As mutual fund companies race to. sell products through banks, they are increasingly feeling pressure to supply more than just funds.
Banks are asking for such extras as software, computers, training assistance, marketing materials - all in exchange for shelf space in banks' investment products programs.
The requests have become so common that fund company executives have come up with a name for them: tollgates. And very frequently, the fund companies are paying the tolls.
While tollgates are legal, some fund executives are starting to grumble about the costs. And the practice clearly can put smaller fund companies at a competitive disadvantage to large, deep-pocketed rivals.
'Only So Many Dollars'
"The bottom line is that there are only so many dollars to play with," said Peter Delehanty, senior vice president of the bank sales division at Boston-based Keystone Group.
"The smaller companies economically don't have the spread to work with," he said.
Firm statistics are hard to come by, but industry experts say that some big fund companies dole out nearly $10 million a year in tolls.
Buying software for banks is increasingly common.
Fidelity Investments, for example, spent between $1.5 million and $2 million last year on asset allocation software for banks, according to Nishan G. Vartabedian, an executive vice president in Fidelity's Institutional Services division.
Tolls, of course, are not the only noncash payments fund companies are making to banks. Once a company is in a bank's investment program, the company's marketing representatives often ply bank-based sales representatives with goodies ranging from golf balls to Tiffany clocks.
But tolls are playing a key strategic function, sometimes sealing deals between fund companies and banks.
"This business is becoming much more competitive," said William Guilfoyle, marketing director for G.T. Global Financial Services, a San Francisco-based fund company.
"It's no longer enough to just have a good fund," he said.
Some banks say that they don't demand any form of toll.
"We don't want their support, we just want their funds," said James Eads, president of Signet Financial Services, Richmond.
But others freely acknowledge that they press fund companies for extras.
"We are asking for more support on the technology side," said Ken Lepore, chief financial officer at ASB Financial Services, the Irvine, Calif.-based brokerage arm of American Savings Bank.
Since ASB clears its own transactions, it wants to do business with fund companies that provide software links to their back offices, he explained.
Other items on ASB's shopping list include statement stuffers, software promotional materials, motivational speakers, and access to portfolio managers, so that the bank's sales representatives can use them as a resource.
Many mutual fund executives say that footing a few bills is simply the price of doing business.
"If you're going to use someone else's distribution channel, you're going to have to pay for it," said Elie M. Genadry, president of Dreyfus Institutional Services Division, New York.
"At the end of the day, banks are card carrying capitalists like all of us," said William F. O'Grady Jr., senior vice president and national sales manager for banks at Alliance Capital Management Corp., New York.
But the fund industry is increasingly concerned by the costs of the practice.
As the price of entry into banks' investment products programs rises, mutual fund companies' returns diminish, said Jeffrey L. Shames, president of Massachusetts Financial Services, Boston. Paying for these extras "comes out of our margins," he said.
And Massachusetts Financial is not the only fund company feeling squeezed.
Ultimately, of course, toll-gates can hurt consumers, as mutual fund companies raise fees to cover costs.
So where should fund companies draw the line?
"That's a business call," said Jerome S. Contro, manager of the national bank division at John Nuveen & Co. Inc., Chicago. Companies must decide what makes sense economically, he said.