Bank Management of Mutual Funds Tapers Off

By Plasencia, William; Kimelman, John | American Banker, March 6, 1996 | Go to article overview

Bank Management of Mutual Funds Tapers Off


Plasencia, William, Kimelman, John, American Banker


The party seems to be dying down for banks that manage mutual funds.

After years of vigorous growth, banks' share of the nearly $3 trillion mutual fund market stalled at just under 14% in 1995. Indeed, last year marked the first time in a decade that banks' mutual fund asset growth lagged the broader fund industry's.

The slowdown is troubling for banks, which have come to view mutual funds as a centerpiece of a modern line of consumer financial services. Having embraced fund management as a way to boost fee income and keep customers in their fold, banks are now finding that their strategies for gathering assets just aren't effective enough.

"The small advantage that banks had with their customer base is essentially gone, and it isn't getting any easier for them," said Kenneth R. Hoffman, president of Optima Group, a Fairfield, Conn.-based consulting firm.

Reasons for the slowdown in bank mutual fund growth abound: *The "easy money" has dried up. Banks are no longer getting the boost they once got from converting common trust assets into mutual funds - a practice that produced roughly 60% of the $391 billion in bank-managed funds at yearend. Such conversions pumped $25 billion into bank-managed funds in 1993 and 1994, according to Lipper Analytical Services, Summit, N.J. Last year, only $4.8 billion in mutual fund assets were created this way.

*Money-center and regional banks, which bragged of plans to be avid acquirers of mutual fund companies, haven't made good on their boasts. After acquiring companies holding more than $83 billion of managed assets in 1993, banks picked up only $24 billion over the following two years, according to Berkshire Capital Corp., a New York investment banking firm.

*Banks are still struggling to compete for customers in a business where such marketing powerhouses as Fidelity Investments and Vanguard Group set the standards. Observers say banks haven't come to grips with building the sales culture and brand identity needed to thrive in the fund business.

To be sure, banks aren't throwing in the towel yet. For instance, First Union Corp. Chairman Edward E. Crutchfield has vowed to increase his mutual fund business nearly tenfold, to $100 billion, by 2000. And many bankers say they remain eager to buy fund companies, but are simply riding out a period where prices are too high.

Nevertheless, banks haven't been living up to the heady expectations that have built up in the past four years, as their aspirations in the fund business have become widely known.

With droves of loyal customers and coffers full of common trust fund assets ripe for the converting, banks were considered a natural to gain market share in the fund business.

"Banks thought they could make a go of it because of the trusting relationship they already had with millions of customers," said David R. Meuse, chief executive of Banc One Capital Holdings Corp.

For years, bank-run mutual fund complexes ran on a virtually inexhaustible supply of money.

In the early 1990s, low interest rates, roaring markets, and bank customers' voracious appetite for bond mutual funds helped fuel sales.

"Banks had it easy in 1992 and 1993, because all the markets were running, and everything was hot," said Richard H. Jones, chief asset management executive for Barnett Banks, Jacksonville, Fla. "Then when it became tough in 1994 and 1995, banks didn't have the sales discipline in place."

Conversions of trust assets into mutual funds also helped banks jump start their mutual funds businesses.

But the problem is that "any bank that had trust assets to convert has probably already done so," said Henry Shilling, a senior analyst with Moody's Investors Service. "Having completed much of this transfer, growth has begun to diminish."

Legislation under consideration by Congress could free up additional trust assets for conversion into mutual funds. …

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