Market Channel to Purchase Mutual Funds . . . . . . . . . . . . . 36

FIGURE 45 Perceptions of the Direct Market Channel for the Purchase of Mutual Funds . . . . . . . . . . . . . . . 37

Chapter 4: Profile of Channel Users

FIGURE 46 Channel Users’ Investment Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

FIGURE 47 Channel Users’ Demographic and Financial Characteristics . . . . . . . . . . . . . . . . . . . . . . . . 41

FIGURE 48 Channel Users’ Mutual Fund Ownership Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . 42

FIGURE 49 Channel Users’ Ownership of Nonfund Savings and Investments . . . . . . . . . . . . . . . . . . . . . 43

FIGURE 50 Channel Users’ Recent Mutual Fund Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . 44

FIGURE 51 Channel Users’ Primary Source of Mutual Fund Investment Information . . . . . . . . . . . . . . . . . 44

FIGURE 52 Channel Users’ Readership of Business-Related Publications . . . . . . . . . . . . . . . . . . . . . . . 45

Chapter 5: Single-channel and Multichannel Users

FIGURE 53 Single-channel and Multichannel Users’ Investment Portfolios . . . . . . . . . . . . . . . . . . . . . . 47

FIGURE 54 Channel Through Which Single-channel Users Own Funds . . . . . . . . . . . . . . . . . . . . . . . . 48

FIGURE 55 Channels Through Which Multichannel Users Own Funds . . . . . . . . . . . . . . . . . . . . . . . . 48

FIGURE 56 Channel from Which Single-channel Users Expect to Purchase Their Next Fund . . . . . . . . . . . . . 49

FIGURE 57 Channel from Which Multichannel Users Expect to Purchase Their Next Fund . . . . . . . . . . . . . . 49

FIGURE 58 Single-channel and Multichannel Users’ Demographic and Financial Characteristics . . . . . . . . . . . 50

FIGURE 59 Single-channel and Multichannel Users’ Mutual Fund Ownership Characteristics . . . . . . . . . . . . 51


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FIGURE 60 Single-channel and Multichannel Users’ Ownership ofNonfund Savings and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

FIGURE 61 Single-channel and Multichannel Users’ Attitudes About Investing . . . . . . . . . . . . . . . . . . . . 53

FIGURE 62 Single-channel and Multichannel Users’ Primary Source ofMutual Fund Investment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

FIGURE 63 Single-channel and Multichannel Users’ Readership of Business-Related Publications . . . . . . . . . . 54

FIGURE 64 Patterns in Channel Use for Former Multichannel Users . . . . . . . . . . . . . . . . . . . . . . . . . . 55

FIGURE 65 Characteristics of Single-channel Users Who Were Multichannel Users . . . . . . . . . . . . . . . . . . 55

Chapter 6: Segmentation of Shareholder Investment Channel Needs

FIGURE 66 Market Share of Respondent Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

FIGURE 67 Underlying Need and Investment Dimensions Based on Respondent Attitudes . . . . . . . . . . . . . . 59

FIGURE 68 Underlying Need and Investment Dimensions of ConfidentGuidance-Oriented Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

FIGURE 69 Confident Guidance-Oriented Shareholders’ Self-Assessed Understandingof Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

FIGURE 70 Confident Guidance-Oriented Shareholders’ Primary Source forMutual Fund Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

FIGURE 71 Underlying Need and Investment Dimensions of Adviser-Dependent Shareholders . . . . . . . . . . . . 62

FIGURE 72 Adviser-Dependent Shareholders’ Self-Assessed Understanding of Mutual Funds . . . . . . . . . . . . 63

FIGURE 73 Adviser-Dependent Shareholders’ Primary Source for Mutual Fund Information . . . . . . . . . . . . . 63

FIGURE 74 Underlying Need and Investment Dimensions of Fee-SensitiveIndependent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

FIGURE 75 Fee-Sensitive Independent Shareholders’ Self-Assessed Understanding of Mutual Funds . . . . . . . . 65

FIGURE 76 Fee-Sensitive Independent Shareholders’ Primary Source for Mutual Fund Information . . . . . . . . . 65

FIGURE 77 Underlying Need and Investment Dimensions of Cautious Shareholders . . . . . . . . . . . . . . . . . 66

FIGURE 78 Cautious Shareholders’ Self-Assessed Understanding of Mutual Funds . . . . . . . . . . . . . . . . . . 67

FIGURE 79 Cautious Shareholders’ Primary Source for Mutual Fund Information . . . . . . . . . . . . . . . . . . . 67

FIGURE 80 Underlying Need and Investment Dimensions of Uninvolved Shareholders . . . . . . . . . . . . . . . . 68

FIGURE 81 Uninvolved Shareholders’ Self-Assessed Understanding of Mutual Funds . . . . . . . . . . . . . . . . 69

FIGURE 82 Uninvolved Shareholders’ Primary Source for Mutual Fund Information . . . . . . . . . . . . . . . . . 69

FIGURE 83 Segments’ Use of Channels to Purchase Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

FIGURE 84 Segments’ Mutual Fund Ownership Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

FIGURE 85 Segments’ Demographic and Financial Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Appendix A: Research Methodology

FIGURE 86 Statistical Reliability for Determining Accuracy of Observed Percentages—One Sample . . . . . . . . 75

FIGURE 87 Statistical Reliability for Determining Accuracy of Observed Percentages—Two Samples . . . . . . . . 76

Appendix B: Detailed Tabulations

FIGURE 88 Channel Users’ First Mutual Fund(s) Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

FIGURE 89 Year in Which Channel Users Purchased First Mutual Fund(s) . . . . . . . . . . . . . . . . . . . . . . 78

FIGURE 90 Channel Users’ Most Recent Mutual Fund(s) Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . 78


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FIGURE 91 Year in Which Channel Users Purchased Most Recent Mutual Fund(s) . . . . . . . . . . . . . . . . . . 79

FIGURE 92 Demographic and Financial Characteristics of All Respondents . . . . . . . . . . . . . . . . . . . . . . 80

FIGURE 93 Mutual Fund Ownership Characteristics of All Respondents . . . . . . . . . . . . . . . . . . . . . . . . 80

FIGURE 94 Ownership of Nonfund Savings and Investments by All Respondents . . . . . . . . . . . . . . . . . . . 81

FIGURE 95 Recent Mutual Fund Investment Activity of All Respondents . . . . . . . . . . . . . . . . . . . . . . . 81

FIGURE 96 Primary Source of Mutual Fund Investment Information for All Respondents . . . . . . . . . . . . . . 81

FIGURE 97 Readership of Business-Related Publications for All Respondents . . . . . . . . . . . . . . . . . . . . . 82

FIGURE 98 Segments’ Level of Agreement with Statements About Investing . . . . . . . . . . . . . . . . . . . . . 83


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Introduction

The ability of mutual fund organizations to take

an innovative approach in response to a complex

financial environment is one of the hallmarks of

the mutual fund industry. Because it stays attuned

to investor needs, the mutual fund industry con-

tinually adapts and expands its product lines,

services, and pricing structures, as well as its

methods of distribution. This responsiveness has

helped to propel the mutual fund industry into

the ranks of financial services leaders.

Innovations in distribution have contributedsignificantly to the growth of the mutual fundindustry in recent years. Traditionally, financialinstitutions offered a limited product range—banks and thrifts offered checking and savingsaccounts, securities firms offered stocks andbonds, and insurance companies offered insurance.Over the last decade, however, a new financiallandscape has emerged. Today’s financial institu-tions sell a broad range of financial products,including mutual funds. Mutual funds are nowprimarily available from six distribution channels:full-service brokers, discount brokers, insuranceagents, financial planners, banks, and directly fromthe mutual fund company.

The increased accessibility of mutual funds, com-bined with the growth in the number of mutualfunds offered, enables today’s shareholders tochoose from among many investment alternatives.Because the road shareholders travel to purchasemutual funds is a key component of mutual fundmarketing, mutual fund companies must under-

stand the distribution channel’s role in the invest-or’s fund purchase process, particularly as itevolves over time. How shareholders choose a fund,the information and advice they receive during thefund purchase process, and the service received atthe point of sale are critical to the continued successof the industry.

In 1988, ICI conducted its first extensive study ofshareholders’ use of distribution channels to pur-chase mutual funds. This research found that thedistribution channel plays an important role inbuilding and maintaining relationships with cus-tomers: It is the bridge that links the investor tothe mutual fund. Given the tremendous growth ofthe mutual fund industry since 1988, it is appro-priate to reexamine that nexus. Thus, the Invest-ment Company Institute and its Research Com-mittee undertook this study, with the assistanceof the Response Analysis Corporation (RAC).

Research Objectives

The overall objectives of the research are to examinemutual fund owners’ current use of distributionchannels for the purchase of long-term mutual funds,and to identify and describe the financial, attitudinal,and demographic factors that link active fundowners to specific distribution channels. Specifically,the study seeks to:

Measure shareholders’ use of six channels ofdistribution for mutual funds—full-servicebrokers, discount brokers, insurance agents,


1

banks and savings institutions, financial planners,and direct market;

Understand why shareholders use a particular dis-tribution channel and identify the factors that tiethem to that channel;

Identify how shareholders’ use of distributionchannels changes over the course of their invest-ment history;

Understand why shareholders no longer use par-ticular distribution channels to purchase mutualfunds, and

Segment shareholders according to their invest-ment needs.

Research Methodology

Interviews were conducted in the fall of 1993with a random sample of 720 mutual fund-owning households. The interviews were heldwith the household’s primary or co-decision-maker for saving and investment. To qualify forthe survey, households had to be recent buyersof long-term mutual funds, that is, they had tohave purchased a long-term mutual fund fromone of the six distribution channels in the five yearspreceding the survey. A “purchase” was definedas the purchase of shares of a long-term fundfrom which no previous shares had been ownedbefore 1988. This definition, therefore, excludesinstances where a respondent invested moremoney in a fund in which he or she already ownedshares prior to 1988, as well as any mutualfunds obtained through an employer. Hence,this is not a study of the average mutual fundshareholder. By definition, the survey respondentswere active shareholders.

Although a respondent’s level of income was nota criterion for participating in this study, the rand-om sample was drawn from households in high-in-come areas in order to increase the likelihoodof finding households that would qualify toparticipate in the study according to the definitionsexplained above.

The respondents who participated in the study wereasked questions about the mutual funds they cur-

rently own, including any mutual funds that theypurchased before 1988. Hence, they are referredto interchangeably as “owners” or “channel users.”For example, respondents who currently own mutualfunds from a full-service broker are referred to as“owners through the full-service broker channel”or “full-service broker channel users.”

To construct a questionnaire that reflected fundowners’ use of channels, ICI and RAC conductedfocus groups with mutual fund shareholders whopurchased funds through at least one of the sixdistribution channels in the last five years. Thediscussions revealed that some shareholders pur-chased their mutual funds from more than onedistribution channel, and that their use of channelschanged over time. The groups also identified thatthe availability of information and advice, the trustof an investment adviser, and the integrity of thecompany issuing the investment are important con-siderations in the fund purchase process.

As is typically the case with survey research,response rates vary because some respondents willnot or cannot answer a particular question. Whereappropriate, the number of respondents answering,or “base,” is provided.

Limitations of the Study

The data for this study were collected through tele-phone interviews. The data for the 1988 study,which ICI published in theDistribution Connectionseries, were collected using in-home interviews.Because the two studies have different datacollection methodologies, it is inappropriate tocompare and contrast the findings of the twostudies. The reader should also note that this researchis a study of recent buyers of long-term funds and isnot designed to provide demographic and financialcharacteristics of the general population of mutualfund shareholders. For a profile of the typical share-holder and key shareholder segments, see ICI’sProfiles of Mutual Fund Shareholders(1992).


2

Executive Summary

1 The survey respondents use a varietyof distribution channels to purchase mutualfunds—full-service brokers, discount brokers,insurance agents, banks, financial planners, anddirect market—but with differing degrees offrequency. More than half of respondents ownfunds purchased from the full-service brokerchannel and more than half own funds from thedirect market channel. Less than 20 percent ownfunds bought from each of the remaining channels:financial planner, discount broker, insurance, andbank. These findings suggest that the financialplanner, bank, insurance, and discount brokerchannels could benefit from marketing initiativesdesigned to increase consumer awareness thatthey offer mutual funds.

2 Some distribution channels that areused by survey respondents for their investmentactivity are not necessarily used for mutual fundpurchases.This disparity in usage is most evidentin the discount broker, bank, and insurance chan-nels, and suggests that a particularly attractiveopportunity exists for these channels to increasetheir customers’ awareness of mutual funds. Forexample, Figure 1 shows that 62 percent of respon-dents have some portion of their total financialassets invested through a bank, yet only 13 per-cent own mutual funds through this channel. Thisdisparity in usage is much less evident with re-gard to the full-service broker and direct marketchannels. For example, about six out of ten re-spondents have invested some portion of theirhousehold financial assets through the full-

service broker channel, and more than half usethe channel to purchase mutual funds.

3 Most survey respondents currently usemore than one channel to purchase mutual funds.Respondents who own funds from the discountbroker, insurance, and bank channels are the like-liest to be multichannel users for mutual funds.As seen in Figure 2, 80 percent or more of discount

FIGURE 1

Use of Channels for Mutual Fund Investment andTotal Investment Activity*(percent of respondents)

Base=720*Multiple responses included

51

14

15

13

18

52

61

28

36

62

21

59

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market

Mutual Fund ActivityTotal Investment Activity


3

broker, insurance, and bank channel users ownfunds from at least one other channel. Two thirdsor less of full-service broker, financial planner,and direct market channel users own funds fromat least one other channel.

4 Wide variations exist in the share ofmutual fund assets that each channel group hasinvested through its particular channel, indicatingthat allegiance to some channels is stronger thanfor others. Figure 3 shows that full-service broker,financial planner, and direct market channel userstypically have the majority of their mutual fundassets invested through their respective channels.Discount broker, bank, and insurance channelusers generally have the majority of their mutualfund assets invested in other channels.

FIGURE 3

Distribution of Mutual Fund Assets(percent of respondents’ assets)

Note: Channel users are respondents who currently own at least one fund fromthat channel.

FIGURE 2

Number of Channels Used to Purchase Mutual Funds(percent of respondents)

Full-service Discount Financial DirectBroker Broker Insurance Bank Planner Market

Channel Channel Channel Channel Channel ChannelUsers Users Users Users Users Users

One channel 40 20 18 16 33 38Two channels 40 47 32 43 40 43Three channels 15 22 34 24 18 14Four or more channels 5 11 16 17 9 5

100% 100% 100% 100% 100% 100%Mean 1.9 2.3 2.6 2.5 2.1 1.9Median 2 2 3 2 2 2Base = 337 120 126 107 147 384

Note: Channel users are respondents who currently own at least one fund from that channel.

Invested Through Channel

Invested Through Other Channels

Full-serviceBroker

ChannelUsers

DiscountBroker

ChannelUsers

InsuranceChannel

Users

BankChannel

Users

FinancialPlannerChannel

Users

DirectMarketChannel

Users

$60K $60K $60K

$50K$52.7K

77

40

30 25

70

60

7075

30

$60K

80

2023


4

5 Differences exist in the number of mu-tual funds that channel users own throughtheir respective channels, another sign ofvariation in shareholders’ commitment tochannels.This variation is especially notice-able when the total number of funds owned isbroken down according to the channels throughwhich the funds were purchased. For example,financial planner channel users own a medianof five funds, three of which were purchasedfrom a financial planner. Both direct marketand full-service broker channel users owna median of six funds, three of which werepurchased from their respective channels. Dis-count broker channel users own a median ofseven funds, of which only two were purchasedfrom a discount broker. Figure 4 shows thatinsurance and bank channel users own a medianof six and five funds, respectively. In both cases,users purchased a median of just one of thefunds they own from their respective channels.

6 Some channels are more successful thanothers in garnering repeat business from theircustomers.This is evident from the share of respon-dents who purchased their most recent fund fromthe same channel they used to purchase their firstmutual fund, and from the share of respondents whosay they will purchase their next fund from the samechannel they used to purchase their most recent fund.Figure 5 shows that the majority of respondents whowere introduced to mutual funds through the full-service broker, discount broker, financial planner,and direct market channels returned to these chan-nels, respectively, to purchase their most recent fund.However, most of those who purchased their firstfund from the insurance or bank channel purchasedtheir most recent fund from some other channel. Fig-ure 6 shows that the majority of respondents whobought their most recent fund from the full-servicebroker, discount broker, financial planner, and directmarket channels plan to purchase their next fundfrom these channels. In contrast, most of those whopurchased their most recent fund from the insuranceor bank channel expect to purchase their next fundfrom some other channel.FIGURE 4

Number of Funds Owned by Channel Users(median)

Note: Channel users are respondents who currently own at least one fund fromthat channel.

Full-serviceBroker

ChannelUsers

DiscountBroker

ChannelUsers

InsuranceChannelUsers

BankChannelUsers

FinancialPlannerChannelUsers

DirectMarketChannelUsers

Through ChannelThrough Other Channels

3

3

6

2

5

7

1

4

5

1

5

6

3

2

5

3

3

6

FIGURE 5

Repeat Channel Use*(percent of respondents who bought most recent fund from samechannel used to purchase first fund)

*For respondents who have owned more than one fund.

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market

Channel Used toPurchase First Fund

55

51

34

20

53

68


5

7 Although many respondents are, or expectto be, repeat customers of their respective chan-nels, there is a tendency to move toward thedirect market channel.As shown in Figure 7, thelargest proportion of respondents, 41 percent,bought their first mutual fund from a full-servicebroker, compared with 32 percent for the directmarket channel. Thirty-two percent of respondentswho have owned more than one fund bought theirmost recent fund from a full-service broker, com-pared with 43 percent for the direct market chan-nel. Only a quarter of respondents expect topurchase their next fund from a full-service broker,compared with half who expect to use the directmarket channel.

8 The respondents who are moving towardthe direct market channel are generally well-educated males with large mutual fund port-folios. These respondents also tend to be self-reliant investors who are sensitive to price. Figure8 shows that respondents who purchased theirmost recent fund from the direct market channelare more likely to be male and to have a graduatedegree than are respondents who purchased theirmost recent fund from one of the other channels.Respondents who purchased their most recentfund from the direct market channel own a medianof six funds. This compares with a median of fouror five funds for those who bought their mostrecent fund from one of the other channels.

