Banks offering their own mutual funds outstrip the rest of the funds industry when it comes to waiving advisory and administration fees.
The bank funds waive fees for customers an average of 75% of the time, versus 40% for the rest of the industry, according to data compiled by Lipper Analytical Services for American Banker.
Banks lead in fee waiving "because they are newest to the party," said Geoff Bobroff, a senior vice president at Lipper.
Quick Launches
Banks have rushed to join the mutual fund business by launching complete fund families over a short period of time instead of growing them gradually, Mr. Bobroff said.
Eager to expand each fund to the size that allows it to break even, banks have been quick to waive fees to make the funds more attractive to investors.
"The fact of the matter is that they have to do it," said Rolland Johannsen, a senior partner with Furash & Co., Washington. "If they don't, the yield and the return are not going to be competitive."
After more bank funds start reaching break-even size - $100 million in assets, by many estimates - the number of funds with waivers should come in line with the rest of the industry, Mr. Johannsen said.
On Track to Profitability
If the asset growth of bank funds continues at the current pace, funds will hit those marks and become very profitable, Mr. Bobroff said.
Another factor that could spur banks to turn away from waivers would be passage of a measure allowing tax-free conversion of trust assets.
That measure, stalled in Washington for now, would allow banks to take existing common trust money and move it into mutual funds to achieve a profitable size. As it stands, shifting those would result in big tax bites for consumers.
Lipper Analytical examined fees for advisory work, transfer agency, custodian, and fund accounting, as well as fees paid to brokers.
Taking the Plunge
For banks, the biggest question may be whether they should be in proprietary funds in the first place.
If a bank can't confidently predict that its funds will grow to the break-even point in a few years by vigorous marketing and conversion of trust assets, perhaps it should stick to selling others' funds, Mr. Johannsen said.
With so many new bank proprietary families, more banks will soon face the question of whether they can make the grade in asset size. At that point, Mr. Bobroff expects that many bank decision-makers will have to explain when the anticipated projected profits will show up - if at all.
Mr. Johannsen expects waivers and the break-even asset size will grow in importance over the next few years.
Load Fees Will Drop
"As load charges diminish, the real money is going to be made on managing money," Mr. Johannsen said. "You can't just make money on distribution anymore because of the sales pressures."
Extending waivers beyond a few years will be additionally painful as those loads continue to drop, Mr. Johannsen said.
And management of funds is not equally rewarded with the different types of funds. Money market funds, which make up a whopping 70% of bank fund assets but only 40% of the rest of the industry's assets, offer slim fees compared with equity and bond funds. The equity and bond funds are more lucrative and can bolster profits, Mr. Bobroff said.
The recent growth in equity funds is a positive sign for banks, Mr. Bobroff said.
Doubling of Equity Assets
Ten years ago, only 10% of bank assets were in equity funds. That has doubled to 20% today. And, on average banks are levying 25 basis points to manage such funds, while the industry as a whole is levying 40 basis points.
Only when funds start hitting the critical mass will banks will start to reach for the full potential of those fees, Mr. Bobroff predicts.
While banks may be more likely to waive management fees, when they charge them they mirror the industry as a whole.
And since 1988, there has not been much difference or movement between the total expense ratios for bank versus nonbank funds.
Once a fund gets to size, expense ratios prove fairly stable, Mr. Bobroff said.
