When William Farley peers into his crystal ball, he sees a future where First Bank System's investment and trust division accounts form a solid "third leg" of the banking company's profit picture.

That's not the case now, says Mr. Farley, vice chairman of the Minneapolis company. Currently, the division contributes about 10% to the bottom line--a respectable share, but far less than the retail and corporate banking businesses.

"That number ought to be a third," Mr. Farley said in a recent interview. "In the long term, we should have more managed assets than deposits. That's the way customers are behaving."

In pursuit of that vision, First Bank System last year launched a family of proprietary mutual funds aimed squarely at its masses of retail banking customers.

The First American Funds are marketed through high-profile investment offices located right in bank lobbies. The funds seek to capitalize on the well of trust brought by years-long relationship with branch customers.

"The real growth today is coming in the mass market--people who are investing $5,000 or $10,000. They might be adding only $2,000 a year, building a nest egg for their retirement or education for their kids," Mr. Farley said.

These investors aren't stashing away enough money to attract the attention of "the average Dean Witter or Piper Jaffray broker," Mr. Farley said. But they are mainstream customers for banks.

Its emphasis on mutual funds and other managed assets places First Bank System near the front of the class in awareness of market trends, according to Joy Montgomery, president of Money Marketing Initiatives, a New Jersey consulting firm.

"That they are looking seriously at disintermediation shows that they are taking a longer-term view," Ms. Montgomery said. "Banks are beginning to look at the overall cost of getting deposits, which is much higher than just the spread."

First Bank System officials say response to the First American Funds has been extraordinary. Retail sales last year topped $200 million, Mr. Farley said. This year they should hit nearly $500 million.

Mr. Farley credits much of the sales success to an integrated team effort in branches.

"Tellers are trained to bring over somebody from the banking platform, and say, 'That's a large transaction. It's a $25,000 withdrawal. Let's find out what they're going to do with it.'

Brokers are well-trained in both products and compliance, and get a free hand to recommend various investments. All decisions are reviewed by managers before the papers are signed.

In addition to mutual funds, First Bank System's 140-some brokers also sell insurer-managed annuity products, another strong suit, or even play the middle man on stock and bond transactions.

"A lot of banks have three teams--insurance, investment, and banking. We've created one team," Mr. Farley explained.

But perhaps the most important factor is the one that many banks instinctively understand, but haven't exploited to their benefit: the long-term relationship that banks, in general, have with their customers.

"They trust us," Mr. Farley said. "They have a relationship with us."

Such thinking has led First Bank System to become ever-more jealous when it comes to guarding its turf. This summer, it terminated a joint pilot program with American Express Co.'s financial planning unit, IDS Financial Services, which placed IDS planners in bank lobbies.

The program would have been expanded if it had proven profitable. But First Bank System found little difference between sales of its own brokers and those of IDS.

"We decided, frankly, that we didn't want to share the pie with IDS," Mr. Farley said. "It's our relationship, our customer. That's what the others who want to come in and sell want a piece of."

First Bank System has sold mutual funds to institutional customers for about 10 years. But in 1992, officials became distressed by the flow of deposits out of the bank and into rapidly growing fund companies.

The answer was the March 1993, launch of the First American Funds. It began with nine simple funds, including money market and short-term bond offerings, and has slowly expanded to today's more sophisticated list of 26 funds. The funds now hold $4 billion in assets.

Among its current offerings are funds that specializes in technology stocks, and tax-free municipal funds for specific states like Minnesota and Colorado, home to much of its retail banking business.

First Bank System has booked $2.1 billion in retail mutual fund sales since the beginning of 1993. Of that total, about $800 million has flowed into the First American Funds, with the remaining $1.3 billion going to the array of non-proprietary mutual funds sold in branches.

Last year, First American Funds were the sales leaders, accounting for about 60% of volume. But this year, their share slipped to around 40%.

Mr. Farley said the reason was that the front-end sales charges levied on the First American Funds were chasing people away. So in August, the company added a deferred payment option, known as a back-end load, to its proprietary funds.

Compliance is also vital when dealing with retail customers, Mr. Farley said. Many still think that if a mutual fund is sold in a bank, then it must be insured.

He told of the bank's aborted attempt to advertise its mutual funds on television.

"We showed it internally, but it was a joke," he recalled. "About 15 seconds of the 30-second commercial was disclaimers that the legal department required. It was like the credits at the end of a movie flying by."

Instead, First Bank System relies on an array of banners, signs and literature in its banks, along with referrals, to get the business.

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