FIGURE 7

Channels Used to Purchase Mutual FundsOver Time(percent of respondents)

Base= 720 642 661*For respondents who have owned more than one fund

Channel Usedfor First Fund

Channel Usedfor Most Recent

Fund*

Channel to BeUsed for Next

Fund

0%

20%

40%

60%

80%

100%

Full-service brokerDiscount brokerInsurance

BankFinancial plannerDirect market

32 43 50

9

11

11

7

432

5

65

59

41

3225

FIGURE 6

Anticipated Channel Use*(percent of respondents who expect to purchase next fund from samechannel used to purchase most recent fund)

*For respondents who have owned more than one fund

Channel Used to PurchaseMost Recent Fund

72

71

39

47

68

93

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market


6

9 It is also primarily multichannel users whoare gravitating toward the direct market channel.Most single-channel users expect to purchase theirnext fund from the same channel they currentlyuse. For example, Figure 9 shows that 46 percentof multichannel users who own funds from the dis-count broker channel expect to purchase their nextfund from the direct market channel. This com-pares with four percent of single-channel userswho own funds from a discount broker. These find-ings indicate that channels should seek to maintainand strengthen their relationships with shareholderswho use only their particular channel to purchasefunds. Channels that are better able to meet theneeds of their shareholders may stem migrationtoward another purchase channel.

10 The shift from single-channel user to multi-channel user appears to be a gradual one. Only 11percent of single-channel users will purchase theirnext fund from a different channel than the onethey currently use. This finding indicates that mu-tual fund distribution channels have a distinctwindow of opportunity during which they canstrengthen their relationship with shareholderswho only use their particular channel.

FIGURE 8

Respondents’ Key Demographic and Financial Characteristics According to the Channel fromWhich They Purchased Their Most Recent Fund

Channel Used to Purchase Most Recent Fund*


Median

Age 49 40 45 50 48 47Household mutual fund assets $70,000 $40,000 $20,000 $50,000 $59,000 $60,000Number of funds owned per household 5 5 4 4 5 6

Percent of Respondents

Male 62 68 61 62 69 75Married 84 83 79 88 83 90Retired from lifetime occupation 29 14 9 33 26 20Graduate degree 34 32 26 30 39 43Bought first fund:

1990 or later 11 9 30 33 16 10Before 1990 89 91 70 67 84 90

Own funds from:One channel 56 49 45 43 56 51Two or more channels 44 51 55 57 44 49

*For respondents who have owned more than one fund


7

11 A segment of respondents who currentlyuse only one channel are former multichannelusers, an indication that some multichannel usersreach a point at which they decide to consolidatetheir mutual fund assets within one channel.Fig-ure 10 shows that nearly 70 percent of former mult-ichannel users consolidated their mutual fund assetsinto either the full-service broker or the directmarket channel. Former multichannel users aredemographically more similar to current multi-channel users than they are to respondents whohave never used more than one channel to purchasemutual funds.

12 Some respondents who use a full-servicebroker are quite unlikely to migrate to thedirect market channel or to any other channel.An analysis of respondents’ financial needs andattitudes toward investing found that 16 percentof respondents rely heavily on their financialadviser for advice and guidance, and in manycases, for decisionmaking. Nearly three quartersof these adviser-dependent shareholders are cus-tomers of the full-service broker channel andexpect to remain customers of the full-servicebroker channel.

FIGURE 10

The Shift from Multichannel Use to Single-channel Use

Base=363

FIGURE 9

Respondents Planning to Purchase Their Next Fundfrom the Direct Market Channel(percent)

Single-channel users who own funds from the following channels...Full-service broker 7Discount broker 4Insurance 27Bank 17Financial planner 6Direct market 98

Multichannel users who own funds from the following channels...Full-service broker 55Discount broker 46Insurance 47Bank 50Financial planner 34Direct market 73

34

6

6

7

14

34

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market

Single-channelusers who havealways beensingle-channelusers

Single-channelusers who weremultichannel users

Single-channel Users Former Multichannel Users' Current Channel

43%57%


8

13 A variety of factors motivate respondentsto use channels to purchase mutual funds, butthe need for advice, past experience, fees andcommissions, and convenience are the mostimportant drivers of channel use.Figure 11shows that respondents who use a full-servicebroker or financial planner most often cite adviceand guidance as their key reason for using thesechannels. Low fees and commissions are the pri-mary reason why respondents use the discountbroker and direct market channels. Bank channelusers most often cite convenience, and insurancechannel users cite their existing relationship withtheir agent.

14 Respondents tend to view their channelspositively and to associate important benefitswith them. This is most apparent among full-service broker, financial planner, and directmarket channel users.Respondents using thediscount broker, bank, and insurance channelsgive their respective channels mixed assessments.Figure 12 shows that the vast majority of full-serv-ice broker and financial planner channel users

perceive their channels as providing investmentadvice, information, personalized service, and con-venience. Most direct market channel users viewtheir channel as one that provides reasonable fees,information, and convenience. A large majorityof discount broker channel users perceive theirchannel as providing convenience, but fewerassociate it with reasonable fees and information.A small majority of insurance channel users as-sociate their channel with personalized service andconvenience, but most do not strongly associateit with investment information or advice. Abouthalf of bank channel users perceive their channelas one that provides convenience, but most do notstrongly associate it with investment advice,information, or personalized service.

15 An opportunity exists to cross-sell non-fund investments to mutual fund customers.Exhibiting the traditional relationship betweenparticular investments and channels—for example,life insurance from an insurance agent and certifi-cates of deposit from a bank—respondents oftenpurchase nonfund investments from channelsother than those they use to purchase mutual funds.

FIGURE 11

Primary Reason for Using Channels to Purchase Mutual Funds(three most frequently cited reasons)



Offers initial and ongoing investment advice or guidance 1 2 1Has low or no fees or commissions 1 1Have an established relationship with adviser or institution 2 1 2 2Offers funds with solid performance 2Is a convenient way to purchase an investment 2 3 1 3Offers personalized service 3 3 3Executes orders efficiently 3

Base = 308 102 101 74 133 353



9

To some extent, however, the purchase of nonfundinvestments is limited by the availability of invest-ments through the channel, as in the case of thedirect market channel.

16 Of all the sources respondents turn to formutual fund information, the channel theyuse to purchase mutual funds has the greatestinfluence on full-service broker and financialplanner channel users, and, to a slightly lesserdegree, direct market channel users.Figure 13shows that full-service broker and financial plan-

FIGURE 12

Respondents’ Perceptions of the Channels They Use to Purchase Mutual Funds*(percent of respondents rating attribute 5 or 6**)



Availability of investment advice 85 35 47 42 85 52Personalized service 82 19 54 38 89 27Reasonableness of mutual fund fees 25 58 27 35 35 80Availability of mutual fund information 82 57 46 42 85 81Convenience for purchasing mutual fund shares 90 80 53 52 85 89

* Multiple responses included** With 6 as the highest, 1 as the lowestNote: Channel users are respondents who currently own at least one fund from that channel.

FIGURE 13

Primary Source of Investment Information(three most frequently cited reasons)



Full-service broker 1 2 1 3 3Discount broker 3Insurance agentBank representativeFinancial planner 3 3 3 1Direct contact with mutual fund company 2 2Books, magazines, newspapers, or brochures 2 1 1 2 2 1Base= 324 118 120 98 143 365



10

ner channel users most frequently mention anadviser from their channel as their primary sourceof mutual fund information. For direct marketchannel users, direct contact with the fund com-pany is their second most frequently mentionedprimary source for mutual fund information afterprinted material, such as magazines, newspapers,newsletters, and brochures. In contrast, bank andinsurance channel users do not consider theirrespective channels to be their primary source forfund information. Instead, bank and insurancechannel users typically cite other channels orvarious printed materials as their primary sourcefor fund information.


11

Chapter 1:Current Use of Channels

1Respondents are shareholders who purchased long-term mutual funds from 1988 through 1993 other than through their employer. A“purchase” was defined as purchasing shares of a fund from which no previous shares had been owned before 1988. This definition, therefore,excludes instances where a respondent invested more money in a fund in which he or she already owned shares prior to 1988.

Chapter Summary

The majority of respondents currently own at leastone mutual fund from the full-service broker anddirect market channels.1 Much smaller percentagesown funds from the discount broker, insuranceagent, financial planner, and bank channels. Mostrespondents own funds from more than one chan-nel, but multichannel use is heavily concentratedamong respondents who own funds from the dis-count broker, insurance, and bank channels. There-fore, it is not surprising that discount broker,insurance agent, and bank channel users have onlya small proportion of their mutual fund assets in-vested through their respective channels. In con-trast, full-service broker, financial planner, anddirect market channel users have at least 70 per-cent of their mutual fund assets invested in their re-spective channels. Because respondents oftenpurchase nonfund investments from channels otherthan those used to purchase mutual funds, total in-vestment activity through each channel exceedsmutual fund investment activity. This gap is larg-est for the bank channel, and smallest for the full-service broker and direct market channels.FIGURE 14

Channels Used to Purchase Mutual FundsCurrently Owned*(percent of respondents)



13

Use of Channels to PurchaseMutual Funds

Long-term fund shareholders do not use channelsto purchase mutual funds with equal incidence.Rather, some channels are used more often thanothers.2 Currently, 52 percent of respondents owndirect-marketed mutual funds. Following closely,51 percent of respondents own mutual funds pur-chased from a full-service broker. In contrast,only 18 percent of respondents own funds boughtfrom a financial planner, 15 percent from aninsurance agent, 14 percent from a discountbroker, and 13 percent from a bank representative.

These data include long-term fund shareholderswho use only one channel to purchase mutualfunds, as well as those who use more than onechannel. Figure 15 shows that the majority ofrespondents in each channel group are multi-channel users. Respondents who own funds fromthe discount broker, insurance, and bank channelsare the likeliest to use more than one channel topurchase mutual funds. At least 80 percent ofdiscount broker, insurance, and bank channelusers are multichannel users. While a significantnumber of full-service broker, financial planner,and direct market channel fund owners are multi-

channel users, at least one third in each of thesecategories uses a single channel. Use of a singlechannel to purchase mutual funds could be oneway to define channel loyalty.

Although multichannel use is common amongrespondents, they typically use only two channelsto purchase mutual funds. However, half of insur-ance agent users own funds from three or morechannels. Following fairly closely, 41 percent ofbank channel users own funds from three or morechannels. In contrast, only about a third or lessof discount broker and financial planner users ownfunds purchased from three or more channels (seeFigure 2 on page 4).

Discount broker, insurance agent, and bankchannel users also generally own funds boughtfrom the full-service broker and the direct marketchannels. Among these three groups of respond-ents, roughly half also use the direct market chan-nel and about four in ten also use a full-servicebroker. Figure 16 shows that full-service brokerusers are most likely to also own funds from thedirect market channel. Financial planner users areabout as likely to own funds from the full-servicebroker as from the direct market channels.

2The term “use” refers to respondents who currently own at least one mutual fund purchased from a particular channel.

FIGURE 15

Use of Single and Multiple Channels(percent of respondents)



Single-channel user 40 20 18 16 33 38Multichannel user 60 80 82 84 67 62

100% 100% 100% 100% 100% 100%Base = 337 120 126 107 147 384



14

Respondents have a median of $50,000 investedin mutual funds, including long-term funds andmoney market funds, but this figure varies whenanalyzed by channel. Figure 17 shows that full-service broker, discount broker, financial planner,and direct market channel users each have a medianof $60,000 invested in mutual funds. In contrast,bank and insurance channel users have a medianof $52,700 and $50,000, respectively, invested inmutual funds.

Figure 17 also shows the wide variation in thepercent of mutual fund assets that each group ofchannel users has invested through that particularchannel. For example, direct market channel usershave 80 percent of their total mutual fund assetsinvested through that channel. At the other end ofthe spectrum, bank channel users typically haveonly 25 percent of their total mutual fund assets in-vested through the bank channel.

FIGURE 16

Incidence of Ownership of Mutual Funds Purchased from Other Channels*(percent of respondents)



Other channels used...Full-service broker NA 38 46 44 34 37Discount broker 11 NA 13 15 9 13Insurance 13 14 NA 27 18 14Bank 12 15 25 NA 12 12Financial planner 12 12 21 16 NA 12Direct market 39 50 50 47 35 NABase = 337 120 126 107 147 384

* Multiple responses includedNA = Not applicableNote: Channel users are respondents who currently own at least one fund from that channel.

FIGURE 17

Mutual Fund Investment Activity



Median total mutual fund assets $60,000 $60,000 $50,000 $52,700 $60,000 $60,000Median mutual fund assets invested through channel $46,200 $24,000 $15,000 $13,200 $42,000 $48,000Percent of mutual fund assets invested through channel 77% 40% 30% 25% 70% 80%



15

Use of Channels to Purchase NonfundInvestments

The channels from which shareholders pur-chase mutual funds typically offer other invest-ments, such as stocks, bonds, annuities, and unitinvestment trusts. The question arises, then, doshareholders purchase nonfund investments fromthe channels they use to buy mutual funds? Thesurvey results indicate that respondents are takingadvantage of their ability to diversify their invest-ment portfolios within a single distribution channel.But just as respondents purchase mutual fundsfrom more than one channel, it appears that theypurchase nonfund investments from more thanone channel as well.

Figure 18 identifies the proportion of respondentsin each channel who also own other investments

through that channel. Approximately two thirdsof full-service broker and insurance agent usersown nonfund investments purchased from theirrespective channels. Following closely, 61 percentof discount broker users also own nonfund invest-ments purchased from this channel. Likewise,more than half of financial planner channel usersand more than half of bank channel users ownnonfund investments purchased from their respect-ive channels. Because nonfund investment optionsavailable through the direct market channel tendto be limited, just 36 percent of direct marketchannel users own nonfund investments purchasedfrom this channel.

The types of nonfund investments purchasedvary from channel to channel. For example, 56percent of full-service broker users also purchasedindividual stocks through this channel, and 45

FIGURE 18

Use of Mutual Fund Channel to Purchase Nonfund Investments


Channel Channel Channel Channel Channel ChannelUsers Users Users Users Users Users***

Percent of respondents purchasing at least one nonfundinvestment from same channel used to purchase mutual funds 65 61 68 56 51 36

Percent of respondents purchasing...*CDs 9 4 1 31 2 –Individual bonds** 45 13 1 40 6 4Treasury bills, bonds, or notes 12 2 – 4 3 6Individual stock other than employer stock 56 52 1 6 12 26Life insurance 5 – 59 2 16 –Annuities 11 2 26 – 21 –Unit investment trusts 10 – 1 1 3 –Other investments 4 3 3 4 2 8Base = 312 120 124 102 147 384

*Multiple responses included**Includes corporate, municipal, and U.S. Savings Bonds***Purchased investment directly from the issuer, not the direct market fund companyNote: Channel users are respondents who currently own at least one fund from that channel.


16

percent purchased individual bonds throughthis channel. Nearly 60 percent of insuranceagent users also own life insurance purchasedthrough this channel, and 26 percent own annuities.Slightly more than one half of those using a dis-count broker for mutual funds are also investingin individual stocks through this channel. Amongbank channel users, certificates of deposit andbonds are the nonfund investments most oftenowned through this channel.

While respondents often purchase other invest-ments from the channels through which they ownfunds, they also turn to other channels for nonfundinvestments. In fact, in all but the full-servicebroker channel, a larger proportion of respondentsare going outside their mutual fund channel fornonfund investments than are purchasing nonfundinvestments from that channel. This is particularlytrue of the direct market channel, which reflectsthe limited types of investment products that canbe purchased directly in that channel.

The types of nonfund investments that respond-ents purchase outside their respective mutual fundchannels reflect the traditional relationship ofparticular investments with particular channels.For example, life insurance is traditionally assoc-iated with insurance agents, certificates of depositwith banks, and stocks and bonds with full-serviceand discount brokers.

Figure 19 illustrates the channels other thanrespondents’ mutual fund channel that are usedfor nonfund investments. Because most financialinstitutions that offer mutual funds also offertheir customers a broad range of other investmentoptions, mutual fund customers who purchasenonfund investments from other channels wouldappear to be a market ripe for cross-selling andshould not be overlooked.

FIGURE 19

Channels Other than Mutual Fund Channel Used to Purchase Nonfund Investments



Percent of respondents purchasing at least one nonfund investmentfrom a channel other than that used to purchase mutual funds 57 74 76 73 70 77

Percent of respondents using channel for a nonfund investment...Full-service broker NA 31 34 36 25 37Discount broker 11 NA 13 13 11 23Insurance 28 24 NA 36 30 28Bank 33 40 49 NA 39 45Financial planner 7 7 13 11 NA 7Direct market 16 26 25 22 17 NABase = 337 120 126 107 147 384

NA = Not applicableNote: Channel users are respondents who currently own at least one fund from that channel.


17

Use of Channels for TotalInvestment Activity

The channels used most often for total invest-ment activity are not necessarily the channelsused most often for mutual fund purchases. Forexample, 62 percent of respondents have someshare of their assets invested with a bank or savingsand loan, but only 13 percent own mutual fundspurchased from this channel. Fully 36 percentof respondents have some of their financial assetsinvested with an insurance agent, while only 15percent own mutual funds through this channel.A total of 28 percent of respondents have assetsinvested with a discount broker, and just 14 per-cent use the channel for mutual funds (see Figure1 on page 3).

For respondents who use banks and discountbrokers, the gap between total investment and mu-tual fund investment activity may begin to narrow.Each year, more banks are providing mutual fundsto their customers. The advent of no-transaction-fee programs among discount brokerage firms haseliminated a key drawback to purchasing fundsfrom this channel. Nevertheless, the bank, in-surance, and discount broker channels couldpossibly benefit from increased consumer aware-ness that they offer mutual funds.

For respondents who use the full-service brokerand direct market channels, the difference be-tween total investment activity and mutual fundpurchases is quite small, an indication that mu-tual fund marketing efforts of these two channelshave been successful. Roughly 60 percent ofrespondents use the full-service broker and directmarket channels for some type of investment,and more than half own mutual funds from thesetwo channels.

Although respondents do not invest throughthe financial planner channel as extensively asthrough the full-service broker and direct marketchannels, the difference between the use of thechannel for total investment activity and formutual fund purchases is also quite small. Fully21 percent of respondents have assets with afinancial planner, and 18 percent own fundsthrough this channel.

