A number of years ago investors typically had two broad choices in deciding how to invest their money. One choice was to invest directly, making the investment decisions themselves within their brokerage accounts. At first, most investors relied on full-service brokers, receiving advice and research information but also paying top dollar in brokerage costs. With the rise of discount brokers and Internet brokerage accounts, more of the emphasis shifted to personal decision making. Brokerage costs were reduced substantially, but so was the level of services received in many cases.

Regardless of which approach investors used, they were ultimately responsible for the decisions made. Direct investing means someone has to make the decisions for a particular account.

The alternative approach to direct investing was the investment company, primarily mutual funds. Investors simply turned over their money over to a mutual fund, which then made the decisions and managed the money. The investor gained or lost as the fund gained or lost.

Investment companies offer advantages and disadvantages. What investors gain in ease of investing, convenience, and services, they lose in terms of control over their money and, often, disappointing performance. As we have seen, performance often has turned out to be a disappointment as funds failed to continue to perform spectacularly. The investors also often had little control over gains and losses that affected their tax situations.

Today, investors have other alternatives, and these are becoming increasing important. These alternatives give investors choices—mutual funds are no longer the only game in town. Without alternatives, investors would be much less interested in knowing about the problems that can arise from mutual fund ownership. They might recognize that costs are higher than they really should be, given the economies of scale available in the industry, and that for taxable accounts large capital gains distributions can and do occur. However, they also believe that they are better off with funds than with the alternatives because they can accomplish investing objectives, such as owning stocks and bonds, easily and quickly.

Three alternatives to mutual funds have recently gained attention, with new products and services appearing: ETFs, folio investing, and separately managed accounts.

Press coverage has been, and continues to be, notable, and investors are starting to pay heed. Money is flowing into each of these alternatives, although the three together still comprise only a very small part of total mutual fund assets.

First, ETFs make possible a duplication of a portfolio of securities similar to that offered by an index mutual fund. ETFs have burst on the scene only recently to any significant extent, and they have attracted quite a widespread interest. They offer, to a large degree, an important alternative to the traditional mutual fund, with some advantages that simply do not exist with the funds.

Second, investors can be their own portfolio managers by undertaking folio investing. Folios are simply baskets of stocks that are predetermined by the vendor or chosen by the investor. The investor owns the portfolio directly, and therefore has more control over it in terms of recognizing capital gains and losses.

Folios, as preselected baskets of stocks, do not offer professional management. However, they do offer diversification, and they are based on well-identified themes such as biotechnology. The pre-established list can be changed by the investor to include a smaller number than originally selected.

FOLIOfn provides about 120 preselected stock baskets referred to simply as folios. Each folio consists of five to 50 stocks based on market indexes, asset classes, investing styles, or sectors. Stocks can be traded twice a day. Advisers answer questions, but do not offer professional management of the portfolios. The annual fee for three folios is $295.

Investors can now also have managed accounts. Under this alternative, investors have access to professional managers who choose the stocks in the form of several managed accounts. This means typically that investors receive limited professional advice relative to, for example, a full-service broker. They also achieve much better diversification, which is clearly important, than they are likely to accomplish by themselves. Finally, relative to mutual funds, investors have flexibility. These portfolios are more targeted than a large mutual fund holding 100 or 200 stocks.

These managed accounts can be arranged online or through financial advisors and brokers. An example of this mechanism is Wrapmanager.com, which offers some 120 managed accounts and help in choosing them. The minimum investment is $100,000, in contrast to folio investing, which either has no minimum or a relatively small minimum (e.g., $5,000). The annual cost is 1.25 percent of assets, considerably less than the 1.90 percent charged for managed accounts by brokerage firms and financial advisers.

Wrapmanager's accounts focus on specific investing styles, industry sectors, or asset classes. Although the investor gives up control of the portfolio, he or she can still customize the accounts by excluding certain stocks. For example, if a stock is already owned by the investor, it might be possible to exclude it from the managed portfolio.

These three quite new, and very viable, alternatives to mutual funds are being used by investors on a limited basis as substitutes for funds because they more effectively deal with some of the problems inherent with funds.

Let's be honest and realistic at the outset. The fact that there are now viable alternatives does not mean that they are without some problems themselves, or that they are for everyone. Such is not the case. It means only that investors do have alternatives now, and may be well served by one or more of them. At the very least, they deserve careful consideration.

Investors in the future might be better served by a combination of mutual funds and one or more of these alternatives.