Are Banks Making It in the Fund Business? A Conversation with Michael Lipper

Article excerpt

This much is certain: bank-managed mutual funds are on a growth track. From 1992 through the middle of 1997, the assets of proprietary bank funds grew from $154 billion to $429 billion, as bank-managed funds increased their share of total fund assets from just under 10% to almost 12%. At the same time, the total number of proprietary bank funds climbed from 958 to 2,568, keeping pace with brisk industry trends.

Encouraging as those numbers are, there is still a nagging question when it comes to bank funds: are they actually making money for banks? Put another way, are banks able to bring the impressive profits of non-bank mutual funds down to the bottom line of their own fund operations?

When we looked at this issue in late 1991, evidence suggested that banks had not yet found the right formula to turn bank funds into a significant contributor to profits. Now that bank funds have almost six more years of growth and experience to show, we decided to revisit the issue. We asked Michael Lipper, president of Lipper Analytical Services and the expert who wrote about bank funds for us in 1991, to lay out how bank funds have evolved since then. We wanted to know what progress banks have made what problems remain, and what the future holds for banks as investment managers and marketers of mutual funds

Q. Back in 1991, when you looked at the issue for us, you said that banks were slow to realize that the mutual fund business is "first and foremost a marketing business." How have banks changed their sales and marketing efforts to reflect this reality?

LIPPER: Banks are not just selling through banks anymore. The big (bank) players see all mutual funds--not just bank mutual funds--as competitors, and they are buying non-bank fund families and brokerage firms to gain access to other distribution channels.

One example is First Union's Evergreen Keystone fund family, and its recent announcement that it will buy Wheat First Securities. Others are Banker's Trust's acquisition of Alex Brown; Bank of America's purchase of Robertson Stephens; and NationsBank's acquisition of Montgomery Securities.

Also, banks previously jumped into this market so they wouldn't be "left behind." There wasn't necessarily a lot of forethought as to where they were headed. Now banks are more forward looking. They are expanding their product lines by offering more equity funds and more international exposure.

Major banks are also doing more national advertising, such as the Nations-Funds ad campaign in the Wall Street Journal, and ads by Mellon-owned Dreyfus and Evergreen Keystone funds in magazines like Money or Mutual Funds.

Q. Are banks making good use of the Internet to sell and distribute information about their funds?

LIPPER: Major banks have web sites that include information on mutual funds. Others have dedicated web sites for their funds. These include Dreyfus, Evergreen Keystone, Nations, Norwest, Galaxy, Compass and Key funds, as well as some smaller groups like Amcore, Rembrandt and Marshall funds.

I'm unsure about the impact of these web sites on mutual fund sales. But if the issue is whether this is a profitable way to generate sales leads, the answer is yes. The cost to generate a lead (through the Internet) is less than it is with other methods.

Q. It's apparent from these changes that banks have made a lot of progress in playing catch-up in the competitive fund business. What impact have these changes had on profits?

LIPPER: The dollars have certainly gotten bigger. The real growth has been on the institutional side, through trust conversions. But profit is still in the future in any sort of meaningful way. This is an expensive business to be in. Fund introductions are costly, and there is significant competition for talent at all levels.

This is a game of distribution points. You need to have a large number of distribution points. …