In Second Crack at a Banking Alliance, Dean Witter Remolding Banc One

Dean Witter Financial certainly stumbled in its first attempt to sell investment products through banks. A vaunted alliance with NationsBank Corp. collapsed in November 1994, just two years after it was launched, amid mounting legal woes and seemingly intractable cultural rifts.

But now Dean Witter is back - and this time the financial giant insists it's got a winning formula.

Dean Witter is four months into a massive drive to recast Banc One Corp.'s brokerage business in its own image. By yearend, if all goes according to plan, the Banc One employees who counsel investment customers will be plugging Dean Witter research, trading on Dean Witter systems, and selling millions of dollars' worth of Dean Witter investment products.

James F. Higgins, president of the investment unit of New York-based Dean Witter, Discover & Co., says he is convinced that, despite the NationsBank failure, the Banc One alliance will succeed.

"It was the structure that was wrong at NationsBank," Mr. Higgins said in a recent interview at his office overlooking Wall Street. But "the concept of coming in and forming strategic alliances with banks was absolutely the right thing to do."

Taking an equity stake in its partnership with NationsBank, however, wasn't the way to go, Mr. Higgins said. That feature isn't part of Dean Witter's deal with Banc One.

Instead, in exchange for a slice of sales revenues, Dean Witter is essentially hiring out the sales training, technology, and products it offers its own brokers. Control of the brokerage sales force remains in Banc One's hands.

The bank "wanted to control 100% of what was going on in their branches, and we understood," Mr. Higgins said.

David R. Meuse, executive vice president of Banc One Capital Holdings Corp., said the Columbus, Ohio-based banking company's arrangement with Dean Witter leaves no doubt about "who owns the assets or the customer" accounts. "That's the major lesson Dean Witter's learned," he said.

Mr. Higgins emphasized that Dean Witter is serious about forming many such alliances with banks. He isn't disclosing details about his profit expectations, but the NationsBank deal, when it was unveiled in October 1992, was expected to ultimately pump out $60 million a year in profits for the partners.

Right now, Mr. Higgins said, Dean Witter's focus is on ensuring a smooth transition at Banc One. But by early next year, he said, he hopes to partner up with another bank comparable in size to Banc One, which has $90.5 billion of assets. And over time, he hopes to attract as many as 25 more banks to the Dean Witter fold.

"We want to be in the business of forming alliances with banks, and growing their business," Mr. Higgins said.

Mr. Higgins said that because Dean Witter is currently upgrading its trading systems, he expects the company to be able to handle any increased sales volumes coming from banks.

The company's training program, at present, is adequate to handle additional brokers, he said."We've written the book on training," Mr. Higgins boasted. "With the exception of Merrill Lynch, we've probably trained more brokers than any other brokerage."

Dean Witter has a 9,000-person sales force, making it the third largest broker-dealer in the country, behind Merrill Lynch & Co., and Smith Barney Inc.

And, like its competitors in the world of high-volume brokerages, or wirehouses, Dean Witter has been grappling with how to attract the growing number of investors who are choosing not to visit brokers or pay up-front fees for investment advice.

"The issue turns on the fact that there is a finite amount of customers willing to walk into traditional brokerages today," said Geoffrey H. Bobroff, a mutual fund consultant based in East Greenwich, R.I. "Dean Witter and others are faced with having to go out and find more ways to attract new business."

Indeed, while brokers have long accounted for most mutual fund sales, their hold on the business is slipping, thanks largely to the booming popularity of no-load mutual funds. No-load funds, which are sold directly to consumers rather than through brokers and other middlemen, now account for 41% of all mutual fund sales, up from 34% in 1993, according to the Investment Company Institute.

Mr. Higgins said Dean Witter recognizes that "consumers and individual investors are getting their financial needs met in different venues." The company's move into banks, he said, is a response to that.

Dean Witter Chairman Philip J. Purcell wrote in the company's 1995 annual report that "other parts of the industry - such as the bank, discount broker, and no-load mutual fund segments - are experiencing rapid growth, and we must find ways to participate in these markets as well."

