The sale of mutual funds, annuities, and other investment products is frequently cited as an important growth opportunity for commercial banks, and many bankers have looked to the sale of investment products to retain customer relationships and boost profits.

With the high stock market returns and explosive growth of mutual funds since 1994, one might expect that mutual fund and annuity sales would make up a rapidly growing share of banks' business.Some 1,450 U.S. banking organizations, or about 20% of the industry, sell third-party or proprietary mutual funds or annuities.

This proportion has changed little since 1994, indicating that many banks have not been lured by the prospect of profits from investment product sales as the stock market and mutual fund industry have grown generally.

Today, mutual fund and annuity sales account for less than 3% of banks' total noninterest income.

Banks sell mainly money market mutual funds. Though money funds they accounted for 85% of total mutual fund industry sales in the first three quarters of 1996, they were 93% of total bank mutual fund sales. Banks accounted for 22% of total money market mutual fund sales in this period.

Their success in this market is partially due to the easy substitution of money market mutual funds for money market deposit accounts and other deposit products.

In contrast, banks have been relatively unsuccessful at selling the more lucrative equity and bond funds. Banks' share of total long-term-fund sales peaked at 7.8% in mid-1994.

Finally, investment product programs have been mainly a large-bank phenomenon.

Through the first three quarters of 1996, U.S. banks sold $687.8 billion in mutual funds and annuities, and banks with average assets of more than $15 billion accounted for about 90% of total banking industry sales.

Although large banks that sell proprietary funds make up a small portion of total sellers, sales of proprietary mutual funds and annuities by large banks accounted for 84% of total sales at all banks through the first three quarters of 1996.

Despite individual success stories, the banking industry as a whole does not appear to be gaining market share or generating significant revenue through investment products sales. This might reflect public reluctance to purchase these products from banks.

Highly publicized exposes on unethical sales practices by a few commercial bank brokers may have contributed to a decline in the public's willingness to buy investment products from banks.

A recent American Banker/Gallup survey found that the proportion of bank customers who said they would buy an investment product from their principal bank declined 6 percentage points to 54% during the past two years.

The proportion of those who indicated they would buy a stock or bond mutual fund from their bank declined 5 points to 24%.

On the supply side, banks have enjoyed record profits since 1993, driven largely by income generated from their traditional lending niche.

Banks may have been reluctant to vigorously pursue new business lines, like investment product sales, when their traditional activities have been so profitable and the regulatory and legislative environments concerning investment product sales have been so uncertain.

Moreover, with reduced reserve requirements and deposit insurance premiums, banks may be more willing to compete for deposits to maintain customer relationships.

Without changes in consumer attitudes or a greater willingness by banks to market investment products aggressively, banks are likely to remain bit players in the mutual funds market for some time to come.

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