Figure 20 shows respondents’ median house-hold financial assets and the median amount in-vested per channel. Respondents who purchasefunds through the full-service broker are themost affluent, with median household financialassets totaling $178,700. Of this, a median of$107,200, or 60 percent, is invested through thefull-service broker channel.

FIGURE 20

Household Financial Assets per Channel*



Median household financial assets $178,700 $141,200 $117,100 $133,100 $140,800 $153,500

Household financial assets invested through the channel...Median $107,200 $43,800 $23,400 $26,600 $70,400 $61,400Percent 60% 31% 20% 20% 50% 40%

* Excludes real estate and assets in employer-sponsored retirement plansNote: Channel users are respondents who currently own at least one fund from that channel.


18

The median household financial assets of finan-cial planner channel users is $140,800, and thesebuyers have a median of $70,400, or 50 percent,invested through the financial planner channel.Respondents who own funds from the directmarket channel have median household financialassets of $153,500, of which $61,400, or 40percent, is invested through the directmarket channel.

The median household financial assets forrespondents in the discount broker, insuranceagent, and bank channels range from $117,100to $141,200. However, a smaller percentage ofthese respondents’ household financial assets isinvested through these three channels, respec-tively. Discount broker channel users have 31percent, bank channel users have 20 percent,and insurance channel users have 20 percent oftheir median household financial assets investedthrough their respective channels.


19

Chapter 2:Channel Use Over Time

Patterns in Channel Use

Examining the pattern of channels used over timeis important to understanding shareholder behav-ior. Comparing the channels shareholders use nowwith those they have ever used, as well as withthose they are likely to use in the future, revealschanges in purchase behavior from which mutualfund managers can build marketing strategies.

A comparison of respondents who haveeveruseda particular channel with those whocurrentlyusethat channel suggests that shareholders’ useof distribution channels is dynamic, not static.Figure 22 shows that, for each channel, a largerproportion of respondents have ever used thatchannel than are currently using it. This findingalso suggests that shareholders who use severaldistribution channels eventually pare down the

Chapter Summary

The largest proportion of respondents, 41percent, bought their first mutual fund froma full-service broker and 32 percent boughttheir first mutual fund directly from a fundcompany. Among respondents who haveowned more than one fund, however, morethan half who purchased their first mutualfund from the full-service broker, discountbroker, financial planner, and direct marketchannels purchased their most recent fundfrom the same channel. Similarly, the majorityof respondents who purchased their most re-cent fund from one of these four channelsexpect to purchase their next fund from thesame channel. Nevertheless, the study showsthat respondents are gravitating toward the directmarket channel. Among respondents who haveowned more than one mutual fund, the largestproportion, 43 percent, purchased their mostrecent mutual fund from the direct marketchannel. Furthermore, half of all respondents

expect to purchase their next mutual fund fromthe direct market channel.

FIGURE 21

Channel Used to Purchase First Mutual Fund(percent of respondents)

Base=720

Full-service broker

41%

Direct market

32%

Discount broker5%

Insurance6%

Bank7%

Financial planner

9%


21

channels they use to a preferred few, and in someinstances, to just one.

The pattern of channels ever used is similar to thepattern of channels currently used. Roughly threetimes as many investors have ever purchasedmutual funds from the full-service broker ordirect market channels than have ever boughtfunds from the discount broker, insurance, bank,or financial planner channels. Based on the dif-ference between the percent of respondents whohave ever used and who currently use each chan-nel, respondents who have experience with thefull-service broker or direct market channels aremore likely to still use these channels than arepast users of the other four channels. For example,63 percent of respondents have used and 51 per-cent currently use the full-service broker channel,a difference of 12 percentage points. Meanwhile,23 percent of respondents have used and 13percent currently use the bank channel, a dif-ference of 10 percentage points. Hence, about onefifth of respondents who have ever used the full-service broker channel no longer use it to pur-

chase mutual funds. This compares with abouthalf of those who have ever used the bank channelfor a fund purchase.

Another interesting pattern that emerged fromthe study is that about one fifth of respondentswho have used multiple channels to purchasemutual funds have shifted back to using a singlechannel. These shareholders tend to be seasonedinvestors with large, diverse mutual fund port-folios. This finding reinforces the theory thatshareholders experiment with a variety of chan-nels and that some shareholders will, over time,consolidate their fund assets within one particularchannel. Hence, distribution channels should nottake shareholder assets for granted. Figure 23illustrates this phenomenon for the six channelgroups. When compared with other channel users,a greater share of financial planner users haveshifted from multiple channels to a single channel.

Channel Used to Purchase First MutualFund

Respondents’ first exposure to mutual fundswas typically through either the full-service bro-ker or the direct market channel. The largest pro-portion of respondents, 41 percent, used a full-service broker to purchase their first mutualfund. Nearly one third of respondents boughttheir first fund directly from the fund company.In contrast, no more than 5 to 9 percent of respon-dents began investing in mutual funds throughthe discount broker, insurance, bank, or financialplanner channels (see Figure 21).

These data undoubtedly reflect the primarymethods of mutual fund distribution prior tothe mid-80s, the time when respondents typicallybought their first fund (see Figure 28). A decadeago, for example, the distribution of mutualfunds through banks and discount brokers wasjust emerging. As more banks and discountbrokers begin to offer mutual funds, the numberof shareholders who buy their first fund fromthese two channels will probably grow.

Most respondents went on to buy funds fromother channels regardless of the channel fromwhich they purchased their first fund (see Figure

FIGURE 22

Comparison of Channels Currently Used and EverUsed to Purchase Mutual Funds*(percent of respondents)


51

14

15

13

18

52

63

22

22

23

24

62

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market

Currently UsedEver Used


22

23). This finding demonstrates that it is criticalthat distribution channels meet the needs oftheir customers. Because dissatisfied shareholderscan transfer their assets between channelsrelatively easily, one channel’s customers caneasily become another channel’s customers.

Figure 24 shows the channel that respondentsused to purchase their first mutual fund. Theanalysis of discount broker, insurance, bank, andfinancial planner channel users’ first mutual fundpurchase is especially interesting. The majorityof the respondents who currently use these fourchannels to purchase mutual funds bought theirfirst fund from some other channel. For example,

FIGURE 23

Patterns in Number of Channels Used to Purchase Mutual Funds(percent of respondents)



Current single-channel users who have neverused more than one channel 26 11 10 6 17 24

Current single-channel users who were multichannel users 14 9 8 10 16 14Current multichannel users 60 80 82 84 67 62

100% 100% 100% 100% 100% 100%Base = 337 120 126 107 147 384


FIGURE 24

Channel Used to Purchase First Mutual Fund Among Channel Users(percent of respondents)



Channel used to purchase first fund...Full-service broker 70 32 27 28 23 30Discount broker 1 27 6 5 5 4Insurance 3 2 26 8 10 3Bank 5 9 11 25 4 5Financial planner 5 3 5 7 38 5Direct market 16 27 25 27 20 53

100% 100% 100% 100% 100% 100%Base = 337 120 126 107 147 384



23

32 percent of discount broker users bought theirfirst fund from a full-service broker, and 27 per-cent bought their first fund directly from the fundcompany.

For the majority of respondents, the initial fundpurchase included at least one long-term fund(see Figure 27). Most respondents, 55 percent,bought only a stock fund. Another 12 percentof respondents bought only a bond fund, and 9percent bought either a combination of stock,bond, and money market funds, or all threetypes of funds. Only 24 percent bought justa money market fund. These findings areconsistent across all channel groups.

Respondents purchased their first fund a med-ian of eight years before the survey was con-ducted, or in 1985 (see Figure 28). Tenurein funds varies slightly among the six channelgroups. Discount broker channel users boughttheir first fund a median of ten years beforethe survey was conducted, or in 1983. Financialplanner, insurance, and direct market channelusers each bought their first fund a medianof nine years before the survey was conducted,or in 1984. Both full-service broker channelusers and bank channel users bought their firstfund a median of eight years before the surveywas conducted, or in 1985 (see Figure 89 inAppendix B). Only 10 percent of respondentspurchased their first mutual fund after 1990,a further indication that the vast majorityof survey respondents are seasoned,active investors.

Channel Used to Purchase Most RecentMutual Fund

Nearly all of the respondents who participatedin the study, 96 percent, have owned morethan one mutual fund since they first startedinvesting in funds. The remaining four percenthave only owned the first mutual fund pur-chased. The respondents who have owned morethan one fund were asked a series of questionsabout the distribution channel they used fortheir most recent fund purchase.

Just as respondents were likeliest to use eitherthe full-service broker or the direct marketchannels to purchase their first mutual fund,

those who have owned more than one fundwere likeliest to purchase their most recent fundfrom either of these two channels. However,among the respondents who have owned morethan one fund, slightly more used the directmarket channel than used the full-service brokerchannel to purchase their most recent fund. AsFigure 25 illustrates, 43 percent of these res-pondents purchased their most recent mutualfund directly from the fund company. Thirty-twopercent of respondents who have owned morethan one fund bought their most recent fundfrom a full-service broker. In contrast, 11 per-cent or less bought their most recent fund fromone of the other four channels.

Among respondents who have owned more thanone fund, some purchased their most recent fundfrom the same channel as their first fund. Morethan two thirds of shareholders who purchasedtheir first fund from the direct market channelpurchased their most recent fund from thischannel. More than half of respondents whopurchased their first fund from the full-servicebroker, financial planner, or discount brokerchannels bought their most recent fund fromtheir respective channels. These findings indicatethat these four channels have fairly solid repeatbusiness from the customers to whom they intro-duced mutual funds. However, the findings forthe insurance and bank channels are not as positive.

FIGURE 25

Channel Used to Purchase Most RecentMutual Fund(percent of respondents who have owned more than one fund)

Base=642

Full-service broker

32%

Discount broker=5%

Insurance=5%

Bank=4%

Financial planner

11%

Direct market

43%


24

Only 34 percent of the respondents who purchasedtheir first fund from the insurance channel pur-chased their most recent fund from this channel,and the figure for the bank channel is an evenlower 20 percent (see Figure 5 on page 5).

Figure 26 presents information on the channelused to purchase the most recent mutual fundaccording to the channels respondents currently

use. Underscoring respondents’ heavy use ofthe direct market channel, 76 percent of directmarket channel users who have owned more thanone fund bought their most recent fund throughthis channel. Also noteworthy, 64 percent of full-service broker channel users who have ownedmore than one fund bought their most recent fundfrom a full-service broker, and 58 percent offinancial planner channel users who have owned

FIGURE 26

Channel Used to Purchase Most Recent Mutual Fund Among Channel Users(percent of respondents who have owned more than one fund)



Channel used to purchase most recent fund...Full-service broker 64 12 20 26 16 12Discount broker 2 39 2 6 3 2Insurance 3 4 34 5 2 3Bank 3 2 4 32 1 3Financial planner 4 5 8 5 58 4Direct market 24 38 32 26 20 76

100% 100% 100% 100% 100% 100%Base = 297 108 116 95 135 367


FIGURE 27

First and Most Recent Type of Mutual Fund(s) Purchased(percent of respondents)

First Fund Most Recent Fund*

Stock fund only 55 68Bond fund only 12 21Money market fund only 24 9Stock and bond fund 2 2Stock and money market fund 4 -Bond and money market fund 1 -All three types of funds 2 -Base = 690 690

*For those who have owned more than one fund


25

more than one fund bought their most recent fundfrom a financial planner.

A different picture emerges among the discountbroker, insurance, and bank channel users. Lessthan 40 percent of these channel users who haveowned more than one fund bought their mostrecent fund from one of these three channels.In fact, a considerable number of discount broker,insurance, and bank channel users who haveowned more than one fund bought their mostrecent fund from the direct market channel.

While nearly three quarters of respondentsbought a long-term fund as their first mutualfund, Figure 27 shows that, among respondentswho have owned more than one fund, morethan 90 percent of respondents bought at leastone long-term fund as the most recent fundthey purchased. More than two thirds of theserespondents bought a stock fund as the most recentmutual fund they purchased. Another 21 percentbought a bond fund, and 2 percent bought botha stock and a bond fund. Just 9 percent purchaseda money market fund as the most recent fundpurchase. The type of fund or funds purchaseddid not vary much among the six channel groups(see Figures 88 and 90 in Appendix B).

A sign that they are active shareholders, themajority of respondents who have owned morethan one fund, 60 percent, bought their most recentfund in 1993, the year in which the survey wasundertaken. Figure 28 shows the mean and mediannumber of years since the most recent fund waspurchased for all respondents who have owned morethan one fund. The year in which the most recentfund was purchased did not vary much among thesix channel groups (see Figure 91 in Appendix B).

Figure 28

Year in Which First and Most Recent Fund(s) Were Purchased

First Fund Most Recent Fund*

1991 or later 10 1993 601988 through 1990 15 1992 201985 through 1987 35 1990 through 1991 151984 or earlier 40 1988 through 1989 5

100% 100%

Mean number of years ago 10 1Median number of years ago 8 <1Base = 689 694

*For those who have owned more than one fund

FIGURE 29

Channel to Be Used to Purchase Next Mutual Fund(percent of respondents)

Base=661

Full-service broker

25%Discount broker

9%Insurance=2%

Bank=3%

Financial planner

11%

Direct market

50%


26

Channel to Be Used to PurchaseNext Mutual Fund

Respondents were asked to indicate the channelfrom which they would purchase their next mu-tual fund, assuming they had money to invest.Figure 29 shows that exactly half of all respon-dents indicate they would purchase their nextfund directly from a fund company. Anotherquarter of respondents say they would use a full-service broker. The remaining quarter reportthat they would use one of the other four chan-nels—11 percent would use a financial planner,9 percent would use a discount broker, 3 percentwould use a bank representative, and 2 percentwould use an insurance agent.

Examining the channel respondents expect touse for their next fund purchase according to thechannel they used for their most recent fundpurchase provides some very interesting insights.Most respondents expect to purchase their nextmutual fund from the same channel from whichthey purchased their most recent mutual fund(see Figure 6 on page 6). However, the insuranceand bank channels are the exception. The majorityof respondents who purchased their most recentfund from the bank or the insurance channel donot expect to purchase their next fund from eitherof these two channels. This finding underscores

the importance of meeting shareholder needs andexpectations. As mentioned earlier, some share-holders withdraw their mutual fund assets from achannel and no longer use it.

Figure 30 shows the channel respondents expectto use to purchase their next fund according tothe channels they currently use to purchase funds.The greatest potential for cross-over to the directmarket channel is from the insurance and bankchannel users. Almost half of insurance and bankchannel users say they will buy their next fundfrom the direct market channel. Only 14 percentof insurance channel users and 17 percent of bankchannel users say they will use the insurance agentand bank channels, respectively, for their next fundpurchase.

Respondents were also asked to indicate which,if any, of the six channels their households haveused in the past to purchase mutual funds theywould not use again. Altogether, 28 percent men-tioned at least one channel they say they will notuse again. The largest proportion of these respon-dents, 51 percent, say they are unlikely to purchaseanother mutual fund from a full-service broker.While this reaction is likely to be aimed moreat a particular broker than at the channel as awhole, it clearly illustrates the importance of thebroker-investor relationship and the impact a

FIGURE 30

Channel to Be Used to Purchase Next Mutual Fund Among Channel Users(percent of respondents)



Full-service broker 49 6 20 18 16 6Discount broker 6 44 9 11 5 6Insurance 1 2 14 2 1 1Bank 1 1 5 17 2 2Financial planner 7 8 9 7 45 3Direct market 36 39 43 45 31 82

100% 100% 100% 100% 100% 100%Base = 305 110 118 99 139 368



27

negative purchase experience can have on future in-vestment behavior. In comparison, no more than 20percent of respondents who will not use a channelagain mentioned any of the other five channels.

Among the respondents who would not use a particu-lar distribution channel again, roughly a quarter toone third cite the following reasons: dissatisfactionwith the service received, dissatisfaction with the ad-vice received, dissatisfaction with fund performance,advice from a financial adviser no longer needed, andhigh fees and expenses (see Figures 31 and 32).

FIGURE 31

Channels Never to Be Used Again to Purchase Mutual Funds*(percent of respondents)

Base = 720*Multiple responses included

51

6

17

11

16

4

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market

RespondentsWho Will NotUse a ChannelAgain

28%72%

FIGURE 32

Reasons for No Longer Using Channels(percent of respondents who will not use a particular channel again)

Dissatisfied with service received 31Dissatisfied with fund performance 31Dissatisfied with advice received 30High fees and expenses 24No longer needed guidance from a financial adviser 26Wanted funds not offered through that purchase method 20Not convenient 10Wanted guidance from a financial adviser 9Needed someone to manage my money,no longer had time to do it 4

Base = 213

Channels that Respondents Will Not Use Again


28

Chapter 3:Motivations for Channel Use

Chapter Summary

The vast majority of full-service brokerand financial planner channel users view theirchannels as offering a range of attributes—investment advice, personalized service,information, and convenience. Full-servicebroker and financial planner channel usersgenerally turn to their channels for advice.Most direct market channel users also perceivetheir channel as one with several qualities,including reasonable fees, convenience,and information. Reasonable fees andcommissions are what primarily draw directmarket channel users to their channel. Dis-count broker channel users associate theirchannel with convenience, and to a lesser extent,with reasonable fees and information. Neverthe-less, low or no fees and commissions are whatprimarily drive respondents to use the discountbroker channel. A slight majority of insurancechannel users associate their channel withpersonalized service and convenience. Thelargest share of insurance channel users say theybuy funds from their agent because they havean existing relationship with that person. Aslim majority of bank channel users associatetheir channel with convenience, which is themost frequently mentioned reason for usingthis channel.

FIGURE 33

Respondents’ Perception of the Availability ofMutual Fund Information from the ChannelsThey Use(percent of respondents rating attribute 5 or 6*)

*With 6 as the highest, 1 as the lowest

82

57

46

42

85

81

Full-service broker

Discount broker

Insurance

Bank

Financial planner

Direct market


29

Principles of Motivation Research

Customer perceptions as well as marketplacerealities drive shareholder purchase decisions.Determining which product and service attributesinvestors deem most important, and how investorsperceive each channel in delivering these attrib-utes, is essential to understanding why investorsuse certain channels and not others. This chapteridentifies the particular attributes or servicesthat link respondents to each channel andexamines respondents’ perceptions of each chan-nel, regardless of whether they have used thatchannel. Specifically, channel users were askedto identify the number one reason why theypurchase funds from their particular channelsand to evaluate all channels on the followingattributes:

Availability of investment advice,

Personalized service,

Reasonableness of mutual fund fees,

Availability of mutual fund information, and

Convenience for purchasing mutual fundshares.

