Financial services Dot Coms are challenging the viability of mutual funds by introducing alternative investments. According to a new Brief from Forrester Research, Inc. (Nasdaq: FORR), although these new approaches will face stiff industry opposition, they will overcome their hurdles and crush the mutual fund’s dominance as the investment vehicle of choice.

“For years, mutual funds have been US investors’ No. 1 way to invest,” said Jaime Punishill, senior analyst at Forrester. “By offering all the benefits of funds — without the detriments — new approaches to online investing will force more than $1 trillion worth of assets to exit mutual funds. Faced with massive outflows and enormous pressure on fees, Forrester expects the ballooning number of mutual funds to reverse, leaving just 5,000 funds by 2010.”

Financial Dot Coms are offering investors new investing options like small-amount dollar cost averaging, customized baskets of securities, lower fees and minimums, and transparent mutual funds. Despite the relative advantages of these alternatives, the new approaches face several hurdles. Investors will need advice to understand the benefits of these options, as well as how they work. The industry is also facing opposition from government organizations that are already trying to regulate alternative investment vehicles.

Forrester believes that three factors will enable these new methods of investing to overcome the obstacles they face. First, online brokerage promotion will let investors create custom portfolios based on comprehensive financial plans. Second, advisors will take advantage of institutional offerings to implement their customers’ portfolios and cut costs. Lastly, empowered by 401(k) exchanges and fund supermarkets, investors will frequently switch between funds. Forrester predicts that consumers will adopt alternative investing methods, looking to improve investment performance.