LOOK OUT SCHWAB, FIDELITY, JACK WHITE: TINY SUPERMARKET SHOPS FOR BIG CLIENTS

John Moody doesn’t want to unseat Charles Schwab & Co. as the king of the mutual-fund supermarketers. He just wants Schwab’s best customers.

Mr. Moody, 39, a former broker and trust-company marketer, is in the initial stages of building a mutual-fund supermarket for Matrix Capital Corp., a Denver-based bank holding company. But this is a supermarket with a select clientele – no adviser with less than $100 million in assets need apply.

Thus far, six months after opening its doors, the new unit, Matrix Advisory Services, has snared just two clients.

“We’re very slow and methodical about how we do business because we want big and lasting relationships,” Mr. Moody says.

But these aren’t just any clients. Together, the two bring about $1 billion in assets, one-fifth the total held today in established supermarkets at San Diego-based Jack White & Co. and Denver-based DataLynx Inc. (Schwab rules the supermarket roost with $112 billion in assets as of Dec. 31, an 80% market share.)

The biggest of these clients – Omaha, Neb.-based mutual-fund wholesaler Clarke Lanzen Skalla Investment Firm Inc. – is bringing all $700 million of its assets under management to Matrix.

Matrix’s menu includes more than 900 mutual funds offered by more than 60 fund groups, including heavyweights such as Menomonee Falls, Wis.-based Strong Capital Management and Kansas City-based American Century Investments Inc.

In addition to providing access to the funds, Matrix, like Schwab, provides clearing and back-office services to advisers. But unlike Schwab, it does not offer a separate supermarket to retail investors.

Mr. Moody has promised the parent company he will amass $1.5 billion by yearend, and hopes to hit $5 billion by 2001. But it’s quality, not quantity, this niche player is after.

Do the math: $5 billion at 25 basis points a year from the participating mutual funds is $12.5 million in gross revenue. All from about a dozen advisers.

In the near term, his revenues won’t be that strong because Mr. Moody
has cut some deals. Typically, fund groups pay at least 25 basis points annually to the established supermarkets; some are paying 20 basis points to be on Matrix.

“It’s hard to go to a fund company and say, ‘Hey, I’ve got this great idea and zero in assets. You want to play?’ ” Mr. Moody says.

Even some competitors admire the idea. “It is certainly an interesting strategy to target $100 million-plus (registered investment adviser) firms,” says Skip Schweiss, director of business development for DataLynx. “Of course, there are not that many of them around, but it doesn’t take many to build a sizeable business.”

problems aplenty

There are potential roadblocks. First off, the mighty Schwab could cut special deals with wavering advisers, particularly those who trade individual stocks and pay Schwab’s relatively pricey transaction fees. (Schwab’s policy is not to comment on the doings of competitors.)

Technology, too, is a potential problem. In the last five years, DataLynx has scrapped two internally built back-office systems in favor of a product created by Berwyn, Pa.-based Funds Associates Ltd. Even that system – the backbone also of Mr. Moody’s service – has required tweaking, Mr. Schweiss says.

So how might Mr. Moody pull this off? He knows a lot of people in the business from his experience helping build a no-transaction-fee supermarket for Denver-based Trust Co. of America.

“A lot of this business and industry is relationships,” says Michael Turgeon, vice president and director of the broker-dealer division for American Century. “Those guys (at Matrix) know how to do it. They’ve already built it.”

More important, Mr. Moody had an idea. He thought large-scale advisers would be attracted to a customized record-keeping and reporting system that would give them real-time access to client information normally in the hands of only the custodian. Clients would get a single statement from the adviser instead of documents from both the adviser and the
trust company.

So the frequent problem of discrepancies between the adviser’s and custodian’s statements disappears.

“The communication to the client is key and right now the client gets pretty mixed communications,” Mr. Moody says. For instance, Schwab reportedly confirmed that a recent computer snafu resulted in scrambled account statements for about 6,000 Chicago-area customers.

it’s all about control

Better control over the information going to the client was a major reason Clarke Lanzen Skalla chose Matrix, says W. Patrick Clarke, president and CEO.

“The advantage is, we’re on a wide area network,” he says. “We don’t have to call anyone (when the client has questions) because we’re on the same network.”

In addition to large, independent fee-based advisers, Matrix is targeting independent broker-dealers and is on the final list of custodial firms to be selected by St. Louis-based Walnut Street Securities Inc., which boasts more than 2,000 reps.

For Walnut Street, Matrix’s biggest selling point is its system’s ability to automatically block proposed trades that fall outside a client’s risk parameters, says George Gay, vice president of Walnut Street’s fee-based unit.

Mr. Moody also offers the possibility of sharing some revenues with broker-dealers that commit substantial assets, offering them a payback for compliance duties, a service that today only costs them money.

And, finally, for broker-dealers, Matrix can pass through at least a portion of the 12b-1 marketing fees funds pay Mr. Moody to be on his network. Those 12b-1s aren’t available from Jack White or Fidelity’s supermarkets, and Schwab generally doesn’t serve commissioned brokers.

“That’s a big factor,” Mr. Clarke says. “Because the broker-dealer community we’re working with want that (12b-1) passed through to them.”