Banks have come a long way in mutual fund marketing, but experts say they risk being also-rans in the race with fund specialists and big investment houses to create fund supermarkets.

Banks began offering mutual funds more than a decade ago to slow the drain on deposits as investors chased better returns on their money, and many are now important players in the retail fund distribution chain.

But experts both in and outside the industry now say that banks' hopes of becoming powerhouses on the level of the discount broker Charles Schwab & Co. or full-service brokers like Salomon Smith Barney - a division of Citigroup Inc. - and Merrill Lynch & Co. will be complicated over the long term by a number of factors.

Despite the advantages that banks have in reaching retail customers, they face reluctance on the part of financial planners to act as distribution arms, and have lagged in building their infrastructure and sales forces. What's more, the experts say, such outlets are expensive, and the changing marketplace for investments could reduce the need for them.

Burton Greenwald, a fund industry consultant in Philadelphia, said the logistics of a creating such a supermarket are "overwhelming."

"The endeavor may prove not to be profitable for a long time," he said.

There is no doubt that banks are selling more mutual funds than ever before. On average banks now sell 617 mutual funds from 21 different fund families, according to a study to be released this week by the Consumer Bankers Association. Ken Kehrer, president of Kenneth Kehrer Associates of Princeton, N.J., which surveyed banks for the association, said that is a big jump over last year, when the average bank sold 444 funds from 18 families.

The study also showed that the largest banks account for the jump in the average number of funds offered, Mr. Kehrer said. The very largest bank fund channel has 8,000 funds from 200 families for retail investors, a figure which no other bank comes close to matching. He declined to name the bank.

A median of 200 funds from nine families are sold by banking companies, up from 100 funds from nine families last year, Mr. Kehrer said. Most banks surveyed started by offering brokerage services, and later moved into annuities and mutual funds. All of the banks participating in the study now sell long-term mutual funds.

The findings are especially impressive given the contention among many mutual fund sales people that the market for new funds is shrinking, Mr. Kehrer said. At least part of this increase has to do with the tremendous proliferation of mutual funds, he said. The numbers look large because a handful of banks offer a disproportionate number of funds.

Banks got into the fund business in the 1980s as a defensive measure against full-service and discount brokers, which were drawing customers' funds out of passbook deposit accounts and certificates of deposit and into mutual funds, which offered better returns.

Fritz Elmendorf, spokesman for the Consumer Bankers Association, said that as customers became more comfortable with the risks of investing, "it didn't take a lot of tea-leaf reading to see that deposits were going to leave banks."

William Belden, vice president of product development at Northern Trust Corp. in Chicago, said banks thought offering mutual funds would be a great opportunity, but many found the process of creating and selling them more difficult than they initially imagined.

Banks have gradually become a significant distribution point for mutual funds, to the point where all major fund families have a distribution arm focused specifically on banks. Among the two largest bank distributors of mutual funds are Bank of America Corp.'s Banc of America Securities and KeyCorp of Cleveland, Mr. Kehrer said.

Banc of America now has an array of 350 funds from 30 families, a spokeswoman for the firm said. KeyCorp sells over 6,000 funds from 220 families, a spokesman said.

Mr. Greenwald said that to become a major player in the distribution market, a bank must make huge capital and technological investments that may never pay off. The largest banks that are pursuing this strategy - such as First Union Corp. and Banc of America - have the resources to stay in the business, but will likely have to stay in for a long time to realize substantial profits, he said.

One enormous market that observers say banks should pursue is financial planning. These advisers are a potentially large outlet for bank fund sales, but Mr. Kehrer said firms like Charles Schwab & Co. and Fidelity Investments already get most of the planners' business.

For large supermarket players such as Schwab, financial planners make up nearly half of their clients. Of the brokerage's $117.7 billion of second-quarter sales, $51 billion went through independent financial planners, a Schwab spokesman said.

Dave Shaver, senior vice president of mutual marketing at Schwab, said the fact that others are moving into the fund supermarket arena confirms the importance of such a model to investors.

