Banks urged to perform more fund functions.

Two mutual fund gurus gave bankers a prescription for sucess last week. But for some, the medicine may be hard to swallow.

To succeed in the mutual fund business, banks should take charge of more fund running functions, said A. Michael Lipper, president of Lipper Analytical Services Inc.

Banks can act as their own funds' adviser, administrator, custodian, issuer. marketer, packager, securitizer, transfer agent, and underwriter.

But when Mr. Lipper asked bankers at the American Banker Bank Mutual Fund Conference to raise their hands if their bank performs all nine functions, there was one lone arm in the air.

Just a Handful

Most banks perform fewer than five of these functions for their fund families,-based on results of the straw poll.

Similarly, research by Mr. Lipper's firm found that there are 1,121 funds advised by banks for bank distribution. Banks market 502 proprietary retail funds - a little more than half of the funds they advise. Yet only 33 banks act as administrator for their own funds.

Mr. Lipper. whose Denver-based company tracks the mutual fund industry, warned that "those that are going to succeed in the fund business need to do at least five" of these functions.

More Bitter Pills

Mr. Lipper wasn't the only one espousing unpopular advice. The Investment Company Institute's president, Matthew P. Fink, also gave bankers some bitter pills to swallow.

"I don't believe the fund industry will have completely smooth sailing," said the chief of the mutual fund industry's trade association.

"While the long-term trend is likely to be positive, there will definitely be downsides," he said.

Congressional Scrutiny

Banks should heed the example of the thrift industry when it comes to legislation governing their mutual fund business, Mr. Fink cautioned.

Economic problems in an industry often lead to increased congressional scrutiny, which often leads to legislation, he said.

Since even in boom times banks are on Washington's "radar screen," the level of congressional surveillance is likely to be enhanced in the bank mutual fund business, he predicted.

"The best solution would be legislation now in a noncrisis atmosphere," Mr. Fink said. Laws governing the mutual funds should give banks full rights within the industry and close regulatory gaps, he said.

Unfortunately, he said, "there is not a good likelihood of legislation anytime soon."

Legislation could serve to increase investor confidence, which Mr. Fink views as a key ingredient for success, along with public acceptance of mutual funds.

Steps to Take

Mr. Fink also prescribed some rules of thumb for banks playing the mutual fund game.

"Emphasize advanced planning, avoid misleading [fund] names, develop a code of conduct for employees involved in sales and marketing, and actively supervise employees involved in sales efforts," he said.

Mr. Lipper advised that boards of directors for banks' proprietary funds should "keep the interests of fund holders paramount." At times, that may put them in conflict with the bank.

Although the mutual fund industry is booming, banks are not reaping huge rewards, Mr. Lipper said. "Almost none of you have true economic profits," he told bankers. Most banks are also subsidizing their new funds, he noted.

Indeed, the fund business will never be as profitable for banks as some traditional lines of business like lending, agreed Debra McGinty-Poteet, senior vice president and director of Bank of America.

It's not all gloom and doom, however.

Mr. Lipper told bankers that the fund business is giving them valuable lessons in how to sell.

"In the long run," he said, "it is this sales knowledge that is going to provide the biggest bottom-line return."

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