The market share for traditional open-end mutual funds owned through professional advisers such as brokers is likely to erode over the next two years, according to a new study by Cogent Research LLC.

Citing a survey of 1,266 U.S.-based advisers, the study forecasts that the mutual fund share of invested assets will decline from 35 percent in 2007 to 31 percent in 2009.

Separately managed accounts and exchange-traded funds are expected to pick up market share from the traditional funds.

A loss of 4 percentage points of market share amounts to a decline of about 11 percent.

If mutual funds go down by more than 10 percent every two years, that's a big problem in 10 years, Bruce Harrington, managing director at Cambridge, Massachusetts-based Cogent said in an interview.

For the advisers, the appeal of products such as ETFs lies in their specialization in niche investment areas, allowing the advisers to use them as building blocks for portfolios, Harrington said.

Of special interest is the debut of the first actively-managed ETFs, expected in the marketplace in early 2008.

Harrington expects the new ETFs to have a major impact. He says that most advisers prefer active stock-picking to an index product and ETFs currently available are all index products. So the new ETFs, which have to pass through final regulatory clearance, could command a big following fairly quickly.

ETF assets rose by about 45 percent to $607.67 billion last year, according to State Street Global Advisors. There were 270 new ETFs launched last year, which raised the total to 629.

Despite the rapid growth, ETF assets are but a small fraction of those in traditional open-end mutual funds. Assets in open-end funds totaled $12.039 trillion at the end of 2007, according to the Investment Company Institute, an industry trade group.

Of that, stock funds accounted for $6.528 trillion, or just over half. Bond funds, money market funds and hybrid funds made up the remainder.

Excluding about $4.5 trillion of mutual funds in retirement plans, the bulk of funds, more than 80 percent, are owned through advisers, according to ICI statistics..

The Cogent study, known formally as the Advisor Product Forecast, outlines several steps traditional mutual funds can take to protect their market share.

Noting that 23 fund companies out of 31 had negative ratings when advisers were asked about brand loyalty, the report recommends using a combination of advertising, increased services and value-added options.

The report said mutual funds must emphasize the advantages that helped them reach their dominant position. These include efficiency, regulatory oversight, ease of liquidation and the availability of systems to make apples to apples comparisons of investment performance.

The report also suggests development of more products such as the successful life-cycle funds, which automatically shift to a more conservative stance as the investor grows older. The life-cycle funds are increasingly popular in 401(k) and other retirement plans, but they may also be used outside of plans.

The survey of 1,266 advisers was conducted from Sept. 21 to Oct. 30. (Editing by Tom Hals)