Banks may be fumbling an opportunity to cash in on investor demand for mutual funds because they are resisting a popular and profitable new way of selling them.

Mutual fund wrap accounts, in which investors pay an annual fee in place of up-front commissions, attracted $20 billion in sales last year, up 15% from 1997, according to Strategic Insight, a New York research firm. Industry watchers say wrap accounts may bring in one-quarter of all mutual fund sales within five years.

But banks have been slower than nonbank brokerages to seize this sales opportunity. By the beginning of last year, they had gathered just one- tenth of the wrap account assets that nonbank brokerages had and one-third as much as independent financial planners.

A recent survey of 56 banks of all sizes found that half do not even offer wrap accounts. And those that do, the study found, often have outdated compensation systems that discourage their sales forces from promoting them.

Behind banks' resistance to wrap accounts is their preoccupation with short-term profits, experts say.

"Fear of income loss is holding banks back," said Kenneth Kehrer, a consultant who did the survey early this year.

Here's how it works: Under the traditional sales arrangement, investors pay a one-time, up-front sales charge of 3.5% or 4% of the amount they invest in a mutual fund. Those who opt for wrap accounts, on the other hand, pay fees at a lower rate-1% or 1.5% of their total mutual fund assets each year.

Wrap accounts mean sacrificing some short-term income. But over several years they generate larger profits.

"It's basically: 'Make your money slowly but make more over the long term,'" said Andrew Guillette, a consultant at Cerulli Associates in Boston.

Securities firms like Merrill Lynch & Co., Salomon Smith Barney, and LPL Financial, which banks see as major competitors for mutual fund sales, are shifting to the wrap approach.

"That the major wire house firms have made the wrap accounts a priority is definitely a sign that they think this is one of the ways business will be done in the future," said Tom Tyson, an analyst at Financial Research Corp. in Boston.

As Merrill Lynch moves toward a wrap model, just 10% of its revenue comes from brokerage commissions from funds that carry a traditional up- front sales charge, the Kehrer report said. Sixty percent of Salomon Smith Barney's 10,500 brokers have sold at least one fee-based wrap account. And LPL Financial, the largest wholesale broker-dealer serving independent financial planners, is pushing for wrap business.

Another important category of wrap account providers is so-called third- party sponsors, businesses that offer turnkey wrap programs to be offered through banks or brokers.

But banks should look at changing to a wrap fee approach not just as a defensive measure but as a way to gather all of a client's investment dollars under their roof, Mr. Kehrer said.

Wrap accounts are typically built around "asset allocation" programs, which offer a broad, coherent investment strategy and brokerage services, all overseen by a single adviser.

"Banks have been nibbling at the customer's wallet," Mr. Kehrer said. "This is an opportunity to get their hands around all the customer's money."

If banks are reluctant to tinker with their investment sales formula, maybe it's because that approach has been so profitable. Bank investment programs generate a hefty 32% profit margin by focusing on front-load mutual funds and annuities.

Sensing a shift in investor preference toward wrap accounts, however, some banks are structuring pay systems to encourage their sales forces to talk them up to clients.

Union Bank of California's retail brokerage plans to subsidize its sales representatives' fees so the reps earn as much for selling funds through wrap accounts.

"In their mind, it will put the product at a more even level with other products," said Richard W. Smiley, president of the brokerage unit.

Riggs National Corp., which launched a broker-dealer unit in January, plans to pay sales reps a high base salary and similar payouts whether they sell funds in wrap accounts or not.

"If you make the compensation equal, brokers will sell what is best for the customer," said James R. Eads, president of the brokerage.

Banks with newer investment sales programs, like Riggs, may be more willing to jump into the wrap fee business model because they have less to lose than larger banks with established investment sales programs.

The Kehrer report, commissioned by Alliance Capital, found the biggest dearth of wrap accounts in regional banks, with just 29% of those surveyed offering wraps.

Those banks, with $7 billion to $25 billion of assets, have apparently balked at the short-term revenue dip a shift to the wrap approach would entail, Mr. Kehrer said.

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