Robert Ash, senior managing director and chief executive officer of Fleet Investment Management in Boston, said many independent financial planners have been using Schwab or Fidelity to buy mutual funds for years, and banks will likely have a hard time drawing them away from those companies.

Mr. Kehrer said if a bank's fund supermarket - which typically sells no-load funds - attracts investors, its business may come into conflict with its own affiliated brokerage. For some independent financial planners, this may be an important factor in deciding what firm to go with, he said since such planners will be loath to work with a distribution arm that may try to steal their customers.

Fidelity, for example, may have advantages in pursuing financial planners as clients, since it does not have advisers of its own and is not seen as having a conflict of interest, Mr. Kehrer said.

Harold Evensky, chairman of Evensky, Brown & Katz, an investment advisory firm in Coral Gables, Fla., said banks that make an effort to get the attention of financial planners will also face competition from brokers who have established relationships with the many independent financial planners nationwide.

Some banks may see more of a future cooperating rather than competing with fund supermarkets. Mr. Belden said financial planners will be more important to banks as a vehicle for selling their proprietary funds than as another market to sell a wide variety of funds.

Northern Trust currently offers six of its funds through Schwab, and may expand that channel in the future, Mr. Belden said. The bank has no plans to create any sort of fund supermarket, he said.

Mr. Evensky said brokers and financial planners by and large already have established lines of communication. "Financial planners get calls every day from managers trying to sell some new funds," he said.

Mr. Ash said if banks want to pursue financial planners, their surest strategy likely would be buying an established broker. "To build it from a bank culture is nigh impossible," he said.

FleetBoston Financial Corp. - the parent company of Fleet Investments - bought the brokerage firm Quick & Reilly and is in the process of integrating its brokers into the bank.

Banc of America is specifically targeting the needs of its retail customers, and a spokeswoman for the firm would not comment on whether the firm is pursuing financial planners as a customer force.

One of the biggest obstacles to further growth in banks' fund distribution business is the fact that so many bank products are offered by different salespeople in different ways. Mr. Elmendorf said more banks are going to have to integrate their outlets to improve the cross-selling of products and services. "The challenge is to make the process seamless," he said.

Integrating all the elements of a financial services firm is complicated by securities and bank regulations - which do not allow bank tellers to sell securities, for example - and by recent distractions such as the year 2000 computer bug, Mr. Elmendorf said.

Mr. Kehrer said many banks initially pursued investors on the belief that the marketplace would create several basic types of investors, largely classifiable by how they would interact with the institution. Banks gambled that some investors would prefer to invest online, while others would prefer face-to-face contact, he said.

Banks attempted to put together a plan that would reach and dominate one or more specific segments of the investing public, Mr. Kehrer said. More recent research has suggested that investors will use a variety of methods to make investing decisions, and financial institutions are increasingly building multiple channels in order to reach them, he said. "The challenge is how to pull off going to multiple channels."

Despite the overall growth in fund selling, survey participants reported a slight drop in proprietary funds, though that statistic probably reflects the higher number of community banks - which have less than $2 billion of assets and usually are not large enough to support proprietary funds - participating in this year's study.

The average bank's proprietary fund family consisted of 16 funds - three money market mutual funds and 13 long-term funds- the study reported. Last year an average of 15 long-term funds were reported. But this year's average reflects the offerings of one bank that offers 61 proprietary long-term funds. The median fund offering is seven proprietary funds, one less than last year.

One ongoing challenge for banks is how to increase their share of the mutual fund distribution business without damaging the integrity of their relationships with their own depositors or with affiliated brokers, Mr. Kehrer said.

Some observers say banks' efforts could also be complicated in the future by the fact that the mutual fund industry is at the threshold of tremendous change. Mr. Evensky said financial planners - who are major distributors of mutual funds to retail investors - are under increasing pressure to move away from mutual funds.

Wealthy investors in particular are increasingly demanding more tax-efficient investment vehicles - such as exchange-traded funds or separately managed accounts - and more of the investing marketplace is likely to follow in the future.

If the industry moves forward in this direction, mutual funds may wane as the dominant investing vehicle, Mr. Evensky said.

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