While all financial institutions that sell mutual funds must do thorough due diligence to ensure the products they offer are sound, banks must be particularly careful, according to A. Michael Lipper, a veteran watcher of the mutual fund wars.

"Banks have a greater liability," Mr. Lipper said in an interview at a recent securities sales conference. "They have the normal distributor liability, but they also have a higher level of trust.

"It's more important for a bank than for a brokerage."

The founder of Lipper Analytical Services, Mr. Lipper told attendees of the conference sponsored by the American Bankers Association last week to closely inspect the funds they sell not only for performance risks, but for nonstatistical risks as well. These include possible changes in the sector in which a fund invests, in its portfolio management team, or in its investment concentration.

"Every problem starts with a fund doing too well and then having significant problems," he warned.

For banks, the need to rid their product menus of potential laggards is especially pressing, Mr. Lipper later added.

"A mistake in this area, and a bank can lose an entire (customer) relationship," he said. "That's a problem because the profits are not in the securities relationship. There's a double liability."

For similar reasons, Mr. Lipper warned banks to tread lightly into the 401(k) business. While they are very capable of providing investment management services to corporate clients who want to offer 401(k) retirement plans, they can fumble in administering the plans.

That could earn banks the wrath of their corporate customers, who could take all of their business elsewhere.

"Banks have to be very careful there," he said.

When it comes to selling mutual funds, there is nothing to stop banks from becoming expert practitioners of the due diligence process, Mr. Lipper said.

"It's a function of what's the experience of the individual doing due diligence," he said. "If a bank took someone out of Merrill Lynch, when that person crosses the street to go to a bank, they still do a good job.

"When you have someone without a lot of investment experience, it's more difficult," Mr. Lipper added. "But it can be done. You don't have to have experienced the bubonic plague in order to be concerned with health issues."

Elaborating on some of the information to look for during the due diligence process, Mr. Lipper said brokerages often need to ask questions that go beyond what is covered in a prospectus.

When it comes to portfolio manager risk, for example, sales managers need to learn what plans a fund company has in place to protect itself in case of defection.

He pointed out that in some cases, a manager is not what adds value to a fund.

"The value could be in the person who selected the manager," Mr. Lipper said. "It could be the president of the fund group who consistently comes up with good managers." Or, in some cases, a fund's analyst is more important to its performance that its manager.

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