Banks have long been a haven for slow, steady savers. But can bankers can depend on these customers to drive their mutual fund programs to profitability?

It's a question many bank executives are grappling with. For while experts say mutual fund accounts need to average at least $5,000 to be profitable, many banks are eagerly accepting any sum at all.

"We assume that the smaller investor is going to grow and we'll grow along with them, but that remains to seen," conceded Robert S. Kniejski, president of Wachovia Investments, the brokerage arm of Wachovia Corp., Winston-Salem, N.C.

As banks throw their doors open to small fund investors, some of the best-established nonbank brokers are turning away the very same customers by ratcheting up investment minimums. Their experience could hold some important lessons for banks.

For instance, California-based discount brokerages Charles Schwab & Co. and Jack White & Co. recently hiked opening investment minimums to $1,000, from $250, for mutual funds purchased through their no-transaction-fee programs. Managing smaller accounts, they argued, was creating a drain on profits.

To be sure, small account balances are not unique to banks. They are "a problem anywhere you look in the industry," said John L. Shields, a consultant with Cerulli Associates in Boston. "If you have a lot of those kinds of accounts, you're raising the fixed costs of the fund."

But most banks are so new to the fund business that the costs are just starting to catch up with them. Some bankers are quietly wondering whether counting on small, slow-growing accounts could sabotage rather than strengthen their mutual fund families.

"You don't want to turn business down, because you're operating in a retail environment," said one executive who heads investment product sales at a major southern bank and did not want his name used. "But if all you did was sell minimum-order tickets, you couldn't stay in business very long."

Still, most bankers say there's no mystery behind their willingness to woo small investors. The industry's big opportunity, they say, lies in introducing savers to fund investing.

"We want to build our fund company and many times we'll waive the account minimum to build a longtime mutual fund relationship," said R. Gregory Knopf, vice president/UB Mutual Funds at UB Investment Services, the Los Angeles-based brokerage arm of Union Bank, San Francisco.

"Some banks have probably purged (small) accounts," he added, "but we'd much rather take the smaller minimums and grow the business down the road."

Retail sales are growing in importance for proprietary mutual funds because most of the easy money from trust accounts has already been converted, executives said.

"Our job is to convince folks to bring more assets to us," said Mr. Kniejski of Wachovia. "Our nonbank competition appears, from money flows, to have been very successful at that."

But many retail accounts remain painfully small.

"As long as a fund complex lets people in with $500, they're going to do it," said Mr. Shields of Cerulli Associates. "The objective is to accumulate assets," he added. "But if you are going to do it, do it profitably."

And setting a minimum of, say, $1,000 doesn't solve the profitability problem, according to Mr. Shields.

"Even at those levels, the accounts are not supporting the cost structure within the funds. In order for an account to break even, there needs to be $5,000 to $7,000 in it," he said.

Bankers interviewed were unable to specify the proportion of anemic accounts lurking behind an average boosted by a small number of high net- worth accounts, but they agreed the number was large and growing.

"Our trend is towards a smaller sales ticket," said an executive at a major southern bank, who speculated his bank's eight-year old mutual fund program had already snared many of the higher net-worth investors in its area.

As a result, more from necessity than strategic choice, he is targeting systematic savers who can muster just small sums.

But small accounts mean high expenses, said William G. Papesh, president, Composite Research and Management, the mutual fund subsidiary of Washington Mutual Savings Bank, Seattle.

He estimated fixed costs, led by transfer agency fees, at $18 to $24 per mutual fund account per year.

Even the profit hawks acknowledge that banks can't completely ignore pressure to keep the retail door open.

"If you don't provide a product, the customer is liable to go down the street," Mr. Papesh warned, but "you have to be careful you're not rationalizing and taking a loss."

Simply raising initial account minimums, however, may overwhelm new investors' financial capacity, said Geoffrey H. Bobroff, a consultant in East Greenwich, R.I. "If the minimums in the fund world are too high, they tend to become maximums."

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