NORTHRIDGE, Calif. - Great Western Financial Corp.'s investment management unit stands just blocks from the epicenter of the 1994 earthquake that startled slumbering Los Angeles residents.
It seems an apt location for a savings bank that's shaking up the stodgy image of bank mutual funds.
Over the last decade, Great Western has built a powerful investment products arm that boasts a 320-broker network that admiring observers have likened to the best nonbank brokerages.
In that time, the savings bank has also drawn $2.8 billion into its proprietary mutual fund family, Sierra Trust Funds. That ranks the $42 billion institution 17th in retail mutual fund assets among all banks and thrifts, according to Lipper Analytical Services, Summit, N.J.
But in its aggressive grab for retail sales, Great Western has also paid a price.
Disgruntled investors, alleging that bank brokers misled them about mutual fund investment risk, have filed one lawsuit in Florida and two suits in California.
And last week, a federal district judge granted class action status to one of the California suits. Great Western, while denying any wrongdoing, also disclosed that the Securities and Exchange Commission is conducting an inquiry into the allegations raised by two of the suits.
Great Western executives are taking the latest difficulties in stride.
"When you're the size that Great Western is in this business, you are going to be subject to litigation," said Keith R. Pipes, chief financial officer for Great Western Investment Management. "You could consider it part of the cost of doing business."
While legal controversy swirls around Great Western's investment program, the bank continues to find new directions for the business. The latest step: garnering additional assets and fees by selling its proprietary products outside the bank.
"Those companies that want to be successful have to look beyond the captive customer base and really ask if they can compete in the general retail marketplace," said F. Brian Cerini, president of Great Western Investment Management.
Mr. Cerini, architect of the bank's massive move into investment products, has already chalked up an impressive string of accomplishments as chief of both the retail brokerage and the proprietary mutual fund businesses.
Its mutual fund wrap account - Sierra Asset Manager - has been a major success. The product has garnered more than $750 million in assets and commands a 4% share in the U.S. fund wrap market, according to Cerulli Associates in Boston.
For the third quarter, Sierra Asset Manager accounted for 40% of the thrift's investment product sales and shows no signs of slowing, Mr. Cerini said.
Yet as successful as the bank's retail focus has proved to be, it was borne out of necessity as much as strategic vision. As a savings bank, Great Western had no trust assets to seed proprietary funds.
And lacking trust department money managers, Great Western looked outside for investment expertise. It tapped big-name firms, including Janus Capital Corp. and J.P. Morgan Investment Management Inc., to handle the portfolio management chores as subadvisers.
That saved the expense of starting an investment unit from scratch and brought the bank into the first ranks of mutual fund management almost overnight.
"What was a negative is actually becoming a very strong positive," said Michael D. Goth, chief operating officer for Sierra Investment Advisors and leader of the group that selects outside money managers.
Some keen observers of the mutual fund business agree.
"I think they've done a fabulous job," said Geoffrey R. Bobroff, a mutual fund consultant based in East Greenwich, R.I. In choosing to go with multiple outside managers, "they were ahead of their time," he asserted.
The approach is paying dividends as Great Western pushes its products outside its own brokerage network.
"Shelf space is the $64,000 question," conceded David J. Schulman, vice president and national sales manager for the Sierra mutual funds. Breaking through the thousands of mutual funds already available requires differentiation, he said.
Among financial planning firms and regional brokerages, Mr. Schulman said the convenience of the mutual fund wrap product and the bullpen of top money managers for the individual offerings have helped garner interest.
Mr. Schulman and his team of seven institutional salesmen have succeeded in adding Great Western products to the sales lists at A.G. Edwards, Everen Securities, and Raymond James.
Now, Mr. Schulman is elbowing the Sierra funds into the crowded top rungs of the national marketplace.
Last month, Great Western snared a sales agreement with Merrill Lynch. The deal makes Merrill the largest outside sales channel for the funds.
After a national conference call introducing the funds to Merrill's sales force, Mr. Schulman's group fielded more than 200 broker inquiries. By the middle of November, orders from Merrill started coming in, he said.
Mr. Schulman said he expects outside sales of investment products to grow from almost $150 million this year to more than $250 million next year.
Besides adding needed marketing sizzle, outsourcing portfolio management also allows a bank to weather inevitable performance downturns with minimal risk to its own reputation, said Mr. Bobroff.
While outsourcing investment management and adding sales channels have been important, the bank's in-house sales force remains its greatest asset in reaching investors.
Even the in-house brokers are expected to reach beyond the bank to bring in new brokerage customers. It's not enough to just "poach off the bank's CD list," said Steve Holloway, vice president and regional sales manager for Great Western in Laguna Hills, Calif.
These aggressive retail sales aren't without their downside, as the recent class action attests.
Regardless of the outcome, said James Rockett, partner with the San Francisco law firm of Ropers, Majeski, Kohn,"I don't think this is going to be a break-the-bank kind of lawsuit."
While Great Western maintains that its investment sales practices are well within regulatory guidelines, the bank has nevertheless stepped up its investor education and disclosure efforts.