A six-point scale was used to rate the channels,with a score of 6 indicating high association withan attribute, and a score of 1 indicating lowassociation.

An examination of respondents’ primary reasonfor using any one particular channel for mutualfunds, and a review of how these buyers per-ceive each channel, is valuable for marketpositioning. Funds that are distributed througha particular channel can identify the attributesthat channel users rate highly and emphasizethese strengths to prospective fund buyers. Achannel rated positively on attributes that areregarded as less important to these channel userscould promote these attributes so as to dif-ferentiate itself from other channels. A benefitthat is broadly attributed to one channel in con-trast to others could offer a promotable advan-tage over other channels.

It is important to consider the relative importanceto shareholders of an attribute that receives alow rating. Low ratings of a channel for certain

attributes imply that these fund owners perceivethe attribute to be generally not availablefrom that channel. If the attribute is importantenough, fund buyers may switch to otherchannels where they perceive the attribute tobe more available. Therefore, for the fund com-pany and for the channel, it is essential tounderstand the perceived strengths and weak-nesses of the channel and the segment ofcustomers most likely to be motivated by thosestrengths. This is especially important wheremultiple channel use is high, as shown inthis study.

While channel users generally believe thatthey are receiving important benefits from theirchannels, they often indicate that other channelsprovide these benefits as well. Fund companieshave an opportunity to eliminate weaknessesand retain shareholders by understanding whichchannels customers perceive as having attributesthey value. Likewise, understanding the per-ceptions of other channels’ customers can helpfund companies emphasize their own strengthsand correct mistaken views. The followingelements are helpful in analyzing why shareholdersuse various channels: the key reasons for usinga channel to buy funds, respondents’ perceptionsof the channels they currently use, and a descrip-tion of respondents who currently use these chan-nels. The reasons for using each channel andrespondents’ perceptions of each are presentedin this chapter. Chapter 4 presents the characteristicsof respondents who use each of the six channels.

Full-service Broker Channel

The primary factor that drives respondents topurchase mutual funds through a full-servicebroker is the availability of initial and ongoingadvice. The largest proportion of full-servicebroker channel users, 38 percent, cite initial andongoing advice as the main reason for using thischannel. Another 18 percent of full-service brokerchannel users cite an existing relationship withtheir adviser or institution, and 11 percent seekpersonalized service from a full-service broker.A positive experience with an adviser or an institu-tion not only fosters repeat business from investors,but can also promote referrals. Nine percent of full-service broker channel users cite a personal


30

recommendation as the reason for using thischannel.

Full-service broker channel users view the full-service broker channel as providing a varietyof benefits, including investment advice, theprimary reason why they use this channel. Infact, full-service broker users rate their channelvery highly on this attribute. Full-service brokerusers also rate their channel highly on most ofthe other attributes, such as personalized serviceand convenience, which indicates that the full-service broker channel is meeting the needs thatthese shareholders consider important. However,only 25 percent of full-service broker channelusers rate this channel a 5 or 6 for reasonablenessof fees. Because fees are not a key reason forusing this channel, this group’s overall perceptionof the full-service channel is positive.

Users of other channels view the full-servicebroker channel similarly. These respondents per-ceive the channel as offering advice, personalizedservice, information on mutual funds, and con-venience. However, this group of respondentsalso gives full-service brokers the lowest ratingson reasonableness of fees. As mentioned above,users of the full-service broker channel do notcite low or reasonable fees as a reason for usingthe full-service broker channel, but rather are drawnto this channel for other reasons.

FIGURE 34

Primary Reason for Using the Full-service BrokerChannel to Purchase Mutual Funds(percent of respondents using channel)

Offers initial and ongoing investment advice or guidance 38Has low or no fees or commissions 1Have an established relationship with adviser or institution 18Offers funds with solid performance 5Is a convenient way to purchase an investment 4Someone recommended it to me 9Offers personalized service 11Has an excellent reputation 5Is a convenient source for financial information 2Is the only source for some of the investments wanted 2Executes orders efficiently 1Other 4

100%Base = 308

FIGURE 35

Perceptions of the Full-service Broker Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Full-service Broker Channel

Full-service Discount Financial DirectBroker Channel Broker Insurance Bank Planner MarketUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users

85 Availability of investment advice 72 77 72 73 7482 Personalized service 69 69 63 61 6925 Reasonableness of mutual fund fees 3 14 18 9 782 Availability of mutual fund information 68 71 71 67 6490 Convenience for purchasing mutual fund shares 75 73 66 69 68



31

Discount Broker Channel

Low fees and convenience are the key reasonswhy respondents use the discount broker channelto purchase mutual funds. The largest share of dis-

count broker channel users, 43 percent, say theypurchase funds through this channel because it hasthe lowest fees, or no fees or commissions. Another12 percent of discount broker channel users list con-venience as the most compelling reason for usingthis channel. Fewer than 10 percent cite any of theother reasons.

Discount broker channel users perceive that chan-nel as offering convenience. The discount brokerchannel, according to its users, does not provideinvestment advice or personalized service. Al-though the largest proportion of discount brokerchannel users buys funds from this channel becauseit offers low or no fees, only 58 percent rated thischannel a 5 or 6 for reasonableness of fees. Asmore discount brokers offer no-transaction-feemutual fund programs, the share of discount brokerchannel users who view the channel’s fees asreasonable should rise.

Similar to discount broker channel users, respon-dents who use the other channels do not perceivethe discount broker channel as one that offerspersonalized service or investment advice. With

the exception of full-service broker channel users,respondents who use other channels tend not toassociate convenience or reasonableness of feeswith the discount broker channel. Because respon-dents who own funds from the full-service broker

FIGURE 36

Primary Reason for Using the Discount BrokerChannel to Purchase Mutual Funds(percent of respondents using channel)


100%Base= 102

FIGURE 37

Perceptions of the Discount Broker Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Discount Broker Channel

Discount Full-service Financial DirectBroker Channel Broker Insurance Bank Planner MarketUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users




32

place a great deal of emphasis on advice and ona relationship with their broker, their perceptionsthat the discount broker channel provides con-venience and reasonable fees may not necessarilylead them to use the discount broker channel.

Insurance Channel

Having an established relationship with an in-surance agent is a key reason why investors usethis channel to purchase mutual funds. The largestproportion of insurance channel users, 29 percent,mentions this as their number one reason forpurchasing mutual funds from this channel.Another 16 percent cite the initial and ongoingadvice they receive from their insurance agent asthe key reason for using this channel, and 8 per-cent mention a personal recommendation.

Insurance channel users associate convenienceand personalized service with this channel. Morethan half of all insurance channel users rate theinsurance channel either a 5 or 6 on these twoattributes. Slightly less than half of insurancechannel users rate their channel either a 5 or a 6for availability of investment advice and mutualfund information.

Of the five attributes on which they assessedthe channels, respondents who use the otherchannels to purchase mutual funds mostclosely associate personalized service withthe insurance channel. However, when compared

FIGURE 38

Primary Reason for Using the Insurance Channel toPurchase Mutual Funds(percent of respondents using channel)


100%Base= 101

FIGURE 39

Perceptions of the Insurance Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Insurance Channel

Insurance Full-service Discount Financial DirectChannel Broker Broker Bank Planner MarketUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users




33

with insurance agent users’ ratings of this chan-nel for personalized service, the ratings of usersof other channels are not as high. Users of theother channels generally do not strongly associ-ate the insurance channel with personalizedservice, convenience, reasonable fees, or infor-mation on mutual funds.

Bank Channel

Bank channel users’ reasons for using this chan-nel are quite diverse when compared with thereasons why respondents use some of the otherchannels. The fact that one reason does not standout indicates that the bank channel has notdifferentiated itself as a source of mutual fundsin the minds of its users.

Overall, about a quarter of bank channel usersindicate that their main reason for using thischannel is its convenience. Another importantfactor in the decision to use the bank channelfor mutual fund purchases is the existingrelationship respondents have with their depositinstitution. In fact, 18 percent of bank channelusers cite this as their number one reason forpurchasing funds through this channel. Person-alized service plays a role in purchasing fundsthrough a bank, with 15 percent of bank channelusers citing this as their key reason.

FIGURE 40

Primary Reason for Using the Bank Channel toPurchase Mutual Funds(percent of respondents using channel)

Offers initial and ongoing investment advice or guidance 6Has low or no fees or commissions 13Have an established relationship with adviser or institution 18Offers funds with solid performance 10Is a convenient way to purchase an investment 26Someone recommended it to me -Offers personalized service 15Has an excellent reputation 4Is a convenient source for financial information 4Is the only source for some of the investments wanted 1Executes orders efficiently 2Other 1

100%Base= 74

FIGURE 41

Perceptions of the Bank Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Bank Channel

Full-service Discount Financial DirectBank Channel Broker Broker Insurance Planner MarketUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users




34

Among bank channel users, convenience standsout as the attribute most closely associated withpurchasing mutual funds from a bank. Mostof these channel users do not perceive that theyreceive personalized service from banks. Only38 percent of bank channel users rate this chan-nel a 5 or 6 for personalized service, and person-alized service is the third most frequentlymentioned reason for buying funds through abank. Because most bank channel users alsoown funds from more than one channel, theserespondents have a basis for comparison.

Respondents who use the other channels topurchase mutual funds, particularly insuranceagent users, also tend to associate conveniencewith the bank channel. Nevertheless, respondentswho use other channels tend to give the bankchannel fairly low ratings on convenience andon the other attributes as well. These low ratingsmay reflect the relatively nascent stage ofthe bank channel as a distributor of mutualfunds when compared with the more traditionalchannels, such as the full-service broker or thedirect market channels. Hence, respondentswho do not own funds from a bank may not befamiliar with mutual funds and the relatedservices available through this channel, and,therefore, do not closely associate this channelwith any of the five attributes.

Financial Planner Channel

Similar to full-service broker channel users, thelargest proportion of financial planner channelusers, 34 percent, cite the initial and ongoingguidance that their adviser provides as a reasonfor using this channel. The relationship establishedwith the financial planner or institution is veryimportant to these respondents—21 percentmention it as the key reason for using this channel.Personalized service and personal recommend-ations are also motivators for some financialplanner channel users. Sixteen percent saypersonalized service is their number one reasonfor buying from a financial planner, and 13 percentcite a personal recommendation.

Respondents who own funds from a financialplanner view this channel as providing investmentadvice and personalized service. Respondentswho use other channels perceive financial planners

as having these same two attributes. To a slightlylesser degree, users of other channels perceivethe financial planner channel as convenient andas offering information on mutual funds. Otherchannel users do not perceive financial plannersas having reasonable fees.

FIGURE 42

Primary Reason for Using the Financial PlannerChannel to Purchase Mutual Funds(percent of respondents using channel)

Offers initial and ongoing investment advice or guidance 34Has low or no fees or commissions 1Have an established relationship with adviser or institution 21Offers funds with solid performance 4Is a convenient way to purchase an investment -Someone recommended it to me 13Offers personalized service 16Has an excellent reputation 4Is a convenient source for financial information 2Is the only source for some of the investments wanted 1Executes orders efficiently 1Other 3

100%Base= 133


35

Direct Market Channel

Similar to discount broker channel users, thelargest share of direct market channel users, 31percent, list low or no fees or commissions asthe primary motivator for using this channel.Nearly a quarter mention solid fund performanceas their number one reason. In contrast, only tenpercent or less of the other channel users citefund performance as a reason for using any ofthose particular channels. Also noteworthy, 16percent of direct market channel users list con-venience as their key reason for using this channel.

Users of the direct market channel regard it as aconvenient way to purchase mutual funds. Theyview the direct market channel as one withreasonable fees and one that provides informationon mutual funds. They also perceive this channelas providing investment advice, albeit to a lesserdegree than the other attributes. Users of thischannel do not associate it with personalizedservice, a feature not important to them in theirselection of this channel.

FIGURE 44

Primary Reason for Using the Direct MarketChannel to Purchase Mutual Funds(percent of respondents using channel)

Offers initial and ongoing investment advice or guidance 5Has low or no fees or commissions 31Have an established relationship with adviser or institution 4Offers funds with solid performance 23Is a convenient way to purchase an investment 16Someone recommended it to me 6Offers personalized service -Has an excellent reputation 7Is a convenient source for financial information 2Is the only source for some of the investments wanted 3Executes orders efficiently 2Other 1

100%Base = 353

FIGURE 43

Perceptions of the Financial Planner Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Financial Planner Channel

Financial Planner Full-service Discount DirectChannel Broker Broker Insurance Bank MarketUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users




36

Respondents who use the other channels perceivethe direct market channel as one that providesinformation on mutual funds and as a convenientway to purchase mutual funds. In all cases, usersof the other channels give this channel the highestrating on the reasonableness of fees—higher thanthey give their own channels—indicating thatmost respondents are fairly well informed aboutthe direct market channel, even if they don’t use it.

FIGURE 45

Perceptions of the Direct Market Channel for the Purchase of Mutual Funds*(percent of respondents rating attribute 5 or 6**)

Evaluation of the Direct Market Channel

Direct Market Full-service Discount FinancialChannel Broker Broker Insurance Bank PlannerUsers’ Channel Channel Channel Channel ChannelPerception Users Users Users Users Users




37

Chapter 4:Profile of Channel Users

Chapter Summary

The survey respondents, who had to havebought a long-term fund since 1988 from oneof the six channels in order to qualify for thestudy, are active investors with large, diversi-fied portfolios. In the 12 months preceding thesurvey, nearly two thirds bought more sharesof a fund they already owned, and slightlymore than a third conducted an exchangewithin a family of funds. Full-service brokerusers have household financial assets of$178,700, the largest amount of all channelgroups. When compared with the other fourchannel groups, financial planner and insurancechannel users keep the greatest proportion oftheir financial assets, 43 percent, in mutual funds.Discount broker users own a median of seven

funds, the most of all channel groups. Discountbroker users are younger than other channelusers and are more likely to live in single-incomehouseholds; nevertheless, their median householdincome of $104,100 is the highest among allchannel groups. With their large mutual fundportfolios and high levels of education, it is notsurprising that respondents across all channelgroups say they have either a basic or comp-rehensive understanding of mutual funds.Full-service broker and financial planner usersprimarily rely on an adviser from their respectivechannels when they require mutual fund invest-ment information. In contrast, the primary sourceof mutual fund information for respondents whouse the other four channels is much more diverse.

FIGURE 46

Channel Users’ Investment Portfolios(median amount per household)

Total Financial FinancialFinancial Assets Invested in Assets Invested in

Assets* Mutual Funds Other Investments**

Respondents using the following channels...Full-service broker $178,700 $60,000 $118,700Discount broker 141,200 60,000 81,200Insurance 117,100 50,000 67,100Bank 133,100 52,700 80,400Financial planner 140,800 60,000 80,800Direct market 153,500 60,000 93,500

*Excludes real estate and assets in employer-sponsored pension plans**Individual stock and annuities are examples of nonfund investmentsNote: Channel users are respondents who currently own at least one fund from that channel.


39

Demographic and FinancialCharacteristics

Regardless of the channels they use to purchasemutual funds, respondents are demographicallysimilar to the typical mutual fund shareholder.Most respondents are middle-aged, male, married,and employed either full- or part-time. The vastmajority are college-educated, and many havegraduate degrees (see Figures 92 through 97 inAppendix B for data on all respondents).

However, as Figure 47 illustrates, several dis-tinctions among the six channel groups are note-worthy. With a median age of 50, full-servicebroker users tend to be somewhat older thanother channel users. The median age of respondentsin the other channel groups ranges from 48 forfinancial planner users to 44 for discount brokerusers.

Although they are typically the youngest andthe most likely to reside in a single-incomehousehold, discount broker users’ median incomeof $104,100 is the highest of all channel groups.Bank and insurance channel users have thelowest median incomes; both of these groupsreport a median household income of less than$86,000.

Full-service broker users have a median of$178,700 in household financial assets, morethan all other channel groups. Direct marketchannel users follow with $153,500. With amedian of $117,100, insurance agent users havethe least financial assets.

Although the majority of respondents cite long-term growth as their primary reason for invest-ing, discount broker users are the likeliest tomention this purpose. The largest proportion ofall channel groups cite saving for retirement astheir primary financial goal, but this too variesfrom channel to channel. For example, 53 percentof insurance channel users are saving for retire-ment, compared with 39 percent of full-servicebroker users. Full-service broker users are thechannel group likeliest to indicate that they aretrying to preserve their accumulated assets. Tohelp meet their financial goals and objectives,most respondents have a formal financial plan.Not surprisingly, financial planner users are the

channel group with the highest incidence of aformal financial plan.

Given respondents’ level of assets invested inmutual funds and their level of education, it is notsurprising that respondents across all channelgroups describe their understanding of mutualfunds as either basic or comprehensive. Whencompared with other respondents, those who cur-rently own funds through the direct market anddiscount broker channels are likeliest to say theyhave a comprehensive knowledge of mutual funds.

Current Investment Portfolio

As illustrated in Figure 48, more than one thirdof respondents’ median financial assets are heldin mutual funds. This proportion varies amongthe channel groups, from financial planner andinsurance agent users who have 43 percent oftheir assets in mutual funds, to full-service brokerusers who have 34 percent of their assets inmutual funds.

Respondents own a median of five mutual funds.Discount broker users own a median of sevenfunds, the greatest number among the six channelgroups. Three of the channel groups—full-servicebroker, insurance, and direct market channel us-ers—each own a median of six funds. Bank andfinancial planner channel users each own amedian of five funds.

To qualify for the study, respondents had toown a long-term mutual fund purchased since1988. Of the six channel groups, direct marketchannel users are the likeliest to own stockfunds—97 percent own them. This percentageincludes stock funds that direct market channelusers purchased from the direct market channeland any other channel as well. Thirty-eight per-cent of respondents own tax-exempt bond funds.Discount broker channel users are the most likelyto own tax-exempt bond funds when comparedwith the other channel groups, and direct marketchannel users are the least likely. A total of 29percent of respondents own taxable bond fundsand 58 percent own money market funds.Ownership of these two types of funds did notvary much among the different channel groups.


