For banks, mutual funds providing business boom

November 15, 1992|By Thomas Watterson | Thomas Watterson,Boston Globe

The banking industry may not be out of the financial an regulatory woods, but one part of its business is doing quite nicely.

After almost a decade of steady if unspectacular growth, the sale of mutual funds through banks has exploded in the last year. The boom is adding billions of dollars to the coffers of mutual fund companies and giving banks a new source of revenue -- from commissions for selling outside funds and income from funds they create and market.

Five years ago, assets of funds sold through banks totaled $35 billion; today the figure is about $150 billion, or 10 percent of all mutual fund assets, according to Lipper Analytical Services in New York. At some companies, sales of funds through banks have more than quadrupled since 1990.

Most major banks in the Baltimore area either sell funds or say they will soon.

Signet Bank's Signet Financial Services unit manages $600 million in its six no-load Signet Select Funds and markets a range of load funds managed by other companies. Mercantile-Safe Deposit & Trust Co. has almost $1 billion under management in mutual funds the bank runs on its own and sells to trust department clients.

Likewise, Maryland National Bank has a family of nine funds it manages, and two of them are available to customers of the bank's discount brokerage, which also sells hundreds of other load funds. And Provident Bank of Maryland has applied to the state for permission to sublease space to a broker-dealer that would sell mutual funds.

The boom in sales is easy to understand: With interest rates on short-term deposits and most certificates of deposit paying a meager 3 percent or so, depositors are looking for alternatives, and banks are happy to offer them.

Offerings include government and municipal bond funds, money market funds and stock funds. Even if the money is transferred to an outside mutual fund company, the customer is still available to the bank the next time interest rates rise.

For the mutual fund industry, the symbiotic relationship with banks has meant thousands of new customers and billions of dollars in fund assets.

"We don't view it as a threat," said Stephen Norwitz, a vice president at Baltimore-based T. Rowe Price Associates Inc., one of the nation's largest mutual fund companies. "It could be a positive development for the fund business because it could expand the market for mutual funds."

Mr. Norwitz acknowledged that managing private label funds for banks is an option for Price, but that the company isn't seriously considering it right now.

The jury is still out on whether banks are the best place to buy mutual funds, especially for people with no experience in investing, some of whom might be better off staying with the safety of CDs. Also, it is unclear how novice mutual fund investors will react the next time a big rise in interest rates slashes the value of their bond funds or a major drop in the stock market hits their stock funds.

Still, the growth of this industry segment is impressive. Consider:

* Recently, NationsBank Corp. of Charlotte, N.C., and Dean Witter Financial Services Group announced an agreement that eventually would put brokers in hundreds of NationsBank's 1,800 offices to sell stocks, bonds and mutual funds. NationsBank's chairman predicted that the deal would break even next year and bring $50 million to $60 million in profits to the bank and Dean Witter by the fifth year.

* The Independent Bankers Association of America, which represents community banks, has invited 31 sponsors of mutual fund families to bid for the exclusive right to sell their products through the organization to its 6,000 member banks.

* In October, Boston-based Shawmut Bank began a trial program at two branches in which a selected group of funds from Fidelity Investments will be sold. Fidelity already offers several of its funds to banks around the country.

* Other big banks, including Chase Manhattan, Chemical Bank and Citibank, have entered the mutual fund fray. Citibank offers three money market funds, a variety of taxable and tax-free bond funds, a stock fund, an international equity fund and a balanced fund investing in a mix of stocks and bonds.

Amid all this marketing, there remains the issue of how well bank customers understand the risks of investing, even when a conscientious broker or investment counselor carefully tries to explain them.

What customers are hearing are yield and total return numbers that look far superior to the 3 percent interest rates being paid on CDs.

The consequences of not hearing can be expensive. For example, Lori Dodson, a financial planner in Nashville, Tenn., says she met with an elderly woman a few years ago who had put about $100,000 in a U.S. government bond fund sold by a bank. Over the course of the next year, long-term interest rates rose 2 or 3 percentage points, reducing the principal value of the woman's fund by several thousand dollars, because the prices of the bonds fell as interest rates went up.

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