Two years ago, mutual fund executives saw commercial banks as thriving sales outlets for their products.

Today, many of those executives are scratching their heads, trying to understand why banks haven't lived up to their advance billing.

"We have not returned to the high-water marks we set a couple of years ago," said Henry Schulthesz, national accounts manager at Kemper Financial Services.

In a round of interviews, executives with some of the largest nonbank mutual fund firms expressed a host of concerns about the bank retail distribution channel, including the belief that many banks wavered in their commitment to selling funds when the markets headed south last year.

Their remarks come on the heels of a survey by Cerulli Associates, a Boston consulting firm, that showed banks had lost ground in the mutual fund business at the end of 1994 after brisk sales in 1993.

Two years ago, banks contributed 14% to the sales of funds, but that dropped off to as low as 11%, at the end of 1994, according to Kurt Cerulli, president. Mr. Cerulli said he did not have more recent data, but he didn't think that market share was improving much.

Many fund companies that sell their funds through brokers - including Putnam Investments, Franklin-Templeton Group, and Kemper Financial Services - saw as much as 30% to 35% of their sales go through banks two years ago. But that has dropped off, Mr. Cerulli said.

Mutual fund executives argue that the fall-off is due to the banks' willingness to promote more conservative investments, such as fixed annuities, as the stock and bond markets showed poor performance in 1994.

Kemper's Mr. Schulthesz should know. For example, in April, only 15% of Kemper's mutual fund sales came from commercial banks. While that was marginally better than the second half of last year, it's "nowhere near" the 34% Kemper achieved in 1992 or the 26% in 1993, Mr. Schulthesz complained.

"We believe that banks should be a higher percentage than they already are," Mr. Schulthesz said.

Oppenheimer said it saw 20% of its sales through banks, but now that level is 15%.

Putnam remains the leader with 20% of its sales coming from banks, but even that is a drop, according to Mr. Cerulli.

The chief complaint from executives is that in the recent down market for both stock and bond funds, banks abandoned mutual funds too quickly, choosing to offer investments that guaranteed returns such as fixed annuities.

They also complain that bank efforts to tap their own customer bases are dismal, reaching no more than 1%.

At the same time, fund executives tipped their hats to funds managed by banks, which snared a lot of their investors, they said.

Despite the disappointments presented by the bank channel, fund executives are hardly throwing in the towel. For one thing, fund executives would agree that bank retail divisions, being relatively new to the brokerage business, have plenty of room for improvement. And many said the declines don't signify that much lost ground.

Still, the fall-off in bank business in recent years can't be ignored.

Maryann Bruce, director, financial institutions, at Oppenheimer Funds, said sales this year were "a little lower" than even last year. "We're still devoted to banks, but they are a little disappointing because, the volumes are down," she said.

Two years ago, Oppenheimer saw 20% of its sales through banks, but they contributed only 15% at the end of 1994 and dropped down to 10% for the first couple of months of 1995. Ms. Bruce added banks contributed 15% to May's sales so far.

Last year's drive toward fixed annuities, disappointed Ms. Bruce. "If last year taught me anything, it's the bank channel is very cyclical," she said. "In good markets it will do very well. In bad markets it will offer more guaranteed products like fixed annuities," she said.

Putnam's director of financial institutions, Lou Tasiopoulos, insisted banks are improving efforts to look at the long-term needs of customers. But he acknowledged it probably wasn't enough.

Mutual funds recently became popular again because interest rates have leveled off, making certificates of deposit and fixed annuities less desirable for the moment.

"I'm concerned that part of the decision (to invest in mutual funds) is based on overall return of one vehicle over another. For the banks to reach the pinnacle of being a financial adviser, they need to make more of a planning approach than a transaction-oriented one," he said.

But despite sluggish sales through banks, mutual fund companies continue to make a lot of money in that channel, and some players are gaining ground against their competitors.

Banks contributed 17%, or $800 million, to sales at AIM in 1994, when three years ago penetration was "rather marginal," said the national sales manager, Michael Vessels.

American Capital Family of Funds, Houston, which has no dedicated wholesalers or telemarketers through the bank channel, still raised $700 million of assets last year, said Mr. Cerulli.

Even though Putnam saw its sales drop from its 1993 level of $6 billion, it still raked in $3.6 billion in 1994.

"It's not bad money rolling in if you look at the top 12 or so firms," said Mr. Cerulli, the Boston consultant.

But mutual fund executives say they can do better, and insist they will get bank contribution up to at least 20% in a few years.

Still, many mutual fund executives remain unconvinced.

Lawrence Kash, Dreyfus Corp.'s vice chairman, called the bank distribution channel "overrated." He said bank retail programs, including that of his parent company, Mellon Bank Corp., are too small to have much impact on a large fund company's bottom line.

Dreyfus manages $70 billion in fund assets, one of the biggest fund company's in the country.

"If Mellon was three times as successful as the next bank, and all it sold was Dreyfus funds, Mellon's sales would be insignificant for us," said Mr. Kash.

Mr. Kash also groused that "banks tend to hire lightly trained sales reps."

Some fund executives said that banks, as a way of giving a broker an incentive to keep customers invested in mutual funds over the long haul, should offer brokers a piece of assets under management.

"Sales practices at financial institutions will not change until the reps are paid a percentage of assets under management year over year," said Kemper's Mr. Schulthesz. "You simply won't get them to behave like asset gatherers instead of transaction-oriented brokers."

Oppenheimer's Ms. Bruce said many banks have got to offer more than just conservative investments such as fixed annuities during bad times.

"That's not commitment to the long term. There needs to be more of a commitment on bank management to have a more diversified program not to just take the path of least resistance," she said.

In response, many mutual fund companies are focusing more attention to trust departments. They are offering new wrap account programs, a product that has gained in popularity in trusts.

"We see firms who have been successful in the retail channel trying to go into the trust and institutional side of the banks, so they are not dependent on the retail side," Mr. Cerulli said.

All that said, mutual fund companies said it's way too early to shy away from banks.

Mr. Schulthesz characterized banks as "six-foot-tall three-year-olds - behemoth organizations with many branch outlets that are in their infancy of brokerage."

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