40

FIGURE 47

Channel Users’ Demographic and Financial Characteristics



Median

Age 50 44 46 46 48 47Household income $91,800 $104,100 $85,900 $85,200 $95,400 $93,600Household financial assets* $178,700 $141,200 $117,100 $133,100 $140,800 $153,500Investment real estate assets** $22,900 $12,700 $23,300 $42,600 $29,800 $6,000


Male 67 69 66 65 71 71Married 86 85 86 87 87 91Employed full- or part-time 68 72 83 73 78 77Retired from lifetime occupation 28 17 18 27 21 21Spouse employed 62 61 69 64 74 64Four-year college degree or more 49 46 41 51 40 45Graduate degree 37 37 35 30 43 42Primary financial goal:

Saving for retirement 39 42 53 41 45 47Preserving accumulated assets 26 18 13 22 18 19Providing college education to children or grandchildren 16 22 19 18 17 18

Have formal financial plan 52 56 56 50 76 48Self-assessed understanding of mutual funds:

Comprehensive 28 39 27 24 31 42Basic 61 55 57 63 58 53Very limited 11 6 16 12 11 5

*Excludes real estate and assets in employer-sponsored pension plans**Excludes primary residenceNote: Channel users are respondents who currently own at least one fund from that channel.


41

Respondents’ mutual fund portfolios are di-verse. Their portfolios generally include stockfunds in combination with other types of mutualfunds. In fact, 28 percent of respondents own allthree types of funds, that is, stock, bond, andmoney market funds. Of the six channel groups,discount broker users are the likeliest to own allthree types of funds, and financial planner andbank channel users are the least likely.

In addition to mutual funds, respondents own anaverage of 3.5 nonfund investments. This doesnot vary much among the six channel groups.Aside from bank savings and deposit accounts,which nearly all respondents have, almost two

thirds own individual stock. Perhaps becausefull-service and discount brokers are the twotraditional sources from which to buy stocks,respondents who own funds from these twochannels are also the likeliest to own individualstock. In fact, 77 percent of discount broker usersand 72 percent of full-service broker channelusers own individual stock. In contrast, just 54percent of financial planner users own individualstock. Not surprisingly, of the six channel groups,insurance agent users are the likeliest to ownboth life insurance and annuities, two financialproducts traditionally associated with this

FIGURE 48

Channel Users’ Mutual Fund Ownership Characteristics



Median per Household

Mutual fund assets $60,000 $60,000 $50,000 $52,700 $60,000 $60,000Percent of financial assets invested in all mutual funds 34 42 43 40 43 39Number of funds owned 6 7 6 5 5 6


Types of Funds Owned:*Stock funds 90 89 92 86 91 97Tax-exempt bond funds 45 52 38 43 45 36Taxable bond funds 28 29 27 27 28 32Money market funds 62 62 60 63 60 56

Combinations of Funds Owned:Stock funds only 16 18 25 19 18 25Bond funds only 4 4 4 6 3 1Stock and bond funds 18 16 11 12 19 18Stock and money market funds 25 18 22 24 24 21Bond and money market funds 6 7 4 9 6 2All three types of funds 31 37 34 30 30 33

100% 100% 100% 100% 100% 100%

* Multiple responses includedNote: Channel users are respondents who currently own at least one fund from that channel.


42

channel. Figure 49 shows the nonfund invest-ments owned by each of the six channel groups.

Recent Mutual Fund Investment Activity

The respondents who participated in the studyare quite active mutual fund investors. In the 12months preceding the survey, the majority ofrespondents in all six channel groups investedmore money in a fund they currently owned,other than through exchanging shares of one fundfor shares of another fund, or through reinvestingdividends.

More than a third of respondents conducted anexchange in the 12 months preceding the survey.Of the six channel groups, discount broker andfinancial planner users were the likeliest toconduct an exchange. In contrast, full-servicebroker users were the least likely to conduct anexchange.

In the 12 months preceding the survey, 31 percentof respondents sold shares from one fund companyin order to invest the money with another fundcompany, and 28 percent sold shares and used theproceeds to purchase something other than mutualfunds. Of the six channel groups, financial plannerusers were likeliest to move fund assets from onecompany to another. Along with discount broker

FIGURE 49

Channel Users’ Ownership of Nonfund Savings and Investments*



Median household nonfund financial assets $118,700 $81,200 $67,100 $80,400 $80,800 $93,500Median percent of household financial assetsin nonfund investments 66 58 57 60 57 61

Average number of nonfund savings and investmenttypes owned 3.9 3.7 4.0 3.7 3.5 3.5


Bank accounts 84 81 81 90 83 82Certificates of deposit 33 30 32 37 21 29Individual bonds** 56 54 54 52 47 50Treasury bills, bonds, and notes 18 15 17 19 13 14Individual stock other than employer stock 72 77 63 57 54 66Life insurance 52 45 69 55 59 42Annuities 27 20 43 25 32 19Unit investment trusts 13 11 8 9 9 9Other investments 25 21 20 21 16 22

* Multiple responses included** Includes corporate, municipal, and U.S. Savings BondsNote: Channel users are respondents who currently own at least one fund from that channel.


43

FIGURE 50

Channel Users’ Recent Mutual Fund Investment Activity*(percent of respondents)



Invested more money in a fund currently owned(other than through exchanging shares orreinvesting dividends) 60 66 69 65 68 69

Exchanged shares of one fund for shares inanother fund offered by same company 31 45 33 33 44 39

Sold shares of one fund and used proceeds to buyshares of a fund with a different company 32 34 27 34 41 32

Sold shares and used proceeds to buysomething other than mutual funds 31 36 18 22 33 29

* For 12-month period preceding survey (August 1992 through July 1993); multiple responses includedNote: Channel users are respondents who currently own at least one fund from that channel.

FIGURE 51

Channel Users’ Primary Source of Mutual Fund Investment Information(percent of respondents)



Full-service broker 50 9 17 26 12 7Books and magazines 14 19 14 14 11 28Financial planner 8 9 14 10 56 6Direct contact with mutual fund company 7 11 9 9 2 21Brokerage or investment newsletters 5 10 10 5 4 11Friends, relatives, or colleagues 2 7 4 9 2 5Newspapers 4 8 1 5 2 5Insurance agent 1 1 13 3 1 1Discount broker 1 10 3 0 1 1Bank representative 1 2 5 13 2 1Other 7 14 10 6 7 14

100% 100% 100% 100% 100% 100%Base = 324 118 120 98 143 365



44

users, financial planner users were also the mostlikely to sell shares and use the proceeds forsome other purpose.

Investment Information Sources

Respondents were asked to name the sourcesthey typically consult for information or adviceregarding mutual fund investments, and toindicate the source they consider most importantin their fund purchase decision. Among thesources having the greatest influence on thesebuyers’ purchase decisions are the channelsthrough which they purchase mutual funds. Thisis most prevalent among full-service broker andfinancial planner users. At least half of therespondents who use full-service brokers and

financial planners consider them to be theirprimary source for mutual fund information.In contrast, direct market, discount broker, in-surance, and bank channel users’ primary sourcesfor mutual fund information are quite diverse.Some mention their channel as the most importantsource of investment information while othersmention printed information, such as books,magazines, newspapers, or newsletters.

Figure 51 shows that, of all channel groups, dis-count broker and direct market channel users arethe likeliest to indicate books, magazines, andnewspapers as their primary source of mutual fundinformation. Therefore, it is not surprising that,when compared with other channel groups,discount broker users have the highest readership

FIGURE 52

Channel Users’ Readership of Business-Related Publications*(percent of respondents indicating they frequently read publication)



Local newspaper’s business section 68 62 68 61 62 68Wall Street Journal 42 62 43 42 40 43Mutual fund newsletters 33 36 41 38 33 49Business section of Time, Newsweek,

or U.S. News and World Report 30 25 27 38 33 28Money 27 33 25 29 27 35Consumer Reports 22 25 29 21 27 21Business Week 20 31 23 25 19 24New York Times business section 23 20 18 24 16 20Forbes 18 22 13 16 17 16USA Today business section 11 13 18 17 10 8Fortune 13 13 11 10 10 11Barron’s 11 19 7 8 6 11Changing Times 7 7 12 9 7 11Investors’ Business Daily 6 15 5 5 4 6Financial World 4 8 3 5 3 5Base = 337 120 126 107 147 384

* Multiple responses includedNote: Channel users are respondents who currently own at least one fund from that channel.


45

of theWall Street Journal, Barron’s,andInvestors’ Business Daily.Similarly, directmarket channel users have the highest reader-ship of mutual fund newsletters, as seen inFigure 52.


46

Chapter 5:Single-channel andMultichannel Users

Chapter Summary

Multichannel users tend to be independent,research-oriented investors who are sensitiveto price. Their investment behavior reflectstheir interest in exploring investment alterna-tives as well as their search for low fees andcommissions. For example, multichannelusers own a median of six mutual funds and70 percent own direct-marketed funds. Multi-channel users’ median financial assets of$168,100 exceeds that of single-channel usersby $49,000. With their smaller investmentportfolios, it is not surprising that single-channelusers own fewer financial products, includingfewer mutual funds, when compared withmultichannel users. Single-channel users tend

to depend on financial advice and are notespecially concerned about fees or commis-sions when buying mutual funds. The majorityof single-channel users are customers of afinancial adviser, such as a full-service broker,insurance agent, financial planner, or bankrepresentative. Although most single-channelusers say they have either a basic or comp-rehensive knowledge of mutual funds, whencompared with multichannel users, single-channel users are more likely to say their knowl-edge of funds is very limited. Single-channelusers bought their first fund a median of eightyears before the survey was conducted, twoyears after multichannel users bought theirfirst fund.

FIGURE 53

Single-channel and Multichannel Users’ Investment Portfolios(median amount per household)

Total Financial FinancialFinancial Assets Invested in Assets Invested in

Assets* Mutual Funds Nonfund Investments**

Single-channel users $119,100 $45,000 $74,100Multichannel users $168,100 $61,000 $107,100

*Excludes real estate and assets in employer-sponsored pension plans**Individual stock and annuities are examples of nonfund investments


47

Channels Through WhichSingle-channel and Multichannel UsersOwn Funds

In this chapter, the respondents who partici-pated in the study are segmented according tothe number of channels through which theycurrently own funds. Single-channel users arerespondents who have 100 percent of their currentmutual fund assets invested through one channel.Multichannel users are respondents who havetheir mutual fund assets invested through morethan one channel.

Figure 54 shows that all channels have somesingle-channel users among their client base.The majority of single-channel users are eithercustomers of the full-service broker channel orthe direct market channel. Three quarters of single-channel users own all of their mutual funds fromone of these two channels. However, the datacan also be viewed in another meaningful way.More than 60 percent of single-channel users arecustomers of a financial adviser—that is, theyare customers of a full-service broker, insuranceagent, bank, or financial planner.

Figure 55 presents a distribution of the combi-nations of channels used by multichannel users.A quarter own direct-marketed funds and fundssold through a full-service broker.

Another 23 percent own direct-marketed fundsas well as funds from either an insurance agent,bank, discount broker, or financial planner. A totalof 19 percent own funds from a full-service brokeras well as funds from either an insurance agent,bank, discount broker, or financial planner. Justover one quarter, or 27 percent, of multichannelusers own funds from three or more channels.

FIGURE 54

Channel Through Which Single-channel UsersOwn Funds(percent of single-channel users)

Base=363

Full-service broker

38%

Discount broker=5%

Insurance=5%

Bank=4%

Financial planner

11%

Direct market

37%

FIGURE 55

Channels Through Which Multichannel UsersOwn Funds(percent of multichannel users)

Full-service broker and direct market 25Full-service broker and financial planner 6Full-service broker and discount broker 5Full-service broker and insurance 3Full-service broker and bank 5Direct market and financial planner 6Direct market and discount broker 7Direct market and insurance 5Direct market and bank 5A combination of two other channels 6Three or more channels 27

100%Base = 357


48

Future Use of Channels to PurchaseMutual Funds

Most single-channel users expect to purchasetheir next fund from the same channel, an indica-tion that these shareholders tend to be loyalcustomers. However, their purchase intentionsvary from channel to channel. Figure 56 showsthat 98 percent of single-channel users who usethe direct market channel intend to buy theirnext fund from this channel. More than 80 per-cent of single-channel users who use the full-service broker, discount broker, and financialplanner channels expect to buy their next fundfrom the same channel. However, only 48 percentof single-channel users who use the insurancechannel and 57 percent who use the bankchannel expect to buy their next fund fromtheir respective channels.

Not surprisingly, the channels from which multi-channel users expect to purchase their next fundare quite diverse. Figure 57 shows that the vastmajority of multichannel users who own fundsfrom the insurance and bank channels do not planto purchase their next fund from these channels.At the other end of the spectrum, 72 percent ofmultichannel users who use the direct marketchannel expect to purchase their next fund fromthe direct market channel.

Demographic and FinancialCharacteristics

For most characteristics, the profile of single-channel and multichannel users is quite similar.Single-channel and multichannel users are typi-cally in their late forties and the majority are male.Both groups can be described as employed, highlyeducated, and each has a median householdincome of approximately $90,000. However,Figure 58 shows that these two groups diverge onsome key financial characteristics. When com-pared with single-channel users, multichannelusers have a higher median value in financialassets. Multichannel users are more likely tohave a formal financial plan than are single-channel users.

Single-channel and multichannel users’ self-assessed understanding of mutual funds variessomewhat. While the majority of single-channeland multichannel users say they have either abasic or comprehensive knowledge of mutualfunds, single-channel users are more likely tosay they have a very limited understanding ofmutual funds.

FIGURE 56

Channel from Which Single-channel Users Expectto Purchase Their Next Fund(percent of single-channel users)

Planning to Buy Next Fundfrom Same Channel

Single-channel users who own funds from the following channels....Full-service broker 81Discount broker 83Insurance 48Bank 57Financial planner 81Direct market 98

FIGURE 57

Channel from Which Multichannel Users Expect toPurchase Their Next Fund(percent of multichannel users)

Planning to Buy Next Fundfrom Same Channel

Multichannel users who own funds from the following channels....Full-service broker 28Discount broker 35Insurance 7Bank 11Financial planner 28Direct market 72


49

Current Investment Portfolio

Single-channel and multichannel users arefurther distinguished by the content of their in-vestment portfolios. Compared with single-channel users, multichannel users tend to havegreater financial assets invested in funds andown a greater number of mutual funds. Never-theless, multichannel users’ mutual fund assetsaccount for a slightly smaller median percentageof their financial assets than is found for single-channel users. In part, these findings reflectdifferences in the two segments’ age and house-hold financial assets. Another factor may be

multichannel users’ two-year head start in mutualfund investing—multichannel users bought theirfirst fund a median of 10 years before the surveywas conducted, compared with eight years forsingle-channel users. In fact, 15 percent of single-channel users purchased their first mutual fundafter 1990. In contrast, just 6 percent of multi-channel users purchased their first fund after 1990.

Overall, multichannel users are more likely thansingle-channel users to own stock funds, tax-exempt bond funds, and money market funds.Single-channel and multichannel users are equallylikely to own taxable bond funds.

FIGURE 58

Single-channel and Multichannel Users’ Demographicand Financial Characteristics

Single-channel Users Multichannel Users

Median

Age 47 49Household income $90,200 $92,400Household financial assets* $119,100 $168,100Investment real estate assets** – $20,700


Male 68 69Married 83 89Employed full- or part-time 75 74Retired from lifetime occupation 21 25Four-year college degree or more 48 45Graduate degree 34 40Have formal financial plan 48 56Self-assessed understanding of mutual funds:

Comprehensive 31 35Basic 56 59Very limited 13 7

*Excludes real estate and assets in employer-sponsored pension plans**Excludes primary residence


50

Multichannel users tend to have more diversefund portfolios than single-channel users. Morethan a third of multichannel users own all threetypes of mutual funds, that is, stock, bond, andmoney market funds. In contrast, less than aquarter of single-channel users own all three types.

In addition to mutual funds, those owning mutualfunds through one channel own slightly fewernonfund investments than do multichannel users.Each group is about equally likely to have invest-ments in certificates of deposit and corporatebonds. Single-channel users are significantly less

likely than multichannel users to own the follow-ing types of nonfund investments:

Treasury bills, bonds, and notes,

Municipal bonds,

Individual stocks,

Life insurance,

Annuities,

Unit investments trusts, and

U.S. Savings Bonds.

FIGURE 59

Single-channel and Multichannel Users’ Mutual FundOwnership Characteristics



Financial assets invested in mutual funds $45,000 $61,000Percent of financial assets invested in mutual funds 38 36Number of years since first fund was purchased* 8 10Number of funds owned 4 6


Types of Funds Owned:**Stock mutual funds 88 94Tax-exempt bond funds 34 43Taxable bond funds 28 29Money market funds 54 62

Combinations of Funds Owned:Stock funds only 26 17Bond funds only 4 3Stock and bond funds 16 18Stock and money market funds 23 24Bond and money market funds 8 3All three types of funds 23 35

* From year (1993) in which survey was conducted**Multiple responses included


51

Views on Saving and Investing

As part of the survey interview, respondentswere read a series of 20 investment-relatedstatements. They were asked to indicate theirlevel of agreement with each statement usinga scale in which 5 was equal to strongly agree,and 1 was equal to strongly disagree. A comp-arison of single-channel and multichannel users’responses to these statements reveals significantdifferences between the two groups for nine ofthe 20 statements. It is important to note thatthese nine statements are not necessarily the oneswith which the groups strongly agree; rather,they are the statements on which single-channeland multichannel users differ significantly.

Based on their responses to these statements,which are detailed in Figure 61, multichannelusers appear to be more independent and research-oriented investors than their single-channel counter-parts. In their search for the lowest fee or com-mission, it is not surprising that these investorshave used more than one channel to purchasemutual funds. The single-channel users, incontrast, appear to be more skeptical and less in-vestment-oriented than multichannel users. Whencompared with multichannel users, single-chan-nel users are more likely to seek guidance froma financial adviser. Single-channel users seemless concerned with fees and more concernedwith the reputation of the company offering theinvestment.

