Bigger Minimums Leave Small Guys in Middle

The ticket prices for mutual funds keep going up.

Just a few years ago, an individual investor could buy into most funds for under $500. Today you need at least twice that--and often five times as much--just to open an account.

It’s a trend fund companies say is necessary to cope with rising costs. The contractors who do back-room operations for mutual funds--processing statements and providing shareholder services--say they could solve the rising-costs problem but that the fund companies aren’t interested.

In the middle is the small group of investors with little money to invest.

“Having low minimums is a great idea from a populist standpoint,” says Geoff Bobroff of Bobroff Consulting, a Rhode Island firm that advises fund groups on strategy and marketing. “But if the little accounts lose money for the fund group--and if large shareholders make up that loss--then low minimums aren’t always fair or practical.”

That’s a key reason initial investment amounts have been rising steadily. According to a recent study of nearly 9,500 funds by Boston-based research firm Micropal Inc., there are more funds with a $1-million initial investment requirement than with no minimum whatsoever.

The most recent newsworthy increase in minimums is from Charles Schwab & Co., whose OneSource network of hundreds of fund companies is the world’s biggest mutual fund supermarket. Effective July 1, the minimum for all funds in OneSource--with the exception of funds managed by Schwab itself--jumps to $2,500. You can avoid the new minimum by investing directly with a fund rather than buying it through the more convenient supermarket, but consider that Schwab raised minimums for OneSource from $250 to $1,000 just two years ago.

A number of fund companies now impose special charges on account balances that fall below certain minimums. In some rare cases, funds have notified shareholders to raise the value of an account above the baseline or face being kicked out.

Some investors applaud higher minimums because they know large shareholders won’t be subsidizing money-losing small accounts. Others note that the higher minimums aren’t prohibitive.

Yet consider that last year a study by the consumer group Public Agenda of pre-retirement investors found that 46% of people surveyed nationwide had less than $10,000 saved for retirement.

With a ticket for entry at $2,500, those investors face the prospect of not being able to buy the three or four funds it takes to create a diversified portfolio.

David Alger, president of the Alger Funds--one of the few fund groups still with no minimum initial investment requirement--said earlier this month that his fund family does not lose money on its small accounts. “It is not automatic that a fund company loses money on small investors,” Alger said at the Morningstar Investors Conference in Chicago. “Maybe the other fund companies just don’t want to go to the trouble.”

That last statement is telling.

Transfer agencies--which handle the nuts and bolts of servicing shareholder accounts--once charged every fund company a flat rate for each account, regardless of its value. Today those charges can be based on the assets being serviced, meaning that the costs are spread proportionally among investors.

In addition, transfer agencies say it is possible to charge shareholders based on services used, so that consumers who don’t use a fund’s online offerings or phone hotlines every day could be spared the expense of paying for customers who do. Entire new classes of shares could be created that offer the same investment but with stripped-down services. All transactions might be processed by home computer, say, or there would be limits on the number of transfers and phone calls.

Says William Jackson, a vice president with Boston-based First Data Corp., one of the industry’s leading transfer agents: “Just as discount brokerage firms came in to serve a need, I believe funds could develop products to service all levels of investor, from the one who demands a lot of service to the person who only looks at one statement a year. But right now the fund companies don’t seem to want to go that way.”

Experts generally agree that picking a fund on the basis of the minimum initial investment is a bad move, albeit a move that some cash-strapped investors feel forced into. Many low-minimum funds have high costs that drag down returns. Instead of focusing on the minimum, experts suggest picking the funds you like and then calling to find out how the company may be able to accommodate you on the issue of minimums.

Some fund groups waive or cut initial minimums for customers enrolling in an automatic-investment plan, whereby regular monthly contributions are deducted from a bank account.

Many funds also lower minimums for individual retirement accounts or for accounts given as gifts to children.

“The industry has run away from small accounts,” Bobroff says. “Until there is some impetus to change that, people who can’t afford the bigger ticket to get into these funds will have to work harder to find something they can live with.”

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Charles A. Jaffe is personal finance columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.