The nation's biggest banks, which have been expanding their expertise as investment managers, are now poised to compete directly with major brokerage houses. Once content to market special investment services to wealthy clients only, banks are intent on becoming full-service brokers of numerous products and services to a greatly expanding group of pre- retirees-commonly referred to as private banking wannabes-who are building significant assets in 401(k) plans and IRA accounts.

With major brokerage houses offering deposit accounts and other traditional bank services, banks stand to lose big if they fail to meet the competition head on. Analysts expect banks to step up their efforts to buy smaller brokerage houses (see BT Merger sidebar) in the coming months, and a spot check indicates that some leading banks are keeping their options open.

Banks have carved out only about 5 percent of the market for investment management services, but the pie is huge and is projected to grow larger as consumers invest more aggressively toward their financial futures. Investment managers now manage $1.1 trillion in private assets and some $3 trillion in mutual fund assets.

Foreign banks such as Toronto Dominion Bank, Royal Bank of Canada, and Lloyd's of London, which operate without the regulatory constraints faced by U.S. banks, were the first banks to provide a full range of financial services stateside. Many U.S. banks offer securities products today, mostly in mutual funds. But major banks like The Chase Manhattan Bank Corp., Bank of America, First Union, and NationsBank are swiftly moving to reshape the role of banker as investment manager.


The market for investments is growing much more quickly than the market for traditional deposit services, says Jack Stack, Chase Manhattan Bank's executive vice president in charge of direct financial services. "Mutual funds had a compounded annual growth rate of 20 percent in the last 15 years, compared with 1 percent growth for deposits," he says.Chase Manhattan Bank began offering brokerage services in 1992 to leverage the wealth of its traditional banking customers, developing a technology and product platform that is competitive with major brokers. "We see revenue growth and profit growth in offering a broader range of products," says Stack.

Chase Manhattan Bank is not alone in its bid to capture a larger stake in the growing investment management services market. "Customers increasingly purchase investment products rather than deposit products," says James Overholt, president and CEO of Great Western Financial Services Corp., a sister company of Great Western Bank. "Mutual funds have given more potential investors access to the securities markets. Financial assets held by consumers nationwide are now 62 percent compared with 23 percent in deposits."

Overholt says that people start saving for retirement at age 49, and that the banking industry is "on the front end of a huge increase in baby boomers looking toward retirement." Only a full-service bank can tap into this demographic change, he adds. "That means selling mutual funds, securities, and insurance products. Less than half of financial consumers now regard their bank as their principal financial institution."

Charlotte, NC-based First Union Corp.'s capital management group sells a broad range of financial services, including private banking, personal trust, investment management, mutual funds and full-service and discount brokerage options. "We're competing not only with other banks, but with Wall Street and the large brokerage firms like Merrill Lynch, Smith Barney, and Morgan Stanley," says Alan Adelman, managing director of First Union's first investment advisors division, which was recently created to serve affluent clients.


Adelman has 125 professional portfolio managers located in 71 east coast offices from Connecticut to Florida. He emphasizes that these professionals, who manage more than $26 billion dollars in assets, are trained advisors, not marketing people.

"Investment management is part of a mix of services that is required if shareholders are to continue to enjoy the robust earnings of years past," says Adelman. He attributes First Union's success in this area to a bank culture that is willing to embrace new ideas. "We would like to build the model for successful investment management in the future," says Adelman. "Other banks have not succeeded because of a lack of investment professionals and a full range of products."

NationsBank of Charlotte, NC, which recently acquired Boatmen's Bancshares, Inc. of St. Louis, has been building a full range of investment management products and services for more than ten years, albeit with some challenges.

"We've been competing directly with brokers for quite some time and investment management is crucial to our longtime survival," says John Munce, executive vice president in charge of investment management. The real struggle for market share is over "which banks can provide the most integrated services fastest," he says. "PC banking and home equity loans are important, but so are mutual fund solutions," he says.

NationsBank was the first to market a mutual fund supermarket and allow customers to move from one fund to another in one location. It also pioneered mutual funds set up and managed entirely by the bank. "Investment income will become increasingly important over the next five to ten years as Baby Boomers pay more attention to their assets as they increase in value," says Munce. To reach these new customers, a bank needs a culture of service that gives a customer instant access to investment information and personal contact with a dedicated bank advisor, he adds.

"As the Baby Boomer population ages, it's logical for banks to expand their financial planning and investment activities. Baby Boomers know that social security won't be there for them and that they need to save significantly for retirement," says Joe Tumbler, vice chairman of SunAmerica Inc., a financial services firm based in Los Angeles and the nation's fifth largest issuer of variable annuities to retirees and pre- retirees. Firms like SunAmerica can offer smaller banks that lack the capital foundation to underwrite securities the chance to provide the new services that customers are demanding. Banks can negotiate with the firm to make SunAmerica's annuity, mutual fund, and insurance products available to their customers.

Despite recognition of this growing market opportunity, many banks are struggling to develop the "right" investment management image. And if perception is indeed reality, this is vital.


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