FIGURE 60

Single-channel and Multichannel Users’ Ownership ofNonfund Savings and Investments*


Average number of nonfund savings andinvestment types owned 3.2 3.8


Bank accounts 76 86Certificates of deposit 25 31Corporate bonds 9 10Treasury bills, bonds, and notes 11 18Municipal bonds 21 30Individual stocks other than employer stock 58 70Life insurance 42 53Annuities 19 27Unit investment trusts 4 13U.S. Savings Bonds 24 32

*Multiple responses included


52

Investment Information Sources

The one source that more single-channel usersthan multichannel users rely on for mutualfund investment advice and information is thefull-service broker channel. Three out of tensingle-channel users depend on the full-servicebroker when making purchase decisions, com-pared with 21 percent of multichannel users.In contrast, multichannel users are more likelythan their single-channel counterparts to considerbooks and magazines their “most important”reference for mutual fund information. Addition-ally, among each segment, slightly more than10 percent of respondents consult financial plan-ners or obtain investment information directlyfrom the mutual fund company. Aside fromThe Wall Street Journal,which more multi-channel than single-channel users read on aregular basis, both groups generally read the samebusiness-related publications.

Single-channel Users Who WereMultichannel Users

The discussion in Chapter Two of respondents’patterns in channel use mentioned that somesingle-channel users are former multichannel users.Figure 64 shows that this group of respondents hasused a variety of distribution channels in the pastand has primarily consolidated their mutual fundassets into either the direct market or the salesforce channel.

Single-channel users who are former multichan-nel users differ in many significant ways fromsingle-channel users who have never used an-other channel. If fact, some of the former multi-channel users’ characteristics are quite similar tothose of current multichannel users. As seen inFigure 65, former and current multichannel usersare about the same age, have fairly similar house-hold incomes, and are about equally likely to beretired. Former multichannel users bought theirfirst mutual fund a median of 11 years ago. This

FIGURE 61

Single-channel and Multichannel Users’ Attitudes About Investing(mean score*)


I spend a lot of time seeking information before I make my mutual fund investment decisons 3.9 4.2I feel no-load mutual funds give me better value for my money 3.9 4.0Today I am more likely to purchase mutual funds by myself than I was in the past 3.7 4.1I will invest only in mutual funds offered by large, nationally known financial institutions 3.5 3.2Handling financial matters has become so complicated that you must have experts advise you 3.2 2.9When purchasing mutual funds, I go with the person or institution that charges the lowest

commission or fee 2.8 3.0I would invest only in a mutual fund that has been recommended to me by a

professional financial adviser 2.6 2.4When you invest in mutual funds by mail, you just can’t be sure that the transaction

will go through properly 2.6 2.4I am uncomfortable buying mutual funds because they are not federally insured 2.1 1.9

* 5 equals strongly agree, and 1 equals strongly disagree


53

FIGURE 62

Single-channel and Multichannel Users’ Primary Source of Mutual Fund Investment Information(percent of respondents)


Full-service broker 30 21Books and magazines 14 22Financial planner 13 12Direct contact with mutual fund company 11 12Brokerage or investment newsletters 8 7Friends, relatives, or colleagues 5 4Newspapers 3 4Bank or savings institution 2 3Insurance agent 2 2Discount broker 2 2Other 10 11

100% 100%Base = 351 389

FIGURE 63

Single-channel and Multichannel Users’ Readership of Business-Related Publications*(percent of respondents indicating they frequently read publication)


Local newspaper’s business section 64 66Wall Street Journal 39 46Mutual fund newsletters 34 41Business section of Time, Newsweek, or

U.S. News & World Report 29 30Money 26 32Consumer Reports 20 25Business Week 19 24New York Times business section 22 19Forbes 16 18USA Today business section 11 11Fortune 9 13Barron’s 9 11Changing Times 6 10Investors’ Business Daily 5 7Financial World 5 4Base = 363 357



54

compares with a median of 10 years for currentmultichannel users and 5 years for single-channelusers who have never used more than one channel.Former multichannel users’ fund portfolios arelarger and more diverse than those of single-channelusers who have never used more than one channel,but are not quite as large and diverse as those ofcurrent multichannel users.

FIGURE 64

Patterns in Channel Use for FormerMultichannel Users(percent of respondents who are former multichannel users)

Currently Used Ever Used*

Full-service broker 34 69Discount broker 6 29Insurance 6 26Bank 7 31Financial planner 14 28Direct Market 34 63


FIGURE 65

Characteristics of Single-channel Users Who Were Multichannel Users

Single-channelSingle-channel Users Who Have

Users Who Were Never Used MoreMultichannel Users Than One Channel Multichannel Users

Median

Age 48 46 49Household income $99,900 $83,300 $92,400Household financial assets* $130,800 $111,900 $168,100Household financial assets invested in mutual funds $50,000 $40,000 $61,000Percent of household financial assets invested

in mutual funds 38 36 36Investment real estate assets** $38,000 0 $20,700Number of years since first fund was purchased 11 5 10Number of funds owned 5 4 6


Male 72 65 69Married 85 82 89Employed full- or part-time 77 73 74Retired from lifetime occupation 23 19 25Completed graduate school 37 33 40



55

Chapter 6:Segmentation of Shareholder

Investment Channel Needs

3See Figure 98 in Appendix B for a complete list of the attitude statements and the mean score for each of the five segments describedin this chapter.

Chapter Summary

The analysis in the first five chaptersgrouped the survey respondents accordingto the channels through which they currentlyown mutual funds. Chapter 6 uses segmenta-tion analysis to classify respondents withsimilar needs and requirements concerningthe purchase of mutual funds. The segmenta-tion analysis provides mutual fund companieswith a better understanding of respondents’mutual fund purchase needs, as well as withinformation helpful in building marketingand distribution strategies targeted towardspecific groups of shareholders. Based on re-spondents’ answers to 20 statements, the anal-ysis produced five clusters, or segments:3

Confident Guidance-OrientedShareholders.The respondents in thisgroup are self-reliant investors who pre-fer to make investment decisions them-selves. Nevertheless, Confident Guidance-Oriented Shareholders value personalinvestment guidance and are willing topay for that service.

Adviser-Dependent Shareholders.Like Confident Guidance-Oriented Share-holders, Adviser-Dependent Shareholdershave a need for personal guidance.Unlike Confident Guidance-Oriented Share-holders, Adviser-Dependent Shareholdersare not self-reliant. Adviser-DependentShareholders rely on their financial advisersto evaluate and select investments on theirbehalf.

Fee-Sensitive Independent Shareholders.As their name suggests, this group likes toavoid high fees and commissions. Fee-Sensitive Independent Shareholdersalso prefer to make their own investmentdecisions. They have little need for personalfinancial guidance.

Cautious Shareholders.Extremely hesitantabout investing, Cautious Shareholders needpersonal financial guidance but are alsoquite self-reliant. They are somewhat sensitiveto levels of fees and commissions.

Continued on next page


57

Principles of Segmentation

Segmentation can be used to divide marketsinto groups according to similar customer char-acteristics, such as demographics, purchasinghabits, motivations, needs, or attitudes. In thisstudy, segmentation analysis was used to groupsurvey respondents with similar needs and atti-tudes toward purchasing mutual funds. To deter-mine shareholder needs and attitudes, as well asto classify their responses, respondents were askedto indicate their level of agreement with 20 state-ments about investing. These statements were

developed from the input gained from thefocus groups and were pretested. Using factoranalysis4 to analyze the data, four particularelements emerged. The four elements representthe underlying dimensions of the attitude data(see Figure 67).

Using the four underlying need and investmentdimensions, respondents were divided into fivegroups or segments. Each segment has been givena name that generally describes the overall dis-position of the individuals in that group. Thedescriptions relate to respondents’ investment

Chapter Summary continued

Uninvolved Shareholders. Althoughslightly hesitant about investing, thisgroup expresses little need for personalfinancial guidance. At the same time,Uninvolved Shareholders are neither

self-reliant nor particularly sensitive tomutual fund fees and commissions. Thisgroup seems to want others to take overtheir investment decisions.

4See Appendix A, Research Methodology, for an explanation of factor analysis.

FIGURE 66

Market Share of Respondent Segments(percent of respondents)

Base=720

Confident Guidance-Oriented Shareholders

19% Adviser-DependentShareholders

16%

Fee-Sensitive IndependentShareholders

30%CautiousShareholders

22%

UninvolvedShareholders

13%


58

needs and attitudes, and represent their views onpurchasing mutual funds. The five segments are:

Confident Guidance-OrientedShareholders,

Adviser-Dependent Shareholders,

Fee-Sensitive Independent Shareholders,

Cautious Shareholders, and

Uninvolved Shareholders.

The characteristics of each of the five segmentsare described in the following pages. Figures 83,84, and 85 at the end of the chapter summarizethe key characteristics of each segment. Themean factor scores for the four underlying in-vestment need dimensions are depicted for eachsegment of respondents. A mean factor scoreis the value of each underlying dimension forall respondents that comprise a segment. Themean factor scores identify the degree to whicheach attribute describes each segment relativeto the other segments. Each attribute, or factor,is an independent variable. Hence, the factorsdo not indicate that one particular dimensionis any more or less important than another indescribing each segment.

In Figure 68, for example, Confident Guidance-Oriented Shareholders have a positive meanfactor score for “the need for personal guidance,”meaning that, when compared with other seg-ments, Confident Guidance-Oriented Share-holders can be described as needing personalfinancial guidance. In contrast, Confident Guid-ance-Oriented Shareholders have a high negativemean factor score for “hesitancy about investing,”meaning that, when compared with other seg-ments, Confident Guidance-Oriented Sharehold-ers are not hesitant about investing. Becauseall four factors are independent of one another,the analysis does not indicate which is the betterdescription of a particular segment.

FIGURE 67

Underlying Need and Investment DimensionsBased on Respondent Attitudes

1. The Need for Personal Guidance

“It is important that I be able to sit down face-to-face and talk aboutmutual fund choices with someone.”“I am willing to pay more in commissions and fees in order to getsound mutual fund guidance.”“I would only invest in a mutual fund that has been recommended tome by a personal financial adviser.”“Handling financial matters has become so complicated that you musthave experts advise you.”

2. Self-Reliance

“I spend a lot of time seeking information before I make my mutualfund investments.”“I have become more knowledgeable about mutual funds over the lastfew years.”“Today I am more likely to purchase mutual funds by myself than Iwas in the past.”

3. Hesitancy About Investing

“I am uncomfortable buying mutual funds because they are notfederally insured.”“It is very difficult to find a financial adviser you can trust.”“I am more of a ‘saver’ than an ‘investor.’”“I am overwhelmed by all of the investment choices available to me.”

4. Fee-Sensitivity

“I feel no-load mutual funds give me better value for my money.”“When purchasing mutual funds, I go with the person or institutionthat charges the lowest commission or fee.”


59

Confident Guidance-Oriented Shareholders

Confident Guidance-Oriented Shareholdersaccount for 19 percent of all respondents. Theyare self-reliant investors who value profession-al financial guidance. Confident Guidance-Orient-ed Shareholders place considerable importanceon their relationship with their financial adviser.They believe financial matters are complexenough that expert advice is necessary. In fact,this segment says they are willing to pay more incommissions and fees in order to get sound mu-tual fund guidance. At the same time, however,Confident Guidance-Oriented Shareholders donot base their decision to invest in a fund solelyon the recommendation of a financial adviser.Undaunted by the myriad investments available,Confident Guidance-Oriented Shareholders spenda great deal of time gathering information onmutual funds before selecting a fund in which toinvest. Consequently, members of this group preferto make any investment decision themselves.

Given the time they have spent researchingmutual funds, it is not surprising that ConfidentGuidance-Oriented Shareholders say they arecomfortable with mutual funds even though mu-tual funds are not federally insured. As a signof their ease with mutual funds, Confident Guid-ance-Oriented Shareholders are the least likelyto say they will only invest in mutual fundsoffered by large, nationally known financialinstitutions. This segment believes that no-load mutual funds provide better value for theirmoney and they say they are more likely topurchase mutual funds on their own now thanin the past. They say they have become moreknowledgeable about mutual funds in the last fewyears; nearly half say they have a comprehensiveunderstanding of mutual funds.

More than half of Confident Guidance-OrientedShareholders are multichannel users. Illustratingthe emphasis they place on advice and their self-confidence about investing, 60 percent of Con-fident Guidance-Oriented Shareholders own fundsfrom a full-service broker and 44 percent ownfunds from a direct marketer. This segment’s

Overview of ConfidentGuidance-Oriented Shareholders

Confident Guidance-Oriented Shareholderswant financial advice from professionals butprefer to make any investment decisionsthemselves. A longstanding relationshipwith their financial adviser is very importantto this group of respondents, and they arewilling to pay more in fees and commissionsfor sound mutual fund guidance. Nevertheless,Confident Guidance-Oriented Shareholdersare comfortable with the investment choicesavailable to them, including mutual funds.Demonstrating their desire for advice andtheir self-reliance, 60 percent of ConfidentGuidance-Oriented Shareholders own fundsfrom a full-service broker and 44 percentown direct-marketed funds. Nearly four in tenexpect to purchase their next fund from thedirect market channel. Of all segments, Con-fident Guidance-Oriented Shareholders havethe greatest median household income andfinancial assets.

FIGURE 68

Underlying Need and Investment Dimensions ofConfident Guidance-Oriented Shareholders(mean factor scores)

Base=137

0.44

0.36

-0.73

-0.74

Need for personal guidance

Self-reliance

Hesitancy about investing

Fee-sensitivity


60

trend in channel use indicates a movement to-ward the direct market channel. A smaller pro-portion of Confident Guidance-Oriented Share-holders used the full-service broker channel topurchase their most recent fund than used it topurchase their first fund, and even fewer expectto use this channel to buy their next fund. Incontrast, the opposite pattern emerges concerninguse of the direct market channel for the first,most recent, and next fund purchase.

Confident Guidance-Oriented Shareholders havea median of $68,500 in mutual funds, the high-est of all segments. Including other members oftheir households, Confident Guidance-OrientedShareholders own a median of six mutual funds.Nearly all members of this segment, 92 percent,own at least one stock mutual fund. ConfidentGuidance-Oriented Shareholders are the groupleast likely to own taxable bond funds. BecauseConfident Guidance-Oriented Shareholdersperceive themselves more as “investors” than as“savers,” it is not surprising that this segmentis the most likely to own stock and one of theleast likely to own certificates of deposits.

Nearly half of all Confident Guidance-OrientedShareholders are saving for retirement andmore than three quarters list long-term growthas their primary financial objective. Typicallyin their mid-forties, Confident Guidance-Oriented Shareholders are the wealthiest ofall segments. Confident Guidance-OrientedShareholders’ median household income of$112,800 and median household financial assetsof $188,700 are the highest of all segments.When compared with other segments, ConfidentGuidance-Oriented Shareholders are the likeliestto be married.

Confident Guidance-Oriented Shareholders arethe group most likely to regularly read theWallStreet Journal—more than half read this publica-tion. While they are self-reliant, ConfidentGuidance-Oriented Shareholders also seek outpersonal financial advice. Therefore, it is notsurprising that full-service brokers, financialplanners, and various reading material tend to betheir primary sources of investment information.

FIGURE 69

Confident Guidance-Oriented Shareholders’Self-Assessed Understanding of Mutual Funds(percent of respondents)

Base=137

Comprehensive understanding

45%

Basic understanding

51%

Very limitedunderstanding=4%

FIGURE 70

Confident Guidance-Oriented Shareholders’Primary Source for Mutual Fund Information(percent of respondents)

Base=133

27

24

25

8

5

11

Full-service broker

Financial planner

Magazines, books, newspapers,or newsletters

Calling, writing, or visiting theoffice of a fund company

Friends, relatives, colleagues

Other


61

Adviser-Dependent Shareholders

Adviser-Dependent Shareholders represent 16percent of all respondents. As their name suggests,this segment relies heavily on financial profession-als. Adviser-Dependent Shareholders believethat handling financial matters has become socomplex, and the number of investment alterna-tives available to investors so overwhelming,that expert advice is needed. Adviser-DependentShareholders do not want to make their invest-ment decisions by themselves. Given their hesitan-cy about investing, it is not surprising that Ad-viser-Dependent Shareholders are the segmentlikeliest to say that they will only invest in mu-tual funds recommended to them by a financialadviser. Sitting down and personally reviewinginvestment choices with an adviser is especiallyimportant to this segment, and they are willingto pay more in commissions and fees in orderto receive sound guidance.

Adviser-Dependent Shareholders are unlikelyto become customers of the direct market channel.They describe themselves as unlikely to investin mutual funds on their own and they say theyare leery of investing through the mail becausethe transaction may not be conducted properly.Perhaps because they rely so heavily on theirfinancial advisers, Adviser-Dependent Share-holders are the segment least likely to conducttheir own investment research. They are alsothe segment least likely to say they have becomemore knowledgeable about mutual funds overthe years. In fact, more than a quarter of Adviser-Dependent Shareholders say they have a verylimited understanding of mutual funds, the great-est proportion of all segments.

Adviser-Dependent Shareholders typically useonly one channel to purchase mutual funds, andmost have never used more than one channel. Thevast majority of Adviser-Dependent Shareholders,74 percent, are customers of a full-service broker.Almost a quarter use a financial planner, andeven smaller proportions own funds from theother channels.

Adviser-Dependent Shareholders are exception-ally loyal to the full-service broker channel. In

Overview of Adviser-DependentShareholders

The myriad investment opportunities avail-able to investors tend to overwhelm Adviser-Dependent Shareholders and, therefore, theytend to rely on financial professionals forrecommendations. In fact, Adviser-DependentShareholders will only invest in mutual fundsthat have their advisers’ approval. More thanany other segment, Adviser-Dependent Share-holders are willing to pay more in fees andcommissions in order to receive sound mu-tual fund guidance. Nearly three quarters ofAdviser-Dependent Shareholders own fundsfrom a full-service broker, the greatest pro-portion of all segments. Unlike other segmentswho own funds from this channel, the majorityof Adviser-Dependent Shareholders expectto purchase their next fund from a full-servicebroker. Along with other members of theirhouseholds, Adviser-Dependent Shareholdersown a median of four mutual funds, the least ofall segments. Women account for the majorityof Adviser-Dependent Shareholders.

