Bank customers walking into local branch offices are finding not only the familiar roped-off avenues leading to bank tellers but also brokerage-style offices open for business in one corner of the lobby.
There, bank employees or outside professionals hawk anything from mutual funds to variable annuities to a stock deemed to be in favor that week.
None of those products, by law, may be underwritten by the bank, and in many instances none are managed by the bank.
But all have been given the institution`s blessing as an alternative to a bank certificate of deposit or a long-term savings account, an oddity because it appears the bank is encouraging customers to send savings elsewhere.
This phenomenon has been on the rise for several years in banks across the nation, particularly in the South, and often in smaller towns and cities where brokerage offices are scarce.
Many Chicago-area banks offer mutual-fund sales as part of their full-service operations, and that trend is expected to accelerate in the next few years.
By the end of the decade banks are expected to provide half the sales of mutual funds in the U.S., said Richard Davies, president of First Chicago Investment Services, which offers customers its own proprietary funds as well as 87 mutual funds managed by outside firms.
”If you go to any mutual-fund company, they will tell you that bank sales probably account for 25 to 30 percent of their business, and it is the fastest-growing channel for new sales, by far,” said Joseph Marshall, director of marketing and corporate development for Liberty Financial, the Boston-based parent of Stein Roe & Farnham. Liberty provides consulting services to banks that set up outside investment programs.
Many mutual-fund companies, struggling to expose products to new customers amid escalating competition, have sought out banks to tap their unique relationship of trust with customers.
And banks, squeezed by 1990s financial conditions, have sought out mutual-fund companies, once considered competitors, to try to bring in more fee-producing services.
In addition, bankers explain that their move into non-traditional investment services fills customers` demand for one-stop shopping for financial services.
”Our competition isn`t just the bank down the street, it`s the brokerage office down the street which offers a checking account with their mutual fund, and it`s . . . GM, (which is) offering a credit card,” said Gene Hunziker of Wheeling-based Cole Taylor Bank, which offers customers an array of outside mutual funds.
”The fee income isn`t insignificant, but it doesn`t add up to that much,” he said, adding that the bank`s motivation stems more from enhancing customer relationships than from boosting its balance sheet.
But some banks have found that broadening services can be lucrative.
Thomas Butler, president of Sidell State Bank in Sidell, Ill., population 650, expects that fee income from mutual-fund sales this year will provide about 20 percent of the bank`s income.
”It has the potential to exceed the bank income in a three- to five-year period, with no additional staffing requirements,” he said, speaking from the brokerage office in the lobby of the bank, where he spends about half his time.
In the two years the Sidell bank has offered outside mutual funds to customers, the bank also has gained deposits, despite having some customers withdraw savings from longtime accounts to invest in mutual funds, Butler said.
”We were told to expect a 10 percent runoff from our CDs” into the newly offered mutual funds, he said. ”But they said we could expect those deposits to return to the bank within 18 months. We have found that to be true, only quicker.”
As Butler talks to customers about mutual funds and other investment products, he discusses with them how they should structure portfolios.
”In the course of that conversation, they tell us that they have a mutual fund elsewhere, and we tell them, `You can have that managed right here in your hometown,` ” he said. Over time, the bank tends to gather a customer`s assets under one roof, which makes the customer`s business more valuable to the bank.
”If you`ve got a one-product relationship with a customer, the chances of you keeping that customer at the end of the year are about zero,” Butler said. ”If you can establish a three-product relationship with a customer, you`re likely to keep him.”
More Top Picks How To Help A Child With Adhd Finish Reading Assignments
Most small- to medium-size banks such as Sidell and Cole Taylor do not create mutual funds for customers. Rather, they contract with an outside agent, usually a brokerage service, which allows them legally to offer mutual funds managed by outside firms. These can include some of the best-known, including Putnam Cos. and Kemper Financial Services, in some cases including
”no-load” funds, which have no upfront sales fees.
The fees earned by banks come from the usual ”load” charged by a mutual fund to a new customer. Some ”no-load” funds that charge a management fee often share those fees with banks when their products are sold by them.
Customers who buy mutual-fund shares through a bank pay no more than if they had gone to a broker or the mutual-fund company directly, but they may feel more comfortable with the guidance provided by a local banker.
”That feeling of trust with a local branch manager is very strong,”
said Marshall. A survey by Liberty found that customers rank banks ahead of other institutions for providing the most secure products, he said.
In addition, bankers or their agent brokers are likely to screen the funds offered to customers.
”Most of the bankers are pretty conservative,” Marshall said.
Some of the larger banks, however, believe the best route for customers and themselves is to provide their own mutual funds, managed by their own investment staff.
Under federal law, banks are restricted from underwriting securities and therefore are restricted from underwriting mutual funds. But many, such as First Chicago, offer funds managed by the bank`s portfolio managers but underwritten by an outside investment firm. In First Chicago`s case, that firm is Dreyfus Service Corp.
”Dreyfus is the distributor of the funds,” said First Chicago`s Davies. ”Our investment managers manage the funds, and they are sold almost exclusively to our customers. We take responsibility for the performance, but legally the underwriter is Dreyfus.”
In one of the most ambitious entries by a bank into mutual funds, LaSalle National Trust plans to begin offering investors a choice of 16 of its own mutual funds in January. The funds will be managed by LaSalle Street Capital Management, an investment firm bought by LaSalle National Trust less than two years ago.
Paul Kampner, senior vice president of LaSalle National Trust, said the bank intends to launch that many funds to offer customers the benefits of diversity.
”You may put a component in international securities, and it provides people with opportunities to structure their own portfolio,” he said. LaSalle will offer five bond funds, six equity funds, four money-market funds and a balanced fund.
Boulevard Bancorp plans to launch five funds in the first quarter of 1993, said spokeswoman Karen Spillers. ”Banks have a built-in competitive advantage,” she said. ”People have a lot of trust in their bankers. . . . It`s a way for us as a bank to keep that money in the door.”
She said Boulevard anticipates increasing fee income by $500,000 to $750,000 and assets by $500 million by 1995.
Continental Bank, which left the retail banking business several years ago, nevertheless expects to launch several funds next year, mostly for institutional clients and private banking customers, said Tony Pertile, senior vice president in institutional services.
”A lot of banks want to develop their own fund families,” said First Chicago`s Davies. To mutual-fund companies, ”we are a great opportunity as well as a threat at the same time. There`s a love-hate relationship there.”
”Banks as a whole have been late to the party,” said Don Phillips, publisher of Morningstar Inc., the Chicago-based agency that rates mutual funds. The stampede by banks that offer their own mutual funds ”widens the circle of people introduced to the funds,” he said, acknowledging that banks also ”have a natural advantage in distribution.”
But bank-managed mutual funds as a rule have not been the top performers, Phillips said. ”The newcomers are going against some very sophisticated people. They are beginners in this.”