Deloitte & Touche recently completed a benchmark survey of mutual fund operations in the banking industry. The survey, which drew responses from 144 banks and thrifts with at least $750 million of assets, provides a snapshot of operational trends, strategic initiatives, and the competitive environment for bank mutual funds.
Thomas J. Lannan, director of the financial services group in the Big Six accounting firm's Boston office, recently discussed the survey findings with the American Banker.
Q.: How fast is the bank mutual fund business growing?
LANNAN: The survey results indicate that there is very rapid growth. Both third-party distribution of funds as well as proprietary funds grew at about 20% in the last few months. That's pretty substantial.
There are a lot more banks in the market, and those on the proprietary side are showing substantially increased sales.
Q.: A lot of the asset growth is due to the accelerating pace of conversions of trust assets into mutual funds. Isn't that growth illusory?
LANNAN: Trust conversions are an important way to get started in the business. Some people would make the argument that that is not real growth. My answer is, I hear that, except that you had trust conversions taking place in 1990, too.
Q.: How are banks doing in sales of third-party funds?
LANNAN: In 1990, 70% of the banks we surveyed had less than $50 million in sales. That dropped to 40% by 1992. At the same time, the banks that had over $250 million in sales went from less than 10% to over 20%.
Q.: What kind of expansion plans do banks have?
LANNAN: They are projecting asset growth of between 100% and 200%. And a lot more banks are entering the business. We asked the banks to tell us who their major competitors are today, and how that would change in three years.
Today, they said, broker-dealers are the No. 1 competitors, followed by investment companies and banks.
But as they look out to the year 2000, banks believe their competitors for mutual fund business will be other banks. They see mutual fund companies as No. 2, and brokerage firms as No. 3.
Q.: Did any of the survey findings come as a surprise?
LANNAN: I was very surprised at the number of banks still getting into the business in 1993. Twenty percent of the respondents were basically getting started in proprietary mutual funds in the last 12 months, and you're looking at some big banks, like Bank of New York. Some big players had sat on the sidelines for quite some time.
Another surprising finding was that 82% of respondents said marketing alone was a crucial ingredient for success in mutual funds. Sixteen percent said operations alone was important, and the remaining 2% said both are important.
That surprised me, because if you look at how a business becomes successful, it's not exclusively any one thing. You have to have good operations to support the marketing, but that concept is trailing the market.
Q.: What lessons did you draw from this study that you'll be sharing with clients?
LANNAN: If I were talking to a provider of services to the industry, I would say that the results of the survey indicate that less than half of the banks with proprietary mutual funds will provide their own operational solutions. Most will look outside, so if I was a service provider, I'd say I have a good marketing opportunity there.
If I was consulting with my banking industry clients, I would have to say that I think this business is here to stay. It is incumbent upon the bank to establish itself in mutual funds. But it may have grouble attracting assets because there is going to be a lot of competition, so the bank had better pay attention to operating costs.
Q.: Mellon Bank Corp. recently made a splash with its plan to acquire Dreyfus Corp., the big mutual fund company. Will we see more such alliances? And what form will they take?
LANNAN: The bar has clearly been raised with Mellon's acquisition of Dreyfus.
I think we will see a lot more deals, and they will take a number of forms.
I expect to see a lot more joint venturing between broker-dealers and banks, like the Nations-Bank Corp./Dean Witter deal.
We'll also see acquisitions by major banks of investment advisers - in other words, buying out mutual fund companies. The prices are escalating, but the right kind of acquisitions will be a part of the landscape.