FIGURE 71

Underlying Need and Investment Dimensions ofAdviser-Dependent Shareholders(mean factor scores)

Base=227

0.91

-1.32

0.15

-0.09


Self-reliance


Fee-sensitivity


62

fact, 53 percent of Adviser-Dependent Sharehold-ers have 100 percent of their mutual fund assetsinvested with a full-service broker. Nearly twothirds bought their first fund, and nearly twothirds bought their most recent fund, from a full-service broker. Moreover, a similar proportionexpects to purchase their next fund from a full-service broker.

Adviser-Dependent Shareholders’ median mu-tual fund assets of $44,000 ranks second lowestamong the segments. Including other membersof their households, Adviser-DependentShareholders own a median of four mutualfunds, the least of all segments. Eight in tenown stock mutual funds, making this segmentthe least likely to own this type of fund. Adviser-Dependent Shareholders are also the segmentleast likely to own only stock funds. Along withFee-Sensitive Independent Shareholders, Ad-viser-Dependent Shareholders are more likelyto own money market mutual funds than are anyother segment.

Adviser-Dependent Shareholders typically owninvestments other than mutual funds. Nearly sixin ten own individual stocks. Nevertheless,along with Cautious Shareholders, Adviser-De-pendent Shareholders are less likely to ownindividual stocks than are the other segments.More than half of Adviser-Dependent Share-holders own individual bonds, and about a thirdown certificates of deposit.

About a third of Adviser-Dependent Shareholdersare saving for retirement and 53 percent listlong-term growth as their primary investmentstrategy, both of which are lower than for anyother segment. Women make up 52 percent ofAdviser-Dependent Shareholders, the greatestproportion of all segments. Although the majorityof Adviser-Dependent Shareholders are married,this segment has proportionally more widowedmembers than any other segment. Adviser-De-pendent Shareholders’ median household incomeof $79,600 is the second lowest of all segments.

Similar to other segments, most Adviser-Depend-ent Shareholders read the business section oftheir local newspapers. Adviser-Dependent

Shareholders tend not to read any other business-related publications. Because Adviser-Depend-ent Shareholders generally have little interest inconducting independent investment research,their low readership of business-related publica-tions is not surprising. Predictably, this segmentrarely mentions printed material as its primarysource for mutual fund information, and mostfrequently mentions a full-service broker.

FIGURE 72

Adviser-Dependent Shareholders’ Self-AssessedUnderstanding of Mutual Funds(percent of respondents)

Base=103

Comprehensiveunderstanding

10%

Basic understanding

63%

Very limitedunderstanding 26%

No understanding=1%

FIGURE 73

Adviser-Dependent Shareholders’ Primary Sourcefor Mutual Fund Information(percent of respondents)

Base=102

62

19

5

4

3

7

Full-service broker

Financial planner

Bank or savings institution


Friends, relatives, colleagues

Other


63

Fee-Sensitive Independent Shareholders

Fee-Sensitive Independent Shareholders com-prise 30 percent of the survey respondents. Morethan any other segment, Fee-Sensitive Inde-pendent Shareholders prefer to make all of theirfinancial decisions without guidance from aprofessional. They are comfortable with themany investment choices available to them and

deem any professional investment assistanceunnecessary. For example, Fee-Sensitive Inde-pendent Shareholders exhibit little need or interestin face-to-face discussions about investmentchoices and are generally unwilling to pay feesand commissions for financial counseling.Not surprisingly, of all segments, Fee-SensitiveIndependent Shareholders are the most sensitiveabout fees. They perceive no-load funds as abetter value than load funds and say they pur-chase their mutual funds from the financialinstitutions with the lowest commissionsand fees.

Fee-Sensitive Independent Shareholders saythey are more knowledgeable about mutualfunds than they were in the past. Along withConfident Guidance-Oriented Shareholders,Fee-Sensitive Independent Shareholders arethe most likely to say that they have a compre-hensive understanding of mutual funds.

Most Fee-Sensitive Independent Shareholdersare customers of the direct market channel. Atotal of 85 percent of Fee-Sensitive IndependentShareholders own direct-marketed funds. Somemembers of this segment own funds from theother five channels. For example, 28 percentown funds from a full-service broker channeland 21 percent own funds from a discountbroker. Fifty-one percent of Fee-Sensitive Inde-pendent Shareholders are single-channel users,the vast majority of whom use the direct marketchannel. The remaining 49 percent of Fee-Sensitive Independent Shareholders are multi-channel users.

Although Fee-Sensitive Independent Share-holders overwhelmingly own direct-marketedfunds, half of this segment began their mutualfund investing in a channel other than thedirect market channel, typically the full-servicebroker channel. Twenty-eight percent of Fee-Sensitive Independent Shareholders purchasedtheir first mutual fund from a full-service broker.Nevertheless, three quarters of Fee-SensitiveIndependent Shareholders purchased their mostrecent fund from the direct market channel. Andthis segment expects to continue purchasing its

Overview of Fee-Sensitive IndependentShareholders

Fee-Sensitive Independent Shareholders donot utilize professional investment advice.Face-to-face financial service is not impor-tant to them. When compared with othersegments, Fee-Sensitive Independent Share-holders are the most sensitive to fees andcommissions. They are the segment leastwilling to pay fees and commissions for in-vestment guidance, and the most likely topurchase no-load funds. The vast majoritypurchased their most recent fund from thedirect market channel, and an equally largenumber expect to purchase their next fundthere. Fee-Sensitive Independent Shareholders,of whom nearly half have a graduate degree,are the most educated segment.

FIGURE 74

Underlying Need and Investment Dimensions ofFee-Sensitive Independent Shareholders(mean factor scores)

Base=103

-1.04

0.17

-0.29

0.4


Self-reliance


Fee-sensitivity


64

mutual funds directly. More than eight in ten saythey will buy their next fund from the directmarket channel. Fee-Sensitive IndependentShareholders express minimal concern aboutconducting mutual fund transactions throughthe mail.

Fee-Sensitive Independent Shareholders havea median of $55,000 invested in mutual funds,of which 82 percent is invested through thedirect market channel. Similar to ConfidentGuidance-Oriented Shareholders, Fee-SensitiveIndependent Shareholders own a median ofsix mutual funds, the most of all segments.Although the vast majority of all segments ownstock mutual funds, Fee-Sensitive IndependentShareholders are the most likely to own thistype of fund. Because Fee-Sensitive Indepen-dent Shareholders perceive themselves to be“investors” rather than “savers,” stock mutualfunds best meet their investment requirements.However, approximately one third of Fee-Sensitive Independent Shareholders owntaxable bonds, roughly a third own tax-exemptbonds, and almost two thirds own moneymarket funds. Along with Uninvolved Share-holders, Fee-Sensitive Independent Shareholdersare the segment most likely to own all threetypes of funds, that is, stock, bond, and moneymarket funds.

The largest proportion of Fee-Sensitive Inde-pendent Shareholders, 48 percent, are savingfor retirement. When compared with other seg-ments, more Fee-Sensitive Independent Share-holders list long-term growth as their primaryinvestment objective. Fee-Sensitive IndependentShareholders are the most educated segment—nearly half of them have a graduate degree. Only15 percent of Fee-Sensitive Independent Share-holders are retired, the least among all segments.Fee-Sensitive Independent Shareholders’ medianhousehold income of $97,200 ranks secondamong all segments of respondents, and theirmedian household financial assets of $138,500ranks third.

Fee-Sensitive Independent Shareholders reada variety of investment-related publications inaddition to the business section of their localnewspaper. Nearly half read mutual fund news-letters and theWall Street Journal. Befitting

their independent nature, Fee-Sensitive Inde-pendent Shareholders’ primary source for mu-tual fund information tends to be printedmaterial, such as magazines, books, newspapers,or newsletters.

FIGURE 75

Fee-Sensitive Independent Shareholders’Self-Assessed Understanding of Mutual Funds(percent of respondents)

Base=225


49%

Basic understanding

49%

Very limitedunderstanding=2%

FIGURE 76

Fee-Sensitive Independent Shareholders’ PrimarySource for Mutual Fund Information(percent of respondents)

Base=214

53

22

6

3

3

13


Calling, writing, or visiting the officeof a mutual fund company

Friends, relatives, or colleagues

Discount broker

Financial planner

Other


65

Cautious Shareholders

Cautious Shareholders, who account for 22 per-cent of respondents, have several conflictingneeds and attitudes. For example, CautiousShareholders say they are overwhelmed by theinvestment alternatives available to them andare uncomfortable purchasing mutual funds be-cause they are not federally insured. They wantto talk face-to-face with someone about mutualfunds, and they say they are willing to pay morein fees and commissions in order to get thisservice. At the same time, Cautious Shareholdersalso indicate that they purchase mutual fundsfrom the institution with the lowest fees andthey prefer to make all their fund investmentdecisions themselves.

Moreover, Cautious Shareholders tend to bedistrustful of financial advisers. More than anyother segment, they believe that it is very diffi-cult to find a financial adviser who can betrusted. Cautious Shareholders are also morelikely than other segments to think that finan-cial advisers who sell only one company’s fundsare providing investors with biased advice. Per-haps another sign of their conservatism, CautiousShareholders are the segment most likely tosay they will only invest in mutual funds offeredby large financial institutions.

Cautious Shareholders use a variety of channelsto purchase mutual funds. More than half use afull-service broker and half use the direct marketchannel. Twenty-two percent use the insurancechannel, 20 percent use the bank channel, and19 percent use the financial planner channel.Only 13 percent use the discount broker channel.Slightly more than half of Cautious Shareholders,52 percent, are multichannel users. The balanceof Cautious Shareholders, 48 percent, are single-channel users. Most of the Cautious Shareholderswho are single-channel users use either the directmarket or the full-service broker channels.

Overview of Cautious Shareholders

Cautious Shareholders have conflictingneeds and attitudes. They are uneasy aboutinvesting, including investing in mutualfunds. Nevertheless, Cautious Shareholdersare very self-reliant, preferring to make anyfinancial decisions themselves. More thanany other segment, Cautious Shareholderssay they distrust financial advisers. Despitetheir misgivings about investment profes-sionals, Cautious Shareholders think it is im-portant to meet with someone face-to-faceabout investing in mutual funds and are will-ing to pay more in commissions and feesfor this service. More than half of CautiousShareholders own funds from a full-servicebroker and 19 percent own funds through afinancial planner, among other channels.Cautious Shareholders are typically in theirearly fifties, making them the oldest of allsegments. Cautious Shareholders’ medianhousehold income and household financialassets rank lowest among all segments.

FIGURE 77

Underlying Need and Investment Dimensions ofCautious Shareholders(mean factor scores)

Base=161

0.43

0.45

0.83

0.43

Need for personalguidance

Self-reliance

Hesitancy aboutinvesting

Fee-sensitivity


66

Similar to Confident Guidance-OrientedShareholders, Cautious Shareholders’ use ofchannels over time shows a movement towardthe direct market channel. The percent of share-holders who used a full-service broker dropsfrom 41 percent for the first fund purchased to32 percent for the most recent fund, and to 26percent for the next fund to be purchased. Con-comitantly, the percent using the direct marketchannel for these same points in time increases.

Cautious Shareholders have a median of $41,000invested in mutual funds, the lowest of allsegments. Cautious Shareholders currently owna median of five mutual funds. Despite theirhesitancy about investing, most Cautious Share-holders have fairly diverse mutual fund portfolios.A quarter of Cautious Shareholders own stock,bond, and money market funds; 21 percent ownstock and bond funds; 16 percent own stock andmoney market funds; and 8 percent own bondand money market funds. Roughly one quarterof Cautious Shareholders own only stock fundsand just 6 percent own only bond funds. Perhapsmost surprising is the fact that Cautious Share-holders are the least likely of all segments to ownmoney market funds.

With a median age of 53, Cautious Shareholderstend to be older than the respondents in othersegments. In fact, 31 percent of Cautious Share-holders are retired from their lifetime occupation,the greatest percent among all segments. Reflect-ing their greater likelihood of being retired,Cautious Shareholders are more likely than othersegments to list preserving their accumulatedassets as their primary financial goal. The medianhousehold income of Cautious Shareholders is$79,300, the lowest of all segments. Likewise,Cautious Shareholders’ median household finan-cial assets of $114,600 ranks last among all seg-ments. However, Cautious Shareholders have amedian of $14,600 invested in real estate (ex-cluding their primary residence), an amount thatranks second among all segments.

Cautious Shareholders read some investment-related publications other than the business sectionof their local paper. About a third read theWallStreet Journaland mutual fund newsletters, and

slightly more than a quarter readMoneymagazine.Cautious Shareholders most frequently mention afull-service broker as their primary source of invest-ment advice, followed by printed material, such asnewspapers, magazines, newsletters, and books.

FIGURE 78

Cautious Shareholders’ Self-AssessedUnderstanding of Mutual Funds(percent of respondents)

Base=158


18%

Basic understanding

66%


No understanding=1%

FIGURE 79

Cautious Shareholders’ Primary Source forMutual Fund Information(percent of respondents)

Base=152

30

27

12

10

4

17

Full-service broker


Financial planner



Other


67

Uninvolved Shareholders

Uninvolved Shareholders represent 13 percent ofsurvey respondents. This segment’s overwhelm-ing characteristic is that, when compared withother segments, it does not have any clearly de-fined investment needs and attitudes. For example,Uninvolved Shareholders do not have a firmopinion on whether they are willing to pay morein commissions or fees in order to get soundmutual fund guidance. They neither agree nordisagree that they are more of a “saver” than an“investor,” that they will only invest in mutualfunds offered by large, nationally known financialinstitutions, or that it is very difficult to find afinancial adviser that can be trusted. In contrast,all other segments clearly expressed their viewson these statements.

Uninvolved Shareholders’ views on their self-reliance and the importance of a financial ad-viser border on neutral. Uninvolved Share-holders only slightly agree that they are comfor-table with the investment choices available tothem and that they will make investment decisionsthemselves. Similarly, Uninvolved Shareholdersonly slightly agree that a long-standing relation-ship with their financial adviser and the abilityto discuss mutual funds with someone face-to-face are important to them.

Although Uninvolved Shareholders generallyagree that no-load funds provide the best value forthe money, they do not necessarily say they pre-fer to buy mutual funds from those institutionscharging the lowest fees or commissions.

Similar to most other segments, UninvolvedShareholders say they have become more know-ledgeable about mutual funds in the past fewyears. Almost three in ten Uninvolved Share-holders say they have a comprehensive under-standing of mutual funds. Uninvolved Shareholdersalso say they are more likely to purchase mutualfunds on their own than they were in the past.Similar to most other segments, UninvolvedShareholders say they spend a lot of time seekinginformation before deciding in which mutualfund to invest.

Overview of Uninvolved Shareholders

Uninvolved Shareholders do not havestrong needs or attitudes about investing. Forexample, they express some need for personalfinancial services, but have no opinion onwhether they are willing to pay more in feesand commissions to receive this type of service.While Uninvolved Shareholders typicallyexpress some comfort with investing, theirinterest in making their own investment de-cisions borders on neutral. Uninvolved Share-holders are moving toward the direct marketchannel. The largest proportion of UninvolvedShareholders, 41 percent, bought their firstmutual fund from a full-service broker, but51 percent expect to purchase their next fundfrom the direct market channel.

FIGURE 80

Underlying Need and Investment Dimensions ofUninvolved Shareholders(mean factor scores)

Base=92

-0.07

-0.04

0.12

-0.52


Self-reliance


Fee-sensitivity


68

Fifty-seven percent of Uninvolved Sharehold-ers use the full-service broker channel and 47percent use the direct market channel. Twentypercent use the financial planner channel, 15percent use the insurance channel, 12 percentuse the discount broker channel, and 12 percentuse the bank channel. Altogether, 54 percent ofUninvolved Shareholders are single-channelusers and 46 percent are multichannel users. Mostof the Uninvolved Shareholders who are single-channel users use either the direct market orthe full-service broker channel.

Similar to Confident Guidance-Oriented andCautious Shareholders, Uninvolved Shareholdersare gradually moving toward the direct marketchannel. The largest proportion of UninvolvedShareholders, 41 percent, bought their first mu-tual fund from a full-service broker. In contrast,the largest proportion of Uninvolved Shareholders,38 percent, bought their most recent fund fromthe direct market channel. Slightly more than halfof Uninvolved Shareholders expect to purchasetheir next fund from the direct market channel,whereas only 23 percent expect to purchase itfrom a full-service broker.

Uninvolved Shareholders have a median of$50,000 invested in mutual funds, a figure thatranks third behind Confident Guidance-Orient-ed and Fee-Sensitive Independent Shareholders.Similar to Cautious Shareholders, UninvolvedShareholders own a median of five mutual funds.Uninvolved Shareholders are one of the seg-ments least likely to own money market fundsand one of the most likely to own stock funds.In fact, 31 percent of Uninvolved Shareholdersown only stock funds, the greatest proportion ofall segments. The majority of Uninvolved Share-holders also own individual stocks, and nearlyhalf own individual bonds.

Uninvolved Shareholders have a median age of49. The median household income of this seg-ment is $90,200, which ranks third behind Con-fident Guidance-Oriented and Fee-SensitiveIndependent Shareholders. Uninvolved Share-holders’ median household financial assets of$121,200 is the second lowest among all seg-ments. Typically married and male, more thana third of Uninvolved Shareholders have com-

pleted graduate school. The largest proportionof Uninvolved Shareholders, 30 percent, say afull-service broker is their primary source formutual fund information. Nearly a quarter citeprinted material, such as magazines, books, news-papers, or newsletters.

