Brokerage affiliates of big banks are demanding and getting the kind of revenue-sharing arrangements that major brokerage firms have long enjoyed.
Increasingly, fund companies are cutting in bank brokerages on the fees that investors pay them to pick stocks and provide a range of services.
The payments can be significant: Banks stand to get as much as 0.5% of the amount invested through these fees, industry experts say. For the elite banks that sell upward of $1 billion of mutual funds per year, that could translate into another $5 million in fee income.
The revenue-sharing trend, which has intensified in the past two years, is another sign that banks are becoming a force to contend with in the business of selling mutual funds.
Big banks have clout with fund providers because "they have finally, over time, established themselves as a significant distribution channel for a number of funds," said Dennis Gallant, a consultant at Cerulli Associates, Boston.
Industry experts mentioned BankAmerica Corp., NationsBank Corp., and Citicorp as banking companies whose brokerage units have forged revenue- sharing deals with unaffiliated fund companies.
These incentives exist above and beyond the perquisites that fund companies have traditionally offered banks and other third-party distributors-everything from marketing pamphlets to new computers to conferences in idyllic spots. These inducements are paid for through marketing fees, known as 12b-1 fees, which are typically around 0.25% of assets.
Bank of America spokesman John Houseman said: "Depending on our arrangements with a mutual fund company, we may receive additional fees beyond the 12b-1 fees, but those are only fees allowed by regulations."
Fund companies and banks avoid discussing the topic in detail because they fear that if the word gets out more banks will clamor for better, sweeter deals.
"The problem is, the demands for money have gotten higher than what the 12b-1 fees are," said a bank brokerage veteran who spoke on condition of anonymity.
So fund companies are being forced to ante up more if they want to get top treatment at the banks with the most distribution muscle.
Banks account for 14% of the sales of third-party funds, compared with almost 30% each for nonbank broker-dealers and wire houses, according to Cerulli Associates.
Further fueling the competition among mutual fund companies that sell through banks is the fact that market share is being consolidated as banks merge.
"The raw economics of the business is that probably 60 banks account for 56% of the mutual fund business that banks do," said Kenneth Kehrer, a consultant in Princeton, N.J. "If you're in those banks it's very important to hold onto them. If you're not in them it's very important to get into them."
And banks in recent years have gone with trimmed-down lists of mutual fund providers.
"Shelf space and distribution is the name of the game," said Michael Vessels, a senior vice president at AIM. "And once you get it you've got to stay on the list."
But Mr. Vessels said AIM does not provide any special new incentives aside from the traditional marketing fees.
Banks are sometimes blunt in their demands for special deals, said a mutual fund bank channel head who asked not to be identified.
"Some banks come and say, 'This is how much you have to pay to get on our list,' and we've turned some down," the executive said.
Discount brokerages that offer fund supermarkets and reach a nationwide customer base have led the way in negotiating more favorable deals from fund companies, and banks are following their example, said Liat Rorer, a senior consultant at Spectrem Group, San Francisco.
"Schwab or Fidelity has a whole department of people who manage relationships with all the fund companies, and that's all they do," Ms. Rorer said. "Banks are trying to compete by sophisticated negotiating. They're saying, 'I can bring you a big asset stream.'"
But William Hawkins, president of H.F. Ahmanson & Co.'s broker-dealer and president of the Bank Securities Association, said most banks are likely to be more interested in a high level of service than in financial incentives.
"Certainly incentives will play some role," he said. "But I think banks are looking for other kinds of things, like marketing, advertising, training materials, and seminar support. Those organizations that can do that are going to get the shelf space."
Maryann Bruce, the head of OppenheimerFunds' bank distribution business, said winners in the A-list scramble will be those that combine incentives and good service.
"Do we have financial support we provide to our largest distributors? Yes." she said. "But it's just one factor."
