Stephens chief urges banks to embrace funds.

At 37, Warren A. Stephens presides over one of the best-known investment banking firms in the South.

Stephens Inc., Little Rock, was founded in 1933 by his uncle and father. The younger Mr. Stephens has worked at the firm since he finished college. He was named president and chief executive officer in 1986.

Banks have long been big clients of the firm, which started out as a specialist in tax-exempt municipal bonds. But about 10 years ago, Stephens Inc. cracked into a new business: providing brokerage services through banks.

Today, a sizable chunk of Stephens' business involves helping banks manage and sell mutual funds and securities.

The company serves as fund distributor to such industry giants as Wells Fargo and NationsBank. Stephens also helps scores of regional and community banks to operate full-service brokerages. And the firm recently began placing brokers in bank branches under a program dubbed "Stephens Link."

Banks are nothing new to the Stephens family. In fact, the clan owns a stake in Arkansas' venerable Worthen Bank.

In a recent interview in his elegantly furnished office, Mr. Stephens offered his views on the state of the bank mutual fund business.

Q.: How do you rate banks generally on their ability to provide investment services?

STEPHENS: On a scale of 1 to 10, I'd say in general banks are probably no more than a 4 or 5 right now. They haven't taken full advantage of the franchise they have to offer all of the services that the investment banks are offering to their customers.

I could surely show you some banks that are 10s. You've also got some that are doing zero.

Q.: What's holding them back?

STEPHENS: Every banker starts with a fear that what he's really going to do is run off his client base by making silly investments.

There's almost an evolutionary process bankers go through. To go in and say "We're going to do business this way" is crazy. We have to see where each bank is in the development of the securities business and the development of its thought processes and then tailor our services to meet their needs.

Q.: What's at stake for bankers who say, "Offering investments is not for me"?

STEPHENS: I think it's extinction. Offering investments is part of the total relationship with that customer. Customers would really rather deal with one institution, and they would rather it be a bank.

But for a local banker to think that his customers are not buying securities, either from an investment banker or even from another bank, is crazy.

They're giving their competition an opening into their main asset, which is that depositor.

If you're not providing what that customer wants, you're going to lose him. Over time, if you're not meeting their needs, I don't care if your customers are the most loyal people in the world. They're going to feel obligated to go somewhere else.

Q.: Is offering investment services a purely defensive move for most banks?

STEPHENS: When we first started, we felt it was a defensive mechanism for the banks. What they're finding is it can be a heck of a marketing tool for them as well. Some banks have found they are able to attract totally new customers to the bank. The only relationship some of these customers have is through the [bank's] brokerage.

Q.: There's now nearly as much money in mutual funds as in bank deposits. What does that say to you?

STEPHENS: It's been apparent to everybody that those lines were going to cross. What it means is that the traditional depositor has found another place to stick his money.

Disintermediation is here. Whether it has struck into every little bank, I just don't know. They just have to figure that out.

Q.: Is it just as beneficial for the bank to have control of a customer's assets in a mutual fund as in the deposit base?

STEPHENS: Yes. Look at the Worthen Bank in Conway, Ark. It's about a $220 million-asset bank, and they've got another $200 million in the investment advisory group. That's how they look at the size of their bank, and that's how they ought to look at it.

That's a real breakthrough for a bank. The bank's mentality has always been, "Well, I've got these assets."

The only thing that does give me a little bit of concern is that I worry that a lot of people have been driven [from insured deposits] by a lack of yields on checking and savings accounts.

I'm not really sure that people understand that these mutual funds can go down as well as they can go up. A 10% drop in your principal would make a 2% or 3% interest on 100% principal look pretty good. That can happen.

Q.: Are banks getting that word out?

STEPHENS: I think they are. Wells Fargo has gone to such extremes, I don't know how they sell anything. But they absolutely had to get the word out, because some people think mutual funds are insured deposits, and they are not.

Ideally you'd like to see people with a mix of deposits, mutual funds, municipal bonds, maybe some insurance variants, and government bonds.

Q.: Diversification makes sense, but how do stop bank customers from fixating on yield?

STEPHENS: We educate brokers as best we can, and we pound it into the management of securities operations that yield is great, but the idea that you've got something risk-free here is wrong.

And that's not something peculiar to banks. We see it in our own money management business, with very sophisticated people.

Q.: Some of your client banks are mentioned as likely acquirers of mutual fund companies. Do you expect a buying spree?

STEPHENS: I think it's something banks are going to want to do, though it's hard to tell how profitable it's going to be. We've looked at several mutual fund companies [on behalf of clients], and they get really pricey really quickly. It's not something you just go out and make a wild gamble on.

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