Money Magnet: Mutual Funds

By Levy, Adam S. | American Banker, November 18, 1991 | Go to article overview

Money Magnet: Mutual Funds


Levy, Adam S., American Banker


Money Magnet: Mutual Funds

Last month, when an estimated $400 billion in certificates of deposit matured, banks were able to capture a significant portion of the funds that were not rolled over into new CDs. The reason? A newly successful product on the banking scene: mutual funds.

For the several thousand banks that offer them, mutual funds are hot, hot, hot. Since interest rates are falling, more customers are moving their investments to mutual funds, where returns are normally higher than on a savings or money market account.

In 1990, investments in all mutual funds broke the $1 trillion mark. It's too early to determine how much of the new money flowed into banks, but one thing is for sure. Banks would like to capture more.

Hopes Dim for New Powers

For now, it looks as though banks' hopes to get increased powers to underwrite and sell mutual funds directly are dashed. With the legislative clock ticking down, Congress is expected to pass a much narrower banking bill than the industry wanted, excluding power to run mutual funds.

Nevertheless, banks can and do act as investment advisers, meaning they can manage the funds and sell them through subsidiaries. These funds, known as proprietary bank funds, are offered by 112 U.S. banks, according to Lipper Analytical Securities Corp. Total assets of these funds currently stand at about $113.2 billion.

And many small and medium-sized banks have forged ties with third-party broker-dealers, through which banks can offer nonproprietary mutual fund products to their customers. Through third-party brokers, banks can get their customers into just about any mutual fund in the country.

Both Expected to Grow

Both proprietary and third-party mutual funds are expected to continue as a growth businesses for banks, primarily because customers want them. They know that investing for the long term through CDs alone just will not do. And that point is being driven home especially hard in this era of low interest rates.

"A bank must ask itself whether it is going to let a consumer walk across the street to a brokerage firm or do something about it," said D. Mark Olson, president and chief executive officer of Invest Financial Corp., Tampa, Fla. "Particularly now, with rates plummeting, the question is not whether funds are going to be [purchased] but where."

Banks, even without added legislative powers, are the envy of the securities industry, which has fought long and hard to keep them out of their business.

"Banks have an edge, in that they have hundreds of customers who don't trust securities brokers but do trust banks," said Joy Montgomery, executive vice president of New York-based SunAmerica Asset Management, and former managing partner of Money Marketing Initiative, a consulting firm specializing in bank mutual funds. "These customers want mutual funds, and they want to keep their money with a bank."

What's more, banks have an extensive retail network through which funds can be sold.

Barnett Banks Inc. of Jacksonville, Fla. …

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