Most banks have "failed miserably" in their efforts to sell mutual funds, a top Dreyfus Corp. executive said in an interview Tuesday.

Elie M. Genadry, president of Dreyfus' institutional services division, said last year's sharp drop in mutual fund sales at banks owed much to the industry's failure to develop a strong sales culture. He estimated that 1994 fund sales by banks fell 40% to 50% from 1993's levels.

Rising rates certainly put a damper on sales of bond funds, which had been the mainstay of most bank programs, Mr. Genadry said. But the more serious culprit was banks' passive approach to sales, he said.

Instead of beating the bushes for customers, banks got most of their leads from lists of maturing certificates of deposit, Mr. Genadry said.

"They've been referring the same clients for the past five years," he said. "They ran out of CD lists." He estimated that 70% of bank mutual fund sales in recent years came from this source.

Mr. Genadry's surprisingly blunt assessment comes on the heels of research showing that banks, which had been making solid gains in mutual fund market share, lost ground last year. Cerulli Associates, a Boston consulting firm, recently reported that banks accounted for 11% of mutual fund sales last year, down from 14% in 1993.

Observers said it is not hard to see why banks' market share slipped. "An awful lot of banks rode the wave of low interest rates and jumped into this business without ever living through a down cycle in the market," said John McCune, president of Norwest Investment Services, the brokerage arm of Norwest Corp., Minneapolis.

Now that bank brokerages have seen customers desert them, Mr. Genadry said, they are rethinking their approach to the business. "Banks are questioning every principle by which they embarked in this business."

Yet despite his sharp criticism, Mr. Genadry says he believes banks have great promise as outlets for mutual funds.

"They have all the natural components that will make a successful sales organization and bring in asset levels that can truly compete with other distribution channels," he said.

And there are signs that banks' fund business is bouncing back. "So far this year, we have seen trades picking up every week," he said.

Right now, Dreyfus - a New York unit of Mellon Bank Corp., Pittsburgh - is spending considerable energy counseling banks on how to reinvigorate their programs, Mr. Genadry added.

For one thing, he is trying to persuade bank clients to change the way they pay brokers. Banks should reward brokers for cultivating clients and amassing assets, not for generating frequent trades, he said.

To accomplish that, banks need to "change compensation to a higher salary and lower bonus."

For example, Mr. Genadry said, a broker who earns $100,000 annually from a bank typically draws $20,000 to $30,000 from salary and the balance from bonuses. But this pay structure can encourage brokers to talk customers into trading their mutual fund shares frequently.

A better approach, he maintained, is to base the same $100,000 payout on a salary of $50,000 to $60,000 and a smaller bonus. That way, brokers won't have an incentive to engage in the sort of account churning that can drive away customers.

Banks also need to expand their sales efforts beyond their walls. "Your sales force must sell to internal and external clients," Mr. Genadry said. Indeed, he said, banks should strive to double, to 60%, the share of mutual fund assets that come from outside the bank.

To achieve that, he said, banks need to get more aggressive about contacting prospective investors, and need to install computer systems that will help them spot and track customers.

For instance, banks should establish quotas on the number of sales calls that brokerage representatives must place each day. And they should make sure their computer records enable them to view at customer's financial history and goals.

Mr. Genadry also blasted the banking industry's practice of selling mutual funds from a "short list" of preferred products.

"That is their biggest mistake, because they are limiting the availability of products to clients," he said. "Lack of selection has definitely been a factor in the banks' sales decline."

Some bankers said Mr. Genadry's criticisms might apply to many banks, but not to theirs.

William Ennis, president of First Union Corp.'s Evergreen Asset Management subsidiary, said the banking company has taken some innovative steps in fund sales.

For example, he said, all 1,300 First Union branches are equipped with video screens that enable brokers to speak directly with portfolio managers of the bank's proprietary mutual funds.

"I really don't think there are many banks in the U.S. that have made such a definitive effort to create such a sales culture," Mr. Ennis said.

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