Consultant: Confused Banks Push Others' Money Funds

Banks are allowing billions of dollars of money market mutual fund assets to slip into the hands of their nonbank competitors.

So say mutual fund administrators and others who help bank companies audit their various departments that invest client funds in money markets.

According to these fund servicers, many banks aren't pushing proprietary money funds to their customers. Instead they're selling outsiders' products, forfeiting management fees in the process.

At a time when banks are working to build their presence in the mutual fund industry, this practice of squandering an easy opportunity just to garner short-term mutual fund assets galls several observers.

"Banks are crazy to use someone else's product instead of their own," said Robert Melley, senior vice president at Integrity Investments Inc., Sarasota, a niche provider of products and services to bank trust departments.

According to Kenneth R. Hoffman, president of Optima Group, Fairfield, Conn., a mutual fund consulting firm, many banks are unaware - until they do an internal audit - that their brokerages are selling a high volume of outside money market funds, particularly in treasury management units.

Traditionally, banks have been a large presence in the money market fund world, managing $165.5 billion of money market assets, out of a total $962.5 billion as of March 31, according to Lipper Analytical Services, Summit, N.J., and the Investment Company Institute, Washington.

But the banking industry's lost opportunity presents plenty of opportunity for Mr. Melley's firm.

Integrity Investments helps banks identify money invested in third-party funds that are comparable to the bank's proprietary funds. Once a bank is committed to converting money to its own funds, the four-year-old company assists with the audit.

The company also helps the bank send letters to its institutional clients offering three options: the bank's funds, Integrity's three Valiant money funds, or nonbank money market funds. The first two options come free of fees.

Every bank that Integrity has worked with has converted money to its own funds, said Richard Curcio, Integrity's president. Integrity has captured 7% to 15% of the converted money, he said.

But persuading banks to look internally for assets they have invested in outside mutual funds is often more challenging than persuading the clients to move their money, said Mr. Hoffman at Optima.

"It is generally part of a larger relationship with a customer, and bankers think they will upset the relationship" if they tell the customer to shift money into the bank's funds, he said.

The battle to get banks to convert funds is also a turf issue. "If they are not compensated, why should they care," is the attitude he frequently encounters at banks, Mr. Hoffman said.

Indeed, bank mutual fund executives often have trouble getting all departments on board to sell the bank's own products, said Barbara Worthen, executive vice president of legal services at First Data Investor Services Group.

"There are a number of opportunities in banks' own customer bases that are underutilized," she said. To remedy that problem, Ms. Worthen said she tries to get the head of the investment division together with the head of the other departments that could, but do not, use the bank's products.

"The magic word is cross-selling," Ms. Worthen said. "Many banks are getting smart enough to get corporate checking sweep accounts." A sweep account invests corporate checking account's end of the day balance in the bank's proprietary money market mutual funds.

Indeed, bankers are often surprised when they see how much money is in third-party money market funds, the observers said.

"It's very rare in our experience where a bank has 100% of money in its own (money market) funds," said Integrity's Mr. Curcio. "In fact, we've never found that."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER