Just as banks are getting their bearings in the mutual fund business, the competitive landscape is shifting under their feet.
Giants like Charles Schwab & Co., Fidelity Investments, and American Express Co. have revolutionized the business by creating mutual fund supermarkets. They are offering customers one-stop shopping, no-load products, and easy-to-read, consolidated account statements.
One measure of their impact: No-load funds have been gaining steadily in popularity. They accounted for 44% of fund sales volume in the first eight months of 1996, up from 38.8% for all of 1992, according to the Investment Company Institute said.
At the same time, the brokerage industry is radically rethinking its pay structure. Merrill Lynch & Co. has led the way by shifting to broker compensation based on assets under management rather than commissions paid for transactions.
Banks - already latecomers to the mutual fund game - are now scrambling to assess and respond to the changes, which continue to accelerate. Some industry leaders seem to be reacting nimbly by revamping their pricing and expanding their offerings. But most still have a lot of catching up to do if they want to compete for a share of the mutual fund business.
American Banker interviewed two bankers for their views on how banks can compete with the mutual fund powerhouses. Their answers are excerpted below.
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Anat Bird
Chief operating officer, Roosevelt Financial Group St. Louis
"Banks don't have to compete with Fidelity and Schwab on their own turf. We seek investors who are less seasoned and perhaps not the best market for those category killers. Our institution already has a relationship with these customers.
"Our (investment product) pricing is adequate and highly competitive, but I don't believe people make purchases based on price alone. Otherwise, everyone in the U.S. would be driving a Hyundai, and they are not.
"We feel we can diffuse the price issue further by bringing the customer value on their own terms. They also look for other variables such as a relationship with a broker or representative and convenience.
"There are lots of things these competitors do that we can learn from. They have been masters of product proliferation and cross-selling. Fidelity developed a proactive sales tool to identify customer needs. Schwab, a low- cost provider, is now migrating to fuller service and is totally committed to branching."
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Roy S. Henderson
Vice chairman, Unionbancal Corp. San Francisco
"Many customers want advice and counseling, and are willing to pay for it through sales fees. Right now, about half of all funds are sold no-load and half are sold with loads. And three years from now, it's not going to be the case that 98% of funds sold will be no-load and 2% will be loaded funds. It's our challenge in the banks to figure out a way to deliver to different customer segments comfortably.
"I think it's clear that banks can sell investment products in a mass market approach. They may not have the franchise that Schwab has got at the moment, but by and large banks have the customer relationships. They're in an excellent position if they have competitive products.
"Bankers need to get over this disintermediation fear. That's long over. Customers have basically voted with their feet. The money already left the banking system, and it's in money market funds.
"If you talk to 100 bankers on the street and tell them you want to sell investment products to their clients, they're worried it's going to take deposits. That's wrong. It's not deposit money you're after; it's investment money. The challenge is to get the money back into the bank's fold through the brokerage or mutual fund unit, to bring it home."
- Reported by Debra Cope, Katharine Fraser, and Scott Hensley
