How Are Mutual Funds Changing Banks? A Third of All Mutual Funds Are Now Sold through Banks. How Is This Trend Affecting Bank Profitability, the Deposit Base, and Banks' Image?

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A third of all mutual funds are now sold through banks. How is this trend affecting bank profitability, the deposit base, and banks' image?

Banks have plunged into the mutual fund industry and are making more than ripples. About 3,500 banks now offer mutual funds and the number is growing.

Ten years from now, will the bankers who made the decision to enter this business be patting themselves on the back or will they have some regrets?

That's a highly speculative question, but worth asking nonetheless. For a speculative answer, one can consider the opinions of industry observers and look at what mutual funds have done for (or to) banks so far.

To start, here's a look at banks' current relationships with mutual funds:

* Banks sold shares of a third of all mutual funds in the first half of 1992, according to a survey by the Investment Company Institute, Washington, D.C. Banks accounted for 14% of all sales of long-term funds and a third of new sales of money market funds.

"Banks will soon become the major source of distribution for mutual fund products," says James Shelton, executive director at the Bank Securities Association, Corte Madera, Calif.

* About 91% of banks with over $1 billion in assets offer mutual funds, according to a survey by Alliance Capital Management, New York.

* About a third to half of banks with less than $1 billion in assets offer mutual funds, according to a survey conducted by American Brokerage Consultants, St. Petersburg, Fla.

* One hundred and seven banks manage proprietary funds. There are about 700 bank proprietary funds and they represent about 10% of the industry.

NationsBank and Chemical Banking Corp. have formed joint ventures with brokerage firms (Dean Witter and Liberty Financial, respectively).

* About 75 banks have joined the Investment Company Institute, the mutual fund trade association that used to lobby against banks' fund activities.

Very little of this activity existed before 1987, when the OCC authorized national banks to provide full-service brokerage.


Is the increase in banks' mutual fund activities a temporary spurt of enthusiasm, or a permanent change in the financial landscape?

The short answer probably is, a little of both.

Geoffrey G. Maclay, Jr., president of Elan Investment Services, a unit of First Bank, Milwaukee, says, "It's pretty clear that banks are rapidly trying to advance in this business. It's that phenomenon that reminds people that have been around the banking business for a while of what happened in the good old days of the real estate investment trusts and the other different fad kinds of pursuits. Personally, I don't necessarily see this as a fad per se. It's a question of meeting customer needs."

In fashion at the moment. Doubtless much of banks' activity is the result of consumers' recent addiction to mutual funds--partly the result of depressingly low rates on deposits.

Of total consumer assets, 15.8% are invested in mutual funds, according to the Investment Company Institute. About 27% of all households now invest in mutual funds, whereas in 1980 about 6% did. Investments in mutual funds have grown from about $6 billion in 1980 to $1.6 trillion in 1992, and they're gaining about $1 billion a day. Along with individuals and companies buying mutual fund shares, much 401 K, IRA, and other retirement money has shifted to mutual funds.

Banks' fortunes in this business could depend partly on the investing public's loyalty to mutual funds through periods of rising interest rates, market turndowns, and other economic events. But numerous people believe the loyalty has staying power.

"It's not just a flash in the pan," asserts Shelton at the Bank Securities Association. "Consumers accept mutual funds because of the diversity of risk."

Robert Flowers, president, Banc One Investment Services, thinks demographic changes are locking mutual funds' popularity in place. …