funds, they may be overlooking some obvious ways to generate profits now. Industry experts say executives can boost their immediate returns with a few simple steps. Carefully measuring mutual fund profitability, for instance, is one of the most important yet frequently ignored ingredients for improving a mutual fund operation. Almost two-thirds of all banks surveyed do not separately calculate profitability for their mutual fund investment advisory activities, according to data collected by Paul Brook, partner and director for bank mutual funds at Ernst & Young, New York. And those that do check profitability frequently understate the fund's proper share of expenses and overhead, he said. Without thorough cost accounting, Mr. Brook explained, bank executives cannot accurately assess opportunities for savings - and improving profits. Some bank executives agree. R. Gregory Knopf, managing director of the Stepstone Funds, Union Bank, Los Angeles, performs a detailed annual analysis of expenses by business unit. By making precise allocations, Mr. Knopf said he can calculate meaningful returns on revenue. "It gives us a gauge of whether we're making money on our funds - and we are," he said. Beyond capturing cost and income information, Mr. Brook counsels bankers to create models for profits and losses. Besides paying more attention to their books, bankers also need to harmonize the often contradictory aims of their brokerage and proprietary fund units. "One of the keys is making sure that brokerage and advisory divisions within the bank work together," said Mr. Brook. Brokerages bent on sales commissions can hamstring their banks' drive to capture assets in proprietary funds, if they concentrate on selling outside products, he added. For every proprietary fund that bank broker-dealers sell, they offer an average of nine competing funds from outside the bank, according to the banks Mr. Brook surveyed. Pruning the list of offerings can focus fund sales efforts and boost assets under bank management. Union Bank offers only two or three outside funds in competition with each of its proprietary funds, Mr. Knopf said. And while proprietary funds now account for 20% of broker-dealer sales, he said he expects a newly hired in-house salesperson to help boost their sales to 50% of the broker-dealer's total. That jibes with advice from Gary N. Kocher, executive vice president at Bisys Fund Services, Columbus, Ohio. A typical mid-level bank whose funds capture half its broker-dealer sales could annually reap $500,000 in additional investment management fees, he said. "Clearly, offering proprietary funds is the most profitable product to sell long-term for the institution," said Scott N. Degerberg, a vice president at Fifth Third Bank, Cincinnati. But cultivating customer relationships and satisfying regulators require a bank brokerage to offer adequate fund choices. Besides the retail channel, many banks can boost mutual fund fee income by capturing cash in trust custody and corporate accounts outside the bank in proprietary money market funds. Assuming $200 million of trust assets and $75 million in corporate accounts and 20 to 25 basis points in fund advisory fees, a bank could realize incremental revenue in excess of $500,000 a year, he said. Although he acknowledged that minding expenses is important, Mr. Kocher said banks should pump up their push for assets and income. "The expense issue captures the lion's share of bank's thinking and not enough attention is paid to expanding revenue."
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