FIGURE 81

Uninvolved Shareholders’ Self-AssessedUnderstanding of Mutual Funds(percent of respondents)

Base=92


29%

Basic understanding

64%


FIGURE 82

Uninvolved Shareholders’ Primary Source forMutual Fund Information(percent of respondents)

Base=89

30

23

20

14

3

1

9

Full-service broker



Financial planner


Attorney or accountant

Other


69

FIGURE 83

Segments’ Use of Channels to Purchase Mutual Funds

Confident Guidance- Adviser- Fee-SensitiveOriented Dependent Independent Cautious Uninvolved

Shareholders Shareholders Shareholders Shareholders Shareholders

Channels Currently Used*

Full-service broker 60 74 28 54 57Discount broker 15 2 21 13 12Insurance 17 10 11 22 15Bank 13 12 11 20 12Financial planner 26 22 8 19 20Direct market 44 8 85 50 47

Single-channel Versus Multichannel Users

Single-channel users who are former multichannel users 15 21 24 20 24Single-channel users who have never used another channel 30 56 27 28 28Multichannel users 55 23 49 52 46

100% 100% 100% 100% 100%Channel Used to Purchase First Mutual Fund


100% 100% 100% 100% 100%Channel Used to Purchase Most Recent Mutual Fund**


100% 100% 100% 100% 100%Channel to Be Used to Purchase Next Mutual Fund


100% 100% 100% 100% 100%

*Multiple responses included.**For respondents who have owned more than one fund


70

FIGURE 84

Segments’ Mutual Fund Ownership Characteristics




Financial assets invested in mutual funds $68,500 $44,000 $55,000 $41,000 $50,000Number of funds owned 6.0 4.0 6.0 5.0 5.0


Types of Funds Owned:*Money market funds 60 63 62 48 54Stock funds 92 80 97 87 95Tax-exempt bond funds 42 41 34 43 31Taxable bond funds 23 26 34 29 28

Combinations of Funds Owned:Stock funds only 22 15 20 24 31Bond funds only 1 9 1 6 1Stock and bond funds 17 13 17 21 13Stock and money market funds 27 30 26 16 17Bond and money market funds 7 11 2 8 4All three types of funds 26 22 34 25 34



71

FIGURE 85

Segments’ Demographic and Financial Characteristics



Median

Age 47 47 45 53 49Household income $112,800 $79,600 $97,200 $79,300 $90,200Household financial assets* $188,700 $150,400 $138,500 $114,600 $121,200Investment real estate assets** $20,500 $8,900 – $14,600 $12,700


Male 74 48 78 64 72Married 91 79 89 85 84Widowed, divorced, or separated 6 13 5 8 6Employed full or part-time 78 68 78 70 73Retired from lifetime occupation 21 23 15 31 29Completed graduate school 39 28 47 29 35Primary financial goal:

Saving for retirement 49 34 48 42 40Preserving accumulated assets 18 23 13 29 20

Primary investment objective:Long-term growth 78 53 83 61 69Current income 10 20 6 12 13

Own:***Individual stocks 71 58 65 59 65Individual bonds 51 51 45 49 49Certificates of deposit 25 34 24 33 28

Read:***Business section of local paper 68 61 68 63 63Wall Street Journal 52 30 48 35 40Mutual fund newsletters 34 21 49 32 45Money magazine 34 11 39 27 23

* Excludes real estate and assets in employer-sponsored pension plans** Excludes primary residence***Multiple responses included


72

18 picas wide per column

with 2 picas gutter

Bridging Investors to Investments:Shareholders' Use of Distribution Channels

1

TITLE PAGE TO COME(WILL BE SIMILAR TO COVER)

Copyright ©1994 Investment Company Institute

Appendix A:Research Methodology

Research Design

The data presented in this report are the resultof an extensive survey conducted by the Re-sponse Analysis Corporation (RAC) under thedirection of the Investment Company Institute’sResearch Department. The research programconsisted of two stages.

In Stage One, RAC conducted focus group inter-views with mutual fund shareholders who pur-chased their funds through at least one of thefollowing six distribution channels: full-servicebroker, discount broker, insurance, bank, finan-cial planner, or direct market. The demographiccharacteristics of the focus group participantsvaried. All participants were 18 years of age orolder and were either the household’s primaryor co-decisionmaker for saving and investment.The objective of the focus groups was to exploreand understand shareholders’ use of differentdistribution channels, why they used those chan-nels, and to identify if, and how, channel usechanges over time. The information gatheredfrom these discussions was used to develop thesurvey instrument for Stage Two, the quantitativephase of the project.

Stage Two used a telephone-mail-telephone sur-vey design. Because this study required respond-ents to provide detailed data on their households’financial assets, the telephone-mail-telephonemethodology gave survey participants the op-portunity to review their financial records andassemble the necessary information beforecompleting the survey.

To qualify for the survey, respondents’ house-holds had to be recent buyers of long-termmutual funds; that is, they had to have purchaseda long-term mutual fund from one of the sixchannels in the five years preceding the survey.A “purchase” was defined as purchasing sharesof a fund from which no previous shares hadbeen owned before 1988. This definition, there-fore, excludes instances in which a respondentinvested more money in a fund purchased priorto 1988, as well as instances in which respondentsacquired mutual funds through an employer.

The Investment Company Institute was identi-fied at the outset as the sponsor of the survey.Shareholders who qualified for the studywere asked to complete a self-administeredquestionnaire and to participate in an in-depth,follow-up telephone interview. A total of 1,471shareholders who qualified for the study agreedto participate. About half of these shareholderscompleted the study. All telephone interviewswere held with, and written materials were sent to,the household’s primary or co-decisionmakerfor saving and investment.

Roughly two weeks after study recruits weresent the self-administered questionnaire, RACinterviewers called the respondents and obtainedtheir answers to the written questions, and alsoasked them several other attitudinal questionsnot included in the self-administered survey. Atotal of 720 recruits completed the follow-uptelephone survey and are included in the analysis.The age distribution of the 720 households whocompleted the survey is similar to the age distribu-


73

tion of those who did not. All interviews wereconducted using Response Analysis Corpora-tion’s Computer-Assisted Telephone Interview-ing (CATI) system, at its Hamilton, New Jerseylocation. Interviewing and recruiting wereconducted from mid-August through mid-December 1993.

Factor Analysis

Factor analysis is a data reduction techniquewhich was used in this study. Because practicalproblems arise when a large number of variablesare analyzed, data reduction techniques areoften applied to remove the redundancy from aset of correlated variables and to represent thelarger set with a smaller set of “derived” vari-ables or factors. Hence, factor analysis can bethought of as removing duplicative informationfrom a set of variables through the groupingof similar variables.

Factor analysis can be applied in a variety ofdata analysis situations. In this study, factoranalysis was used to identify the factors under-lying a large set of variables—the 20 attitudestatements on investment needs and prefer-ences—and then to reduce the 20 attitude state-ments to four underlying factors or dimensionsthat were common to all respondents.

The factor analysis procedure comprises threekey stages. The first stage is the creation of theoriginal data matrix—the ratings of each re-spondent to the 20 attitude statements. Thesecond key stage is the creation of the correlationmatrix, which is the systematic arrangement ofthe correlation coefficients that exist betweeneach combination of two variables. The thirdstage is the creation of a factor matrix.

The cell entries of the factor matrix are calledfactor loadings and may vary in value from-1.00 to +1.00. Factor loadings represent thedegree to which each of the variables correlateswith each of the factors. Variables with highloadings on a factor (either + or -) provide themeaning and interpretation for that factor. Vari-ables with a low or zero loading on a particularfactor do not contribute to the meaning of that

factor. Factors are typically given descriptivenames that reflect their high loading variables.

Each respondent has a value for each of thefactors. These values are called factor scores. Afactor score is a summation of a respondent’sscore on each of the attitude statements thatcomprise a factor, multiplied by its factor loading.In this study, mean factor scores were derivedfor the five shareholder segments discussed inChapter 6. The mean factor scores identify thedegree to which each factor describes each seg-ment relative to the other segments. Becausefactors are independent variables, mean factorscores do not indicate that one particular dimen-sion is any more or less important than anotherin describing a segment.

Sampling Methodology and WeightingScheme

Although income was not a criterion for inclu-sion in this study, the sampling methodologyrestricted sample selection to upper income areasfor each of the six distribution channels. Thisapproach substantially increased the likelihoodof finding mutual fund-owning households thatqualified as recent buyers of long-term funds.The effect on respondent demographics of re-stricting the sample selection to upper incomegeographic areas is that the survey respondentson average have higher household incomes thando all fund-owning households. ICI data indicatethat 54 percent of fund-owning households havetotal household incomes of $50,000 or more. Thiscompares with 84 percent of survey respondents(i.e., recent buyers) who had incomes of $50,000or more.

A minimum number of interviews per channelwere established as a sampling requirement. Be-cause of the multiple use of channels by fund-owning households, the number of respondentsper channel varies.

The data were weighted to correct for householddifferences in the probabilities of selection into thesample. These differences are caused by the channelor combination of channels respondents used to pur


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chase mutual funds at the time of the survey or otherselection probabilities, including random effects.

Sampling Tolerances

The use of sample surveys is standard practicefor deriving estimates about a total population.Estimates derived through survey sampling aresubject to sampling error. As sample size in-creases, the level of potential sampling errorgenerally becomes smaller. The findings in thisreport represent the total population of recentbuyers of long-term funds as found in high-income areas with an overall sampling error ofplus or minus 4 percent at the 95 percent con-fidence level. This confidence level can be usedto construct confidence intervals. Confidenceintervals are ranges that would include the aver-age estimate taken across all possible sampleswith known probability. Approximately 95 per-cent of the intervals figured in all possible sam-ples would contain the average estimate taken

across all possible samples. Figure 86 shows theapproximate sampling error for estimates ofproportions computed for the sample as a wholeand for subsamples of various sizes.

Sampling error also occurs when the results fromone independent part of a sample are comparedwith another independent part of the sample. Thedifference between the two parts of the samplemust be at least a certain number of percentagepoints to be considered statistically significant.Figure 87 is a guide to the sampling error ap-plicable to such comparisons based on a 95percent confidence level.

FIGURE 86

Statistical Reliability for Determining Accuracy of Observed Percentages—One Sample

Observed Percentages

Sampling Errors at the 95% Confidence Level

10% or 20% or 30% or 40% orSize of Sample 90% 80% 70% 60% 50%

700 2 3 4 4 4600 3 3 4 4 4500 3 4 4 5 5400 3 4 5 5 5350 3 4 5 5 5250 4 5 6 6 6150 5 7 8 8 8100 6 8 9 10 1050 9 11 13 14 14


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FIGURE 87

Statistical Reliability for Determining Accuracy of Observed Percentages—Two Samples

Observed Percentages

Sampling Errors at the 95% Confidence Level

10% or 20% or 30% or 40% orSize of Samples Compared 90% 80% 70% 60% 50%

700 and 700 3 4 5 5 5600 and 100 7 9 10 11 11550 and 150 6 8 9 9 9400 and 200 5 7 8 9 9350 and 350 5 6 7 8 8150 and 150 7 9 11 11 12100 and 100 9 11 13 14 14100 and 50 11 14 16 17 1750 and 50 12 16 18 20 20


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Appendix B:Detailed Tabulations

FIGURE 88

Channel Users’ First Mutual Fund(s) Purchased(percent of respondents)



Stock funds only 49 48 61 54 55 62Bond funds only 16 12 6 12 12 9Money market funds only 24 27 24 27 21 22Stock and bond funds 2 3 2 3 5 2Stock and money market funds 5 4 4 4 3 3Bond and money market funds 2 1 – – 1 1All three types of funds 2 5 3 – 3 1

100% 100% 100% 100% 100% 100%Base = 337 120 126 107 147 384



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FIGURE 89

Year in Which Channel Users Purchased First Mutual Fund(s)(percent of respondents)



1991 or later 7 8 9 12 11 81988 through 1990 12 20 10 17 13 131985 through 1987 36 16 25 24 25 311984 or earlier 45 56 56 47 51 48

100% 100% 100% 100% 100% 100%Mean (in years) 11 11 12 11 11 11Median (in years) 8 10 9 8 9 9Base = 321 117 120 104 143 365


FIGURE 90

Channel Users’ Most Recent Mutual Fund(s) Purchased(percent of respondents who have owned more than one fund)



Stock funds only 62 67 68 63 66 75Bond funds only 26 24 16 22 21 19Money market funds only 9 8 13 14 9 6Stock and bond funds 2 – 3 1 4 –Stock and money market funds – 1 – – – –Bond and money market funds – – – – – –All three types of funds 1 – – – – –

100% 100% 100% 100% 100% 100%Base = 327 116 121 103 141 377



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FIGURE 91

Year in Which Channel Users Purchased Most Recent Mutual Fund(s)(percent of respondents who have owned more than one fund)



1993 63 65 62 60 56 631992 20 19 19 22 22 221990 through 1991 13 12 14 14 16 111988 through 1989 4 4 5 4 6 4

100% 100% 100% 100% 100% 100%Mean (in years) 1 1 1 1 1 1Median (in years) <1 <1 <1 <1 <1 <1Base = 327 116 122 102 143 378



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FIGURE 92

Demographic and Financial Characteristics ofAll Respondents

Median

Age 47Household income $91,300Household financial assets* $144,400Investment real estate assets** $10,400


Male 69Married 86Employed full- or part-time 74Retired from lifetime occupation 23Spouse employed 65Four-year college degree or more 47Graduate degree 37Primary investment objective:

Long-term growth 71Current income 11

Primary financial goal:Saving for retirement 43Preserving accumulated assets 20Providing college education to children or grandchildren 18

Have formal financial plan 52Self-assessed knowledge of mutual funds:

Comprehensive 33Basic 57Very limited 10


Note: Respondents are shareholders who purchased long-term funds from 1988through 1993 other than through their employer. A “purchase” was defined as pur-chasing shares of a fund from which no previous shares had been owned before 1988.

FIGURE 93

Mutual Fund Ownership Characteristics ofAll Respondents


Mutual fund assets $50,000Percent of financial assets invested in all mutual funds 35Number of funds owned 5


Types of Funds Owned:*Stock funds 91Tax-exempt bond funds 38Taxable bond funds 29Money market funds 58

Combinations of Funds Owned:Stock funds only 22Bond funds only 3Stock and bond funds 17Stock and money market funds 24Bond and money market funds 6All three types of funds 28

100%

* Multiple responses included



80

FIGURE 94

Ownership of Nonfund Savings and Investmentsby All Respondents*

Average number of nonfund savings andinvestment types owned 3.5


Bank accounts 81Certificates of deposit 28Individual bonds** 48Treasury bills, bonds, and notes 14Individual stock other than employer stock 64Life insurance 47Annuities 23Unit investment trusts 8Other investments 21

* Multiple responses included** Includes corporate, municipal, and U.S. Savings Bonds


FIGURE 95

Recent Mutual Fund Investment Activity ofAll Respondents*(percent of respondents)

Invested more money in a fund currently own(other than through exchanging shares or reinvesting dividends) 63Exchanged shares of one fund for shares in another fund

offered by same company 34Sold shares of one fund and used proceeds to buy

shares of a fund of a different company 31Sold shares and used proceeds to buy something other

than mutual funds 28

* For 12-month period preceding survey (July 1992 through August 1993).Multiple responses included.


FIGURE 96

Primary Source of Mutual Fund InvestmentInformation for All Respondents(percent of respondents)

Full-service broker 26Books and magazines 18Financial planner 13Direct contact with mutual fund company 12Brokerage or investment newsletters 8Friends, relatives, or colleagues 4Newspapers 4Insurance agent 2Discount broker 2Bank or savings institution 2Other 9

100%Base = 690



81

FIGURE 97

Readership of Business-Related Publicationsfor All Respondents*(percent of respondents indicating they frequently read publication)

Local newspaper’s business section 65Wall Street Journal 42Mutual fund newsletters 37Business section of Time, Newsweek, or

U.S. News and World Report 29Money 29Consumer Reports 22Business Week 21New York Times business section 21Forbes 17USA Today business section 11Fortune 11Barron’s 10Changing Times 8Investors’ Business Daily 6Financial World 5Base = 720

* Multiple responses included



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FIGURE 98

Segments’ Level of Agreement with Statements About Investing(mean score*)

Respondent Segments

Confident Fee-Guidance- Adviser- Sensitive

Oriented Dependent Independent Cautious UninvolvedAll Respon- Share- Share- Share- Share- Share-

dents holders holders holders holders holders

I have become more knowledgeable about mutual fundsover the last few years 4.4 4.7 3.8 4.5 4.5 4.5

People who sell only one company’s mutual funds arelikely to give you biased investment advice 4.3 4.4 4.2 4.4 4.6 3.1

I always seek a low-pressure sales environment 4.2 4.4 4.3 4.3 4.6 2.9I spend a lot of time seeking information before I make

my mutual fund investment decisions 4.0 4.2 3.0 4.2 4.4 4.0I feel no-load mutual funds give me better value for my money 3.9 3.4 3.4 4.6 4.2 3.6Today I am more likely to purchase mutual funds by

myself than I was in the past 3.9 4.3 2.2 4.4 4.2 3.6When I consider investing in mutual funds, it is important

to me that the people I turn to for investment advice also beable to complete my investment transactions 3.7 4.0 4.5 2.8 4.2 3.6

When I make mutual fund investments, I want to make allthe decisions myself 3.6 3.6 2.8 4.1 3.7 3.3

It is important to me to have a longstanding relationshipwith my financial adviser 3.5 4.0 4.5 2.5 3.9 3.6

I will only invest in mutual funds offered by large,nationally known financial institutions 3.4 2.6 3.6 3.5 4.0 3.0

It is very difficult to find a financial adviser that youcan trust 3.2 2.7 2.9 3.4 3.8 3.0

Handling financial matters has become so complicated thatyou must have experts advise you 3.0 3.2 4.0 2.1 3.6 2.8

It is important that I be able to sit down face-to-face andtalk about mutual fund choices with someone 3.0 3.2 4.0 1.8 3.6 3.3

I am more of a “saver” than an “investor” 3.0 2.5 3.2 2.6 3.7 3.0I am overwhelmed by all of the investment choices

available to me 3.0 2.6 3.7 2.3 3.8 2.8I am willing to pay more in commissions or fees in order

to get sound mutual fund guidance 2.9 3.5 3.9 1.9 3.2 3.0When purchasing mutual funds, I go with the person or

institution that charges the lowest commission or fee 2.9 2.0 2.2 3.6 3.3 2.3I would only invest in a mutual fund that has been

recommended to me by a professional financial adviser 2.7 2.6 4.0 1.6 3.2 2.6

Continued on next page


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FIGURE 98, continued

Segments’ Level of Agreement with Statements About Investing(mean score*)

Respondent Segments

Confident Fee-Guidance- Adviser- Sensitive

Oriented Dependent Independent Cautious UninvolvedAll Respon- Share- Share- Share- Share- Share-

dents holders holders holders holders holders

When you invest in mutual funds by mail, you justcan’t be sure that the transaction will go through properly 2.5 2.6 3.6 1.6 3.0 2.4

I am uncomfortable buying mutual funds because they arenot federally insured 2.0 1.6 2.5 1.4 2.7 2.2

*5 equals strongly agree, and 1 equals strongly disagree


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