As Fund Outlets, Branches Fall Short

When banks first started selling their own mutual funds a decade or so ago, their huge branch networks were seen as one of the most effective ways to reach consumers.

But years later, bankers are still struggling with how to turn their branches into effective fund distribution networks.

Branch closings, compliance problems, lagging broker compensation, and bank executives with other priorities are preventing many banks from realizing the full potential of selling funds through their branches, bankers at a conference here last week said.

"Meeting customers face to face was our advantage over Vanguard, but now we're closing branches," said Richard Harrington, who spent eight years with that mutual fund group before becoming vice president of marketing at Wells Fargo Bank. Mr. Harrington was one of several speakers at the American Banker investment products sales and marketing conference who expressed frustration over branch mutual fund sales.

Mr. Harrington said he had looked forward to using Wells' branches as a built-in distribution system. But executives at the San Francisco-based bank had other ideas for the branch system, and began closing 120 branches last year.

Wells has opened smaller branches in supermarkets as it sheds its traditional branches. But Mr. Harrington said he finds it more difficult to sell investments in the new supermarket offices.

"Can I sell a retirement plan in the produce section? I don't think so," he told the audience.

The challenge is to build a program that would enable Wells to get the customer who opened a checking account in a supermarket to meet with a financial consultant or broker, Mr. Harrington said. But that has been difficult. Wells, he explained, does not have a unified scheme for selling checking, savings, and other components of its vast product line.

"There are half a dozen marketing companies acting independently," Mr. Harrington told the audience. "There is no unified message."

Mutual fund executives at Citicorp faced a similar problem when they rolled out the CitiSelect asset allocation funds last year. Not only did they have to market the funds to consumers, but they had to sell the portfolios to other departments within the bank, said Dan Buompane, vice president of investment products.

Under Citi's old compensation system, he explained, branch managers were penalized for selling investment rather than credit products. When they introduced the CitiSelect funds last year, the bank's mutual fund executives lobbied for that system to be scrapped.

Their efforts were successful, and branch managers no longer take a hit on investment product sales. The mutual fund executives essentially "bought" the branch managers' endorsement of the CitiSelect funds, Mr. Buompane said.

In addition, the bank shifted its system so that the brokers in 85% of its branches now report to branch managers, rather than to the brokerage division.

When designing CitiSelect, the bank's executives listened, for the first time, to what their sales force had to say about the product, Mr. Buompane said. "There's a very strong institutional bias to look at data and keep things at the status quo," he said. "But the distribution channell helped us look at the data and make changes."

It was at the sales force's urging that Citibank permanently waived the up-front sales fee, or loads, on the new funds. And it was also their lobbying that convinced bank executives that the funds should be managed by outside subadvisers with proven track records, rather than by Citi alone.

"The distribution channel people said a new family of funds had to have more than a new name," Mr. Buompane said. "They had to be different from what else is sold."

The changes paid off. In the United States, the CitiSelect funds attracted close to $800 million in assets in eight months.

Jack L. Kopnisky, president of Key Investments Inc., also said competition with other lines of business makes selling funds at banks difficult. At the parent KeyCorp, investment products do battle with 26 other bank businesses for marketing dollars and support.

"We have to eliminate internal competition," Mr. Kopnisky said. "Smith Barney and Merrill Lynch laugh at us." If banks expect to compete with such heavy hitters, he said, they must make it easier for customers to invest with them.

Cleveland-based KeyCorp is showing its support for its investment business this year by dedicating the majority of its marketing budget to its mutual funds, Mr. Kopnisky said.

Big advertising budgets and supportive branch managers might help the banks sell more funds, but won't help them fend off class actions over investment sales practices, warned a lawyer currently suing some of the largest banks in the business.

"Welcome future defendants" was attorney Jonathan Alpert's greeting to the lunchtime audience of bankers. The partner at Alpert, Barker & Calcutt in Tampa, Fla., assured bankers that they will hear from him if their customers can not distinguish brokers from bank employees.

"Broker conduct is regulated. Bankers' conduct is not. Bankers have not figured that out," Mr. Alpert said.

He suggested that banks pay their brokers in branches a salary, rather than sales commission, so they are less likely to sell customers inappropriate investments.

Mr. Alpert is currently in litigation with Amsouth Bancorp., Great Western Financial Corp., and NationsBank Corp., and filed a suit against Barnett Banks Inc. last Friday.

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