In November, when U.S. Bancorp started melding its investment sales force with that of Piper Jaffray Cos., its newly acquired brokerage, mutual fund companies were forced to make a decision.
Would they send their bank emissaries to deal with the combined sales entity, or would they use those wholesalers who had handled nonbank brokerages?
Whichever strategy the fund companies used, their decisions marked a pivotal moment.
As mergers and acquisitions blur the line between banks and brokerages, mutual fund companies are being forced to become more flexible and attentive in catering to the powerful new sales entities.
That means making their top executives more available, paying more to ensure favored treatment, and changing their wholesaling approach.
The merger trend "is really going to cause the fund companies to rethink their distribution strategies," said James Overholt, a consultant at Milliman & Robertson Inc., Chicago, and the former head of Great Western Financial Corp.'s brokerage unit.
Actually, it already has. It has prompted some fund companies to break down the walls that have historically separated the wholesalers who handle banks from those who call on nonbank brokerages.
Wholesalers are the fund companies' point of contact with brokerages. They build relationships with product managers and other key decision makers, often over lunches or on the golf course. And they give sales training and sales ideas to brokers-for example, how to use the new Roth IRA to garner more sales.
Federated Investors, for example, is handing the U.S. Bancorp Piper Jaffray accounts to its wholesalers who had brought in the most revenue, regardless of the distribution channel those wholesalers came from. Van Kampen American Capital is taking the same approach.
AIM Management Group and Fidelity Investments, meanwhile, decided to use their brokerage wholesalers to cover the Piper account. Putnam Investments is continuing to use "cross-channel" wholesalers, a category it has long used to cover both banks and brokerages in less densely populated regions.
The companies all said that they will handle other combined banks and brokerages on a case-by-case basis, depending on whether they follow U.S. Bancorp's lead in merging their investment sales forces.
"You can't use a cookie-cutter approach," said William O'Grady, national sales manager for Fidelity Investments.
That's true because the distribution entities being formed through mergers are so diverse. BankAmerica Corp., for instance, has a huge in- house sales force of some 1,000 brokers thanks to its merger with NationsBank Corp.
Citigroup, meanwhile, has numerous investment sales arms, including an in-house retail brokerage, a major independent brokerage in Salomon Smith Barney, and a door-to-door sales force in Primerica Financial Services.
The fund companies indicated they will take their cues from the banks, rather than imposing a wholesaling system on them.
"We have talked about it, and we've decided to be flexible according to our clients' needs," said David Edlin, the head of bank distribution at Putnam Investments.
It's too early to say how many banks will follow U.S. Bancorp's lead, but it's clear that the merged companies' expanded sales clout is already gaining them extra attention from fund companies.
For example, one large fund company recently agreed to have its bank wholesalers handle the independent brokerage subsidiaries at two banks.
The banks wanted that arrangement because it meant their independent brokerage units would get the greater amount of training usually reserved for bank brokers, said an executive at the fund company who asked not to be identified.
The integration of the U.S. Bancorp and Piper Jaffray sales forces has affected a few dozen wholesalers at most. But fund company executives acknowledge that the shifting of duties may cause anxiety among their wholesalers.
After all, if wholesalers cover fewer banks and brokerages, they could stand to earn less money.
"There's no doubt about the fact that there is some tension" caused when wholesalers' duties are changed, said Fidelity's Mr. O'Grady.
The fund companies said that layoffs are unlikely, however. Wholesalers who lose an account with one bank, for example, are usually given more duties at other banks. But that may necessitate their relocating, which the wholesalers may or may not be willing to do.
The convergence of banks and brokerages is not only prompting fund companies to change their wholesaling approach, but it also is motivating their high-level executives to dote more on their counterparts at the banks, industry observers said.
"The more senior personnel at the fund manufacturers will play a more active role with the distributors," said Andrew Guillette, a consultant at Cerulli Associates, a Boston-based research and consulting firm. "You might see the president of the mutual fund company's sales arm visit the head of distribution more often."
Indeed, Fidelity in July announced it would assemble a team of high- level executives to deal at the corporate level with financial services conglomerates like Citigroup, which encompasses banking, brokerage, and insurance companies.
A number of other fund companies are following suit, working to convince VIPs at companies like Citigroup, U.S. Bancorp, and BankAmerica that they can help the companies nail their strategic goals.
All this extra attention is critical for fund companies that hope to win and keep their places on the preferred-provider lists of the banks and their independent brokerages.
Even if they don't merge their sales forces, the combined institutions are likely to adopt identical lists of fund providers whose products will receive preferential sales treatment and whose wholesalers will be given free access to the sales reps.
Some of those lists are proving to be very short-and thus very competitive. For example, two Citigroup units, Citicorp Investment Services and Primerica Financial Services, are expected to tap just half a dozen companies for their A-list. That is far shorter than the typical dozen providers.
As fund companies position themselves as the big distributors' partners, they can count on paying more to play more. Though exact numbers are hard to come by, the distributors are demanding and getting more lucrative revenue-sharing arrangements with the fund companies, industry experts say.
Fund companies routinely pay tens of thousands of dollars a year just to be invited to conferences that banks and brokerages hold for their sales forces. Technically the money goes toward underwriting the meetings, but in reality it is widely known to help secure a place on these sales companies' preferred-provider lists.
The distributors' muscle may eventually prompt fund companies to try to sidestep them, for instance by selling directly over the Internet, Mr. Overholt said.
Failing that, the fund companies will have to scramble to stay in the good graces of the banks and brokerages, whether that means providing more training, kicking in more money in revenue-sharing deals, or making their top executives more available.
"You've got to figure out ways to be more valuable to the big distribution companies," Mr. Overholt said.