CORONADO, Calif. - James E. Quaschnick says he buys the common wisdom that banks need to sell investments to keep from going down the tubes.

That's why the vice president of Farmers and Merchants Bank of Central California is overseeing an investment sales program launched last month - a program for which the $579 million-asset institution hired a brokerage firm to dedicate two brokers to the 15 bank's.

The bank is based in Lodi, and most of its branches are near Oakland.

But there's only one problem. Mr. Quaschnick said that so far the initiative has been less than an overwhelming success.

"Our customers are savers, not investors," he said.

Indeed, so far about 90% of the investment sales by the two brokers have been of Treasuries, which pay much slimmer commissions than the mutual funds and annuities most bank brokerages focus on.

Furthermore, Farmers' customers have had questions about the brokers. Some have asked, "'Who are these people? Do we trust them with our money?'" Mr. Quaschnick said.

Even bank employees are taking a "short-term view" and looking at the two brokers as "competitors" who can take away deposits and move them into investments, Mr. Quaschnick said.

He spoke at a recent conference of the International Association of Financial Planners here. About two dozen people watched his presentation.

But even with the questions, Farmers and Merchants has to charge ahead with investment sales to stay up with the times.

"Our customers have investment needs and nonbanks sell them a lot of services," Mr. Quaschnick explained. "We're concerned about our relationship with our customers."

By October 1993, when Farmers and Merchants started looking into selling investments, things appeared grim for his bank and for the whole industry.

Referring to data compiled by the American Bankers Association, Mr. Quaschnick said the proportion of all corporate and consumer financial assets controlled by banks' declined to just under a quarter by 1993, from 40% two decades earlier.

In that same period, banks' share of consumers' financial assets declined to 19% from 34%.

"Because of disintermediation, I question how many banks we're going to have in the future," Mr. Quaschnick said. "Is it going to be 3,000 instead of 13,000?"

Farmers and Merchants has shared in the decline.

"We weren't all that different from the other banks," he said. "We didn't keep up with inflation."

The answer for banks, Mr. Quaschnick said, is to start selling investments.

"'Banks need to get into the alternative investment business," he said. "They've got to go from the traditional (net-interest) margin-based products to fee-based products."

But getting there isn't easy. For example, Farmers and Merchants had to screen eight so-called third-party marketers before settling on Financial Network Investment Corp., Torrance, Calif., as its sales partner.

Last year, Financial Network sold over $1 billion in mutual funds and securities through 135 commercial and savings banks and credit unions, according Jack R. Handy Jr., a senior vice president at the company.

Mr. Quaschnick said one reason the bank teamed with Financial Network was that it can end the partnership with only 30 days' notice. Other marketers were looking for contracts of a year or longer.

The one-month notice would make it easy for Farmers and Merchants to kick Financial Network out if it decides the partnership isn't working.

It also gives Financial Network an incentive to work harder.

"They believe they can give us a value that will make us stay with them for a long time," said Mr. Quaschnick,

Mr. Handy said his firm's one-month notice policy has helped Financial Network win about three-quarters of the clients it has.

Another reason Farmers and Merchants chose Financial Network is that the brokerage doesn't push its own mutual funds and annuities, like other brokerages do. This gives the bank confidence that brokers are focused on selling investments that are best for investors.

That Farmers and Merchants isn't making a killing isn't that important, at least right now, Mr. Quaschnick added.

That's because the institution "didn't get into this business to make a ton of money," he said.

Instead, it is looking to solidify customer relationships. And even though investment sales haven't taken off, Mr. Quaschnick said he understands "it takes a little while for that to sink in."

"I think it will work out," he added.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.