Many Banks Have Started Managing Portfolios

Reports of the banking industry’s death have been greatly exaggerated, as representatives of mainstream mutual fund companies will quickly tell you.

After a slow start, many banks have jumped into the fund business in a big way as investment advisers, buying and selling stocks and bonds for the funds they run and earning lucrative management fees in the process. Other depositary institutions profit by helping to market mutual funds managed by other companies. Both avenues give banks access to a steady stream of income at a time when their traditional operations may be struggling.

It’s now nearly as easy to buy a mutual fund through a bank as it is to open a savings account, and some industry observers predict that this marketing avenue will only continue to grow. “I believe the banking industry will be the dominant retail channel for mutual funds by the year 2000,” says Peter M. Delehanty, marketing manager for the Composite group of mutual funds, which are owned by Washington Mutual Savings Bank of Seattle.

As it is, bank-managed funds have captured 8.5% of mutual fund assets, according to Lipper Analytical Services, up from 4.1% in 1985. Some 93 banks either manage or administer funds, Lipper reports.

Should you buy a fund through a bank? In some ways, the approach makes sense.

For instance, if you have already opened a checking or savings account or have taken out a loan at a local branch, you might want to purchase a fund through the same bank to keep your financial affairs under one roof. In some cases, a bank is a customer’s main financial contact--a big marketing advantage for the institution. “It’s almost like having a captive audience,” says Joseph F. Kissel, president of Concord Distribution Cos., a New York firm that provides various services for bank-run funds.

The fact that a bank might have dozens if not hundreds of branches undoubtedly appeals to investors who value convenience and in-person contact. “How many mutual fund companies can say they have 100 or more places to invest?” Kissel asks.

In fact, the elements of trust and face-to-face service help explain why people buy mutual funds at a bank. “It’s a different type of customer who buys through a bank,” Delehanty says. “This person wants to talk (to a fund marketing representative) one-on-one and generally isn’t very sophisticated financially.” Bank-affiliated funds often carry loads, just like products sold through brokerages.

Yet, however safe and secure you might feel with your bank, it’s important to realize that no mutual fund, including those offered by banks, carry federal deposit insurance. That goes for money market funds, too. In other words, there are no guarantees against loss on bank-affiliated portfolios.

This safety issue is one that confuses some people, says Carol Boltz, a director of the brokerage subsidiary of Crestar Financial Corp., a bank holding company based in Richmond, Va. “This is an area that can be clouded by a bank that wished to do so.”

Of course, bank mutual funds are sold with the same disclosures as other funds, including a prospectus, and the vast majority of sales reps undoubtedly don’t try to mislead the public. “Banks enjoy instant credibility, trust and confidence,” Kissel says. “It would be foolish for them to mess with that.” Even so, the fact that insured accounts are marketed under the same roof could cause some people to reach the wrong conclusion.

If you can’t get any extra guarantees with bank mutual funds, can you expect better performance? Not necessarily. Those banks that serve as investment advisers to a fund can tap the stock- or bond-picking expertise of their trust departments, but there’s little evidence to suggest that banks do a better or worse job than other money managers.

Performance numbers compiled by Lipper Analytical Services indicate that banks are doing better than average in many investment categories. However, the survey includes a relatively small number of bank-run funds with track records that date as far back as 1985.

In short, you should investigate a bank-run fund as you would any other--focusing on the management team, past performance, the investment objective, expenses and other factors.

Even if you buy a mutual fund through a banking institution, you might not get a portfolio managed by that company. Several independent marketing outfits have set up shop in the lobbies of certain banks and savings and loans, offering a variety of funds and insurance products that aren’t directly linked to the depositary institution.

PAMCO Securities & Insurance Services, based in Encino, is one such firm that helps banks and thrifts, including many smaller ones, get a slice of the mutual fund pie at a minimal cost. In essence, PAMCO offers a turnkey marketing operation: It supplies a broker licensed for selling mutual funds, and the banking institution supplies a desk, phone and space in the branch lobby for that person to work. The two parties share the commissions.

PAMCO’s reps market a variety of funds, mostly bond portfolios, as well as annuities and other types of insurance. The company offers a choice of commission-generated products managed by fund groups such as Alliance, Franklin and Dreyfus.

Banks On a Roll

For decades, banks have been active in the investment business, running trusts and private accounts for wealthy individuals, pension plans and the like. In recent years, they have also entered the mutual fund business in force. According to Lipper Analytical Services, 93 banks serve as either investment advisers or administrators for funds. Their mutual fund assets under management and market share have expanded steadily since the mid-1980s.

Year Assets Under Management Market Share 1985 $20 billion 4.1% 1989 $65 billion 6.5% 1990 $88 billion 8.3% 1991 $101 billion 8.5% (1st Quarter)