At an Investment Company Institute gathering in the early 1990s, one banker rose and boldly predicted that banks would control half the mutual fund market by 2000.

You could almost believe it back then. Banks were promising rookies in the mutual fund sales game, and even conservative observers saw them quickly grabbing as much as 30% of volume.

Such predictions proved premature, to say the least. After pocketing 15% of the market in 1993, banks' share slumped to 10% in 1994-and it has taken them four years just to climb back to 1993 levels, according to Cerulli Associates, Boston.

But as this year's conference of the Investment Company Institute kicks off today in Washington, there is a renewed optimism about banks' potential. Many industry leaders now expect banks' share of long-term fund sales to reach 20% or a bit more within two to three years.

"Larger banks are going to increase their (sales) dramatically," said Lawrence S. Kash, vice chairman of Dreyfus Corp., the mutual fund arm of Mellon Bank Corp., Pittsburgh. "They are going to build tremendous sales platforms." He sees banks hitting 20% by 2000, but does not expect them to top that.

But Jim Ruff, president of OppenheimerFunds Distributors Inc., one of the biggest fund distributors through banks, said banks could do even better.

To be sure, there are skeptics. "We certainly don't feel they're stagnating," said Andrew Guillette, a consultant with Cerulli. "But 25% is not around the corner by any means."

But there is no denying the consensus that bank distribution has yet to peak.

The reasons: After their rough start, banks have sharply improved the quality of their sales forces, expanded their menus of proprietary and third-party funds, and adopted sophisticated sales approaches such as wrap- fee programs. And by growing through mergers over the past few years, many have gained an important advantage in the sheer number of customers they can market to.

All of those developments mean banks are now "formidable competition to other channels," said Mr. Ruff, whose company gets one-fifth of its sales through banks.

Michael Baker, senior executive vice president and head of the capital management group at Amsouth Bank Corp., Birmingham, Ala., said it is clear that fund companies recognize that.

"They're sure still calling on us-every single one of them," he said. "They're fighting for shelf space."

At stake for banks are millions of dollars in sales commissions and fees. New sales of bond and equity funds were $869 billion in 1997, according to the Investment Company Institute, the mutual fund industry trade group.

There is no consensus about which distribution channels banks will take share from. But industry leaders like Michael W. Kellogg, executive vice president with Fidelity Investments, said the direct marketplace will probably take part of the hit because investors are increasingly seeking advice before buying funds.

In hindsight, it is easy to see why banks gained a false optimism about the ease of selling funds, said Richard A. Davies, managing director at Alliance Capital.

Economic conditions in the early 1990s were excellent for bond fund sales: Decreasing interest rates sent certificate of deposit customers in search of better returns, and a rising yield curve made the alternative obvious-the very bond funds that were banks' earliest variety of long-term mutual funds.

"We all thought we were really great salespeople in '92 and '93," Mr. Davies said. "Everybody thought 25%, 30% was within reason."

But a series of interest rate increases by the Federal Reserve led to a collapse of the bond market in 1994. Because banks had relatively few equity funds to offer at the time, they saw sales plummet and watched their share of the total fund market plunge to 10%.

First Chicago Corp.-which has since merged with NBD Corp.-saw its bond fund sales drop by two-thirds in two months, remembered Mr. Davies, who then was the president of the banking company's brokerage arm. "It flushed a lot of the lesser-grade talent from banks," he said.

But the downturn spurred the very improvements in bank sales programs that will make them more successful, said Mr. Guillette of Cerulli Associates.

"Banks have paid their dues," he said. "Through sheer time and experience, they are fostering an investing climate within the larger institution."

The optimism this time around is tempered, however. Mr. Davies, for instance, feels banks will hang on to their current share of the market but may not get much more. Still, he said, in today's competitive sales environment, that is nothing to sneeze at.

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