North Fork Bancorp is riding out turmoil in the mutual fund market virtually unscathed, thanks to a tactical decision it made last June.
That's when the $1.9 billion-asset bank, based in Mattituck, N.Y., decided to take charge of its in-branch investment products sales program.
By cutting out the middleman--a Rhode Island marketing firm that had operated the program for three years--North Fork was able to keep all the commissions that it once had to share.
As a result, net revenues from investment sales have held steady despite a 30% drop in volume.
That has been the silver lining of bringing the sales program in house just as market forces trimmed sales, said Donald DeMaio, senior vice president.
To underscore the importance North fork places on the investment sales business, chairman John Kanas placed the brokerage operation under Mr. DeMaio, who oversees all of the bank's retail financial services.
Another byproduct of bringing investment sales representatives onto the bank's payroll is that communication and referrals between all segments of the bank have improved. That just didn't happen when Financial Insurance Service of Lincoln, R.I., was in charge of the marketing, Mr. DeMaio said.
"We tried really hard to make it work but it didn't," Mr. DeMaio said of the third-party marketing arrangement.
Mr. Kanas was more blunt in his view of the old arrangement: "I hated it." He said the bank is most comfortable when it can use its own employees to deal with customers.
North Fork's decision to run its own investment products sales program reflects an industry trend aimed at improving control over mutual fund sales.
But for the most part, the strategy has been confined to large banks. Community banks typically choose to stick with outside firms because of their extensive experience with investment products.
That has become particularly important in the past year and a half, as Congress and financial regulators have riveted their attention on investment sales practices of banks.
But North Fork is proving that running your own program isn't just for larger banks.
To make the change, the bank hired the eight Financial Insurance Service salespeople who had been working in its branches and placed their activities under the purview of North Fork's existing brokerage, Compass Investment Services Co.
The representatives already knew the bank and ended up with a more secure situation by having just one master, Mr. DeMaio said.
Last year, these investment representatives sold $34 million worth of products. This year, the figure will be closer to $24 million, according to Mr. DeMaio.
The brokerage's preferred list of vendors includes Alliance Capital Management, Federated Investors, and Putnam Investments.
The slowdown in sales has been something of a disappointment, but North Fork officials know they're not alone.
"Sales are down systemwide," said Peter De Buona, president of Compass Investment Services. "We're learning a market that's a little bit on the downside."
His boss, Mr. DeMaio, said the peaks and valleys of mutual funds and annuities sales are just part of that business. He notes that the bank still sees investment sales as a smart way to build fee income.
"We're committed," Mr. DeMaio said flatly. "As long as we're up front with our customers about the risks," the strategy should work, he added.
Reflecting the bank's emphasis on investments, employees are pitching in by referring prospective investors to the brokerage unit. Mr. DeMaio sees this referral boom as an encouraging sign that a sales culture is taking root at North Fork.
To compensate employees for spotting business prospects, the bank pays between $10 and $15 for each referral.
Now, Mr. DeMaio says, Mr. De Buona regularly fields phone calls from branch employees asking how they can market investment products better.
The trust department is getting in on the act, too. The department, which once had an "us versus them" attitude toward the investment sales force, has reinstated its program of referral incentives, Mr. De Buona said.
North Fork has found that customers' attitudes about investment products have shifted as its program and the market have changed.
Sales representatives report that it takes longer to close sales to customers who have been referred their way.
Customers are more closely scrutinizing fund information, like performance data, and becoming much more selective, Mr. De Buona said. A flight to quality is under way, with investors seeking out plain-vanilla funds, he explained.
Now that North Fork no longer relies on an outside marketer to make product decisions, it is able to respond more nimbly to customers' demands for new alternatives, Mr. De Buona added.
By bringing the sale program in-house, North Fork has taken over "due diligence"--the process of sizing up mutual funds to decide if they will suit customers' needs.
Mr. De Buona said annuities are rapidly becoming a preferred product. Customers are flocking to these tax-deferred investment contracts in response to fluctuations in mutual funds, he explained.
Annuities, which used to account for about half of North Fork's investment product sales, have made up about 70% of volume in the last few months.
North Fork still uses outside marketers to sell annuities in branches. But that arrangement will change next year, when the bank completes its registration to directly offer these products.
North Fork sees a clear path in the wake of a New York state court ruling last spring that permits bank employees to sell annuities.
Sales representatives will also begin making "cold calls" with branch managers who know their communities and the needs of their customers, Mr. De Buona said.
North Fork will also tap a new vein of customers next year, when it completes the purchase of $1 billion-asset Bayside Federal Savings Bank, in Jericho, N.Y.