The Banc One deal alone will potentially let Dean Witter sell its products to as many as 22 million customers. "That's the incentive that binds us together," said Banc One's Mr. Meuse.

Right now, Mr. Meuse said, less than 10% of Banc One's customers use its brokerage services. With Dean Witter in the picture, he said, he hopes to boost that rate to as much as 40% over the course of the bank's five-year contract with the company.

And any deals that follow Banc One's will likely pump cash into Dean Witter's proprietary mutual funds, which have lost assets in spite of record inflows for the fund industry as a whole during the past 18 months.

Investors pulled more than $900 million out of Dean Witter's long-term stock and bond funds last year, and another $2.2 billion flowed out in 1994, according to Strategic Insight, a New York-based mutual fund tracking firm.

Through the end of April, the Dean Witter Funds complex had attracted $700 million, and it is on track for a mediocre year of asset gathering, said Avi Nachmany, a partner at Strategic Insight.

Mr. Nachmany said that Dean Witter's problems are endemic to the wirehouses. "Hardly any broker-dealer fund line has shown significant advancement," he asserted.

For instance, Smith Barney proprietary stock and bond mutual funds had inflows of $600 million last year, 87% below the 1993 level, according to Strategic Insight. Inflows through the end of April were on par with Dean Witter's.

"The basic observation is that a captive sales force - whether it's a mature and established one like in the wirehouses, or a new one like in the banks - is limited in its ability to reach new sources of distribution," Mr. Nachmany said.

That hasn't stopped Dean Witter from knocking on the doors of several large banks, according to sources at those institutions.

Some bank brokerage chiefs have had mixed reactions after sitting through Dean Witter's pitch and having mulled the idea of a partnership with the financial services company.

The head of one leading bank brokerage in the Northeast, who asked that his name not be disclosed, said he was concerned that Dean Witter was ultimately interested in simply swiping his customers.

Mr. Higgins, however, said that Dean Witter is determined to avoid any conflicts of interest. To do that, he said, Dean Witter is building firewalls into the recordkeeping systems used by its own brokers on the one hand and its bank clients' brokers on the other.

Also, many of the large institutions that Dean Witter is chasing now are choosing to build their own capability internally rather than bring in a brokerage partner they also regard as a competitor.

"Their whole argument is that they can do it all," said the brokerage chief at another leading bank. "But we already underwrite securities, and we have our own proprietary research. We don't need what they have to offer." The executive, who requested anonymity, said he passed on Dean Witter's proposal.

Joan S. Solotar, a stock analyst for Donaldson Lufkin & Jenrette in New York, said Dean Witter has a more compelling reason to partner with banks than just additional sales.

Dean Witter, she said, "sees a longer-term melding" of the securities industry with commercial banking. "They want to be out there first through partnerships" with banks.

On the West Coast, the head of one large bank brokerage said Dean Witter's offer was attractive, but he wouldn't say if he was seriously considering it.

"The key thing the banks have trouble doing is recordkeeping and reporting in a brokerage style," he said. "There is a lot of systems development and expense that goes into getting that capability, and many banks are trying to decide whether to build it or buy it."

Indeed, Banc One's Mr. Meuse said that was a major selling point for the banking company. Banc One brokers will be able to compete on more equal footing with the likes of Merrill Lynch and Smith Barney, which have systems and research similar to Dean Witter's own.

"We could have built the front and back office technology ourselves, but it would have taken us twice as long - and cost us considerably more," Mr. Meuse said.

This summer, Banc One brokers will begin training on Dean Witter's computer systems and research and become familiar with Dean Witter's investment offerings. By August, the banking company's brokerage back-office will transfer over to Dean Witter's clearing and execution systems.

For now, observers say, the industry is closely watching to see if Dean Witter's deal with Banc One goes smoothly. Another failure like the one with NationsBank will likely strike down any effort to sign on more banks.

Mr. Meuse said that Dean Witter "is very interested in making this work." A sanguine Mr. Higgins said he's confident that the transition at Banc One will go forward without a hitch.

"Customers want more comprehensive products and services than what they have been given" up until now, Mr. Higgins said. Banks that "embrace a strategy that says 'My customers are only going to get bank products' will lose the day."

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