WELLESLEY HILLS, Mass. - Bank of America Corp. is a complex company, and it has streamlined its fund business to appeal to investors confused by too many options but more savvy about costs, says Brian Moynihan, the president of its global wealth and investment management division.
The company's efforts to simplify its fund complex have included trimming portfolios and relying on fewer service providers. And these moves have saved it $200 million in the past 18 months - savings that have been passed along to customers, Mr. Moynihan told a meeting here this month of investment company service providers.
About two years ago, in the wake of its purchase of FleetBoston Financial Corp., Bank of America looked at its proprietary Columbia Management unit's 119 fund products and realized many overlapped.
What's more, the company relied upon two transfer agents and three service custodians, Mr. Moynihan said. So Bank of America whittled its fund list to 76 and chose just one third-party transfer agent and one third-party custodian, he said.
"We went to one provider for simplicity," Mr. Moynihan said. "We get all the scale we can."
This consolidation realized $200 million of fee savings in the past year and a half. "That is [a] significant benefit through scale," he said, "all of which goes to the investor."
Even as companies expand their businesses, such savings become crucial because investors are becoming savvier about fees and more discerning about how much they are willing to pay, he said.
President Bush's plan to reform Social Security, which called for privatization at an estimated cost to individuals of 30 basis points, may have had the effect of giving investors a reference point, he said.
"The federal government is educating Americans that if they pay more than 30 basis points they are paying too much," he said. In a climate of weak performance, fund companies cannot argue that investors are paying for stellar returns. "We can't take 200 basis points from a customer getting an 8% return," Mr. Moynihan said.
In order to compete in a growing marketplace, mutual fund complexes must simplify, he said. "We are complex," he said of his parent company, which, with $482 billion of assets under management, has the fifth-largest fund complex in the country.
This goes for products, too. In trying to sell target-date funds, for example, he said, "we cannot have a customer face 45 choices." Each salesperson in Bank of America's 5,800 branches across the country is moving among 13 to 14 products per day, he said.
The proliferation of "more and more ubiquitous" hedge funds, value-oriented exchange-traded funds, and the migration of stocks from U.S. exchanges to those in Europe and elsewhere only worsen the pressure on mutual funds.
"Low costs drive greater returns for investors," Mr. Moynihan said.
Adding to the trend toward picking just one service provider is increased scrutiny from regulators, he said. The fewer providers a fund complex relies upon, the fewer sets of rules, forms, and practices it must sift through to deliver information to regulators, he said.
This scrutiny has raised service providers' profile, agreed Nancy Wolcott, the chief operating officer at the PFPC Worldwide Inc. unit of PNC Financial Services Group Inc.
"The service provider used to be the snooze part of the [fund board] meeting," Ms. Wolcott said. But in recent years, "discussions that used to be back-office are now being held at the executive level," she said. Boards have even held their meetings in PFPC's Wilmington, Del., headquarters in order to get a see-it-for-yourself understanding of what these companies do.
A single provider also helps engender trust between the service provider and the fund company, according to Mr. Moynihan. And this relationship, in turn, fosters faith in the company by the two million individual and institutional customers at B of A's global wealth and investment management division.
"We have to provide a seamless and strong client experience," Mr. Moynihan said. "We have to integrate product design with trading [and] with the customer." Effective third parties can supply that type of experience by working closely with fund companies, he added.
"Any change is an opportunity to add value for the client," said Peter Cherecwich, an executive vice president at State Street Corp. in Boston. If service providers "can give the chief compliance officer[s] the information they need, you can be paid for that."
Mutual fund complexes are seeking products that will help them compete with other banks and other products, such as trade-by-the-minute exchange-traded funds. From an operations standpoint, this means supplying products that can efficiently execute trades while keeping down costs.
The average trade on the New York Stock Exchange has declined from about 1,000 shares in 2002 to only 300 today, but volume has grown, increasing mutual funds' trading costs. Meanwhile, investors have been trained to comparison shop for the fund with the lowest costs.
"The current product set has to be a lot more efficient," Mr. Moynihan said. Successful service providers also must possess a reliable infrastructure for back-office operations upon which a fund company can promote its product, he said.
"We lean on people to provide technology - to bring us as close to the customer as they can," he said.
Taylor Bodman, a partner at Brown Brothers Harriman & Co., who works in Boston, suggested that, though reliance on one provider may appear to be a step toward simplification, it actually increases the amount of supervision the third-party company demands. "One's duty to supervise actually increases to inform shareholders and the board, and to ensure it is best for the company," he said.
Mr. Moynihan said that Bank of America concluded it had minimized such operational risk by its analysis of the companies it works with.
