Bank brokerages are opening their doors wider than ever to big-name mutual fund and securities firms - a move once considered akin to letting the fox into the henhouse.
Last week, mutual fund giant Zurich-Kemper Investments began helping banks devise a written business plan for their brokerages, working with them to set goals for their investment representatives and mutual funds. At the same time, a top-level executive from Smith Barney Inc. said her company is considering selling funds through banks.
First Union Corp. and KeyCorp. struck deals late last year with discount broker Charles Schwab & Co. to set up mutual fund 'supermarkets' in their branches. And last summer, Glendale Federal Bank opened its doors to insurance agents employed by Metropolitan Life Insurance Co.
While banks have been letting mutual fund companies and other financial services firms pitch products to their customers for years, these deals are different. Banks are giving their new partners greater access to their programs, thereby offering these companies better insight into the goals, priorities, and weaknesses of the bank's program.
"That's clearly not where we want to go in the long term," said Peter Herlihy, director of mutual funds at Barnett Banks Inc. "The banks should be responsible for their own programs."
In an effort to expand their brokerages at a faster pace than they can on their own, bankers are listening to offers that involve sharing revenue in exchange for help boosting sales of their own funds, and gaining access to research and trading services.
"When banks look at technology issues, and brand-name credibility, the conclusion is 'I can't build all of that myself as quickly as I can working with someone else,"' said David Master, a bank consultant with Optima Group, Fairfield, Conn.
Allying with competitors may seem an odd way to build a business. But many observers say that despite banks' growing experience, they still need help selling investment advice alongside their own mutual funds.
Just as strange is the eagerness of securities firms and mutual fund companies to build banks in their own images. After all, banks created their own mutual funds to steal back the deposits that fled to their competitors' portfolios.
Some interpret these partnerships as a bad sign for the future of bank mutual funds, as they indicate that securities firms have concluded that banks' asset management skills are scarcely a threat. Observers see most banks becoming hired sales arms for fund companies and brokerages.
"They (the nonbanks) are not at all concerned about how well a bank can manage money or sell its own mutual funds," said Louis Harvey, president of Dalbar Inc., a Boston-based research company for financial services firms. "That's been discounted already."
Making these arrangements work is remarkably difficult. These latest players are entering a second round of arrangements, after a few others tried in the past. A few programs collapsed due to culture clashes.
For instance, American Express Financial Advisors was forced to scrap three deals with banks. The banks had trouble fitting Amex's time-consuming financial planning style into a culture used to taking orders for specific products from customers.
"We couldn't work out our agendas together," said Peter Lefferts, senior vice president at the financial advisory unit.
Amex, which continues to aggressively supply financial planners to 75 community banks and credit unions, has put efforts to reach large banks on hold. But the company is open to any new ventures, Mr. Lefferts said.
Other companies have struggled, too. A much-ballyhooed marriage between Liberty Financial Cos. and Chemical Banking Corp. quickly turned to an embarrassing divorce in the early 1990s. And about six months ago, Banc One Corp.'s brokers began plugging into the research and investment products of Dean Witter Reynolds Inc. The program was a second go-around for Dean Witter, which tried a similar deal with NationsBank Corp. several years ago.
To be sure, some outside companies say they can make these deals work if they pay more attention to bank mutual funds. Zurich-Kemper is hoping to ingratiate itself with bank customers through just such an attitude.
"I would have no trouble with the proprietary funds being the No. 1 sellers, Kemper funds being No. 2, and No. 3 being a long way back," said Henry Schulthesz, senior vice president in charge of sales through banks at Zurich-Kemper.
Bankers insist the recent partnerships do not indicate that they are having trouble selling investment products. Indeed, they note they are approached by their nonbank competitors, not the other way around.
What's more, some nonbank companies are getting the help of banks. American Express Financial Advisors, for instance, sells its customers mortgage services provided by Norwest Financial Corp.
In addition, nonbank companies are allying with one another as well as with banks. Last weekend, the mutual fund behemoth Fidelity Investments and investment bank Salomon Brothers Inc. agreed to distribute services through some of each other's customer bases.
Some bankers watching their peers are optimistic about the second round of bank-nonbank alliances, saying bankers are more sophisticated about the mutual fund and brokerage business.
"The banks are gaining a better understanding of what they want to accomplish, where they're doing well, and where they are not," said Allen Croessmann, director of retail and marketing investment services at Bank of Boston Corp.
"Therefore, more meaningful discussions are taking place to see where these firms can add value."
These new partnerships are a giant step above banks' alliances with third party marketing firms - small companies that specialized in helping banks run their investment products operations.
These alliances taught banks the basics, and most of the larger ones ended their contracts once they learned the ropes. But now banks realize they need the resources of the largest brokerages and mutual fund firms to gain sophisticated training, access to equity research, and various back office technologies.
Such desires are driving banks' willingness to hook up with their more experienced nonbank competitors. But while bankers may farm out services they don't want to build from scratch, they are foolish to give up too much control, they acknowledge.