Administrators and distributors of bank-related mutual funds could face competition from their own clients: the biggest banks.

With some banking giants eyeing ways of doing more fund servicing in house, the supplier side of the industry is looking elsewhere, industry officials say.

When Banc One Corp. said last month it was considering taking over some administrative functions of its proprietary One Group of funds, Banc One executive Paul Walsh predicted that other large banks would follow.

Other experts agreed.

"There's a pattern that exists where banks get to be a credible size, the take over these functions themselves, maybe when they get about $4 billion or $5 billion," said Geoff Bobroff, analyst with Lipper Analytical Services Inc.

He cited Chase Manhattan Bank, which replaced Signature Financial Group with Concord Holding Corp. when it decided to internalize some functions; and Wilmington Trust Co., which brought in its own management subsidiary to replace Scudder