Richard A. Davies is the first to admit that when it comes to mutual funds, First Chicago Corp. has been living off the fat of the land.

Like many banking companies, First Chicago has been reaping the rewards of unprecedented demand for mutual funds by depositors who are unhappy with the low yields on their savings.

Sales of mutual funds, including First Chicago's own First Prairie funds, are way up. And the bank's investment services business, which barely broke even two years ago, is generating solid profits today.

Sales Culture

But Mr. Davies, president of First Chicago Investment Services, knows the boom won't last forever. So he is setting out to develop the sales culture First Chicago needs to gain a permanent foothold in mutual funds.

"Banks have had an easy time for the last couple of years," Mr. Davies said in a recent interview. But "the strategy of dropping capable sales reps into branches and waiting for people to walk in the door is ending."

To prepare for the next stage, First Chicago is devoting substantial technology and manpower to its investment services division. The bank is also hiring employees with sales backgrounds and realigning its current staff.

Industry Takes Note

Mr. Davies maintains that banks are so pleased with their success in the fund business that many are overlooking the need to develop "good sales skills to take them through the bad times as well as the good."

Mr. Davies' efforts to get ahead of the curve have caught the attention of others in the mutual fund business.

"He's spending time working on tomorrow now and is cognizant of the fact that he needs to do it," said William O'Grady, head of the bank division at Alliance Capital Management, a New York fund company.

But others say First Chicago will have an uphill battle if it wants to make it in mutual funds. "They're at a bit of a disadvantage because they don't have a huge branch network," said George Salem, bank analyst at Prudential Securities.

For his part, Mr. Davies thinks all the signs point toward a much bigger role for mutual funds at First Chicago.

Competing with Brokers

Bank customers are becoming more experienced and sophisticated investors, he said. And banks are starting to compete directly with brokerage firms as well as each other for mutual fund business.

In coming years, Mr. Davies believes, banks that market mutual funds will have to work much harder to reap the rewards they are enjoying today.

Growing up in a banking family in Baraboo, Wis., Mr. Davies was determined not to become a banker. Today, at 37, he says, "I view myself as working in the fund industry, not as a banker."

After majoring in economics at the University of Wisconsin, he earned an MBA from Harvard Business School.

Mr. Davies joined First Chicago's corporate strategy department in 1989, having worked in the management consulting field for the Boston Consulting Group. He moved over to become president of First Chicago Investment Services in November 1991.

He now spends about 90% of his time managing the investment services department. He also oversees an employee benefit plan services that assists Chicago-area companies with retirement plans for employees.

Mr. Davies has been plotting his next move with the help of his department's sales director, Patrick Walsh, and marketing director, Karl Keller.

The bank wants to become "much more proactive in soliciting business, instead of waiting for customers to walk in the door," Mr. Davies said. "We're also putting professional marketing and product management practices into effect."

To set the stage for growth, First Chicago is devoting money and staff to training and technology. About 3% of operating revenue next year will be spent on technology and hardware for the investment services department, Mr. Davies said. Seven people are also working full time on systems development.

Phase one of the project involves making basic data available to employees, enabling brokers to pull up everything from sales leads to stock quotes via ADP or Quotron without leaving their desks.

"We're trying to maximize the leverage of our network," he said.

In general, First Chicago puts great emphasis on training, and that extends to the investment products division. About 800 bankers are learning how to make referrals.

Within regulatory guidelines, the bank also plans to have some platform bankers trained and licensed in annuity and mutual fund sales.

Sales by platform brokers soon may account for about 20% of total volume, Mr. Davies estimated. And that figure is likely to grow as bankers become more knowledgeable about nontraditional products.

First Chicago is also creating a dedicated force of four to five people to provide investment services to small businesses and commercial customers. "We want to provide [commercial clients] with a better range of products and services," Mr. Davies said.

A Head Start

First Chicago is no newcomer to investment products. It started its own broker-dealer unit about 10 years ago, when few banks were in the business.

The bank started handling brokerage business on a discount basis, but it wasn't a money-maker. However, it set the administrative framework needed to run a sales force.

Therese Kealy, director of operations, "built a very efficient back office with strong processing capabilities," Mr. Davies said. "It provided a springboard for us, so when we expanded our sales force in 1991, we were ready."

Part of First Chicago's rapid expansion in the sales arena was spurred by the acquisition of Gary-Wheaton Bank about 18 months ago. "It had a strong mutual fund sales force in place," Mr. Davies said.

A third of the sales force came from the Gary-Wheaton organization, with the same portions coming from First Chicago and outside companies. "These are the building blocks of our success," Mr. Davies said.

However, he added, the investment services division still has a long way to go. "We're not yet an equal revenue generator" for the bank, he said.

In 1992, First Chicago Investment Services contributed 10% of the operating profits of the community banking group. As recently as 1990, the division's profit contributions were barely measurable.

"Home equity loans, and checking accounts are still our lead product," Mr. Davies said. But indicative of First Chicago's overall strategy, the bank now considers investment services one leg of its three-legged stool, he said.

"In terms of management support and visibility, we get a third," he said. For example, "from now until Christmas, the look of our branches will be investment products."

Offerings Limited

Unlike other big banks that offer a plethora of proprietary products, First Chicago has a relatively narrow product line. Its First Prairie Funds, with $1.5 billion in assets include a flexible income fund, two tax-exempt bond funds, and a U.S. government income fund. Additions are planned.

First Chicago also makes a variety of other mutual funds available. "Our philosophy is a level playing field between our funds and outside ones," Mr. Davies said.

Its preferred products list includes funds from Putnam Financial Services, Alliance Capital, Fidelity Investments, Van Kampen Merritt, Colonial Mutual Funds, and Kemper Financial Services.

Consistent with the overall strategy to make investment products an even more profitable part of First Chicago's business, Mr. Davies and his crew are focusing on meeting customer's needs.

"We're clearly going to feature our proprietary funds, but we also want to offer brand choice," he said. "We have to have full product line to compete successfully."

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