The first part of this article, which is excerpted from a speech Ms. Clark delivered to an American Banker conference, appeared on May 13.

Many analysts attribute mutual funds' phenomenal growth over the last few years to low interest rates. While interest rates are a big part of the story, another major contributing factor to mutual funds' growth is the participation of banks in this industry.

For banks that want to get into this business, there are three different distribution channels, which very by degree of bank resource involvement and potential profitability.

The Third-Party Route

By going through one of all three of these distribution channels, banks are becoming major players and competitoris in this industry.

The easiest and most common way to enter the business is through a third party. An independent vendor will arrange to lease space and sell funds to your customers, using their own salespeople or specially trained bank employees.

While compensation arrangements vary substantially, most banks earn leasing income as well as commissions based on the funds sold through the thrid-party firm.

Proprietary funds represent the most direct way for a bank to get involved in the mutual fund industry. This option requires the greatest commitment of resources yet offers the greatest potential for revenue. Proprietary funds are usually managed and advised by the bank itself and often have a bank-related name.

Bonanza in Fees

Each service provided by the bank to the fund generates a fee, which is why this option is potentially the most profitable. Over the last decades, bank regulators and the courts have permitted banks to engage in most activities related to mutual fund operations.

In general, the only mutual fund activity banks are still prohibited from undertaking is the underwritting and distributing of the mutual fund's shares because that would violate the Glass-Steagall Act.

Private-label funds are sort of a hybrid of the other two -- the fund typically has a bank-related name but is operated independently by a third party.

The advantage of a private-label fund is the bank association via the fund name without the resource expenditure that goes into running a proprietary fund.

Survey Results

Hard data on the extent of bank involvement are lacking, but several surveys and studies have been done. Some results:

* The American Bankers Association etimates that one-third of all banks (about 3,500) are involved in mutual fund sales through at least one of the three bank distribution options.

* Ninety percent of all banks with assets of more than $1 billion offer mutual funds to their customers.

* One-third to two-thirds of banks with assets of less than $1 billion offer funds.

* One-third of all the 4,000-plus mutual funds are available through at least one of the bank channels.

* Almost 120 banks manage their own funds; the number of bank-managed funds recently topped 1,400.

What kind of funds are banks selling and what exactly is banks' market share?

12% of the Pie

The best information we have available at this time comes from an Investment Company Institute survey conducted last year to gauge activity in 1991 and the first half of 1992.

The ICI estimates that 12% of mutual fund industry assets, or $175.5 billion, were attributable to bank sales.

A few things stand out. First, bank sales of money market funds have dominated sales of long-term funds. Money market accounts have been offered at banks for many years, are generally less risky than long-term funds, and until recently were generating acceptable yields for many folks.

In addition, bank sales of mutual funds to date are split nearly 50-50 between nonproprietary and proprietary funds.

Money Funds Lead

Looking at very recent trends in bank sales, it's still true that money market mutual funds outsell long-term funds by a wide margin. In the first half of 1992, banks sold almost $300 billion in money market funds versus just $17.1 billion in long-term funds.

For long-term funds, the retail side has had the recent advantage, with $10.4 billion in funds sold in the first half of 1992, vs. $6.7 billion on the trust side.

Whether one looks at trust or retail, however, fixed-income funds had about a 75% share of new sales, which is not surprising given the interest rate enviroinment of the time. Considering the recent behavior of the bond and stock market, it will be interesting to see if and how these shares change.

While it's true that banks are still primarily in the money market side of the mutual fund industry, that appears to be rapidly changing, at least on the proprietary side.

Bank Share Tripled Since '87

Lipped Analytical Services tracks the 118 banks that currently manage their own funds. Of the $219 billion in assets under management at yearend 1993, almost 40% were in long-term funds, versus just 12% at yearend 1987.

Bank-managed mutual funds continue to grow in importance. Bank proprietary fund assets accounted for almost 11% of total industry assets at the end of 1993, almost triple the market share of 1987.

Bank-managed funds are holding their own against other mutual funds in performance measures too. These funds did as well as the universe of all mutual funds -- bank equity funds fared a little worse than the average, but bank fixed-income funds did better.

Up until now, all of this has sounded pretty good. Banks have some good motives for getting into the mutual fund business, there's reason to think they'll be successful, land early results show banks are gaining a toehold in the industry.

In the Spotlight

The bar news: Not surprisingly, all of this activity has not gone unnoticed by the media, regulators, and policymakers.

Many of the proposed laws, regulations, industry guidelines, and the like governing bank mutual fund sales programs have been prompted by consumer stuides that show many investors are not clear about the nature and risks of mutual fund investments.

These studies or surveys, which have used focus groups, buyer polls, mystery shopper programs, and other survey methods, have been conducted by the Securities and Exchange Commision, the National Assoication of Securities Dealers, the American Association of Retired Persons, the General Accounting Office, the American Banker, Conusmer Reports, and Money -- and those are just the major ones.

While one can quibble about the interpretation of survey results or the survey's methodology, it's hard to deny that there is a potential for problems. The greatest risk banks face in entering this business is the risk to their reputation for safety and soundness, which is the most valuable component of a bank's charter.

You can make customers read and sign discolosures till the cows come home. Legally, you'll probably be on firm ground. But it's difficult to put a price tag on the damage to a bank's reputation that could occur if a customer loses money because he feels he's been misled or misinformed.

You'll not only lose his business, but you risk losing other customers too. Banks can turn a key bank advantage -- a high degree of confidence and trust -- into a liability that affects all segments of the bank.

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