With the stock market tumbling, bank brokerages are bracing for a shift in sales from mutual funds to less volatile investments.
Most brokerage executives say they have yet to see a significant slowdown in fund sales. But given the market's 9.7% drop since its peak March 11-as well as last month's 25-basis-point increase in interest rates- brokerages are preparing for a flight to fixed annuities, money market mutual funds, certificates of deposit, and other safe havens.
"The media has made 10% a magic number," said Margaret Donahue, vice president for sales and marketing at Dreyfus Investor Services Corp., the brokerage subsidiary of Mellon Bank Corp., Pittsburgh. "If we hit that number, you could see some action."
Not only could new fund sales decline, but investors could start moving cash out of mutual funds and into other investments.
"We've definitely seen a shift out of high growth funds to more conservative funds," said Kerry Alberti, executive vice president overseeing investment services at Marine Midland Bank. "I would not be surprised to see a shift out of mutual funds."
Just as banks are emerging as significant sellers of stock mutual funds, the party is showing signs of winding down. Total returns on equity mutual funds declined 1.98% during the first quarter of 1997-the first negative result since the fourth quarter of 1994, according to Lipper Analytical Services, New York.
The first quarter was also tough on bond funds, another staple of bank- owned brokerages. The average taxable fixed-income fund lost 0.29% during the period.
As a result, brokerage and fund company executives say some bank customers, who still rank among the most conservative investors, are poised to take their assets out of funds, especially those that invest in equities. That could be a significant event for banks, since stock funds represent approximately 50% of the average bank-owned brokerage's fund sales.
"In discussions with bank clients we are seeing some people say there is a strong interest on the fixed-income side, and they are talking less about aggressive growth funds," said a spokesman for Boston's Fidelity Investments, one of the largest suppliers of mutual funds to banks.
Dime Savings Bank of New York has already seen a very clear shift from mutual funds to fixed annuities, said J. Edward Diamond, president of the brokerage there.
Mutual fund sales were up slightly in the first quarter over the fourth of last year, but fixed annuity sales were up 30%. Mr. Diamond speculated that most of the increase in fixed annuity sales came at the end of March.
Fixed annuities offer customers a guaranteed rate of return as well as a tax-deferred investment. Many investors view them as an alternative to short-term certificates of deposit.
At TCF Financial Corp., Minneapolis, insurance suppliers American Enterprise Life Insurance Co., Aegon USA and Western National Life Insurance Co., are trying to capture more investors' assets, said Mary Sipe, president of TCF Financial Insurance Agency Inc.
These companies usually introduce new annuity products two weeks after the Federal Reserve raises interest rates. But this, time they brought out higher-yielding products immediately.
"Sales have lagged for them; they didn't want to wait," she said.
So far, Ms. Sipe's customers haven't bitten the bait. TCF customers have yet to siphon money out of mutual funds and dump it into safer havens, she said.
But at Jackson National Life Insurance Co., Lansing, Mich., for instance, sales of fixed annuities through banks in March were the highest ever, up 26% over February's sales, said J. Bradley Powell, president of Jackson's financial institutions group.
"We've seen a renewed interest in fixed annuities from reps, because of customers' concerns over market volatility," Mr. Powell said.
Meanwhile, bank brokerage presidents are starting to bite their nails. If the market has to crash, they say they want it do so quickly and start back up again. Nothing worries them more than a prolonged-bull market-or a market that remains level for too long.
"If you have a correction over a prolonged period of time, that's when people get apprehensive, and might start moving their money to something more stable," said Anthony Psilos, president of the brokerage at Hibernia Corp., New Orleans. ,
Mr. Psilos said he has yet to see a switch from funds to fixed annuities or any other products. He said investors are more savvy than they get credit for, because they appear to be holding steady during the current rocky market.
"We haven't seen a panic," Mr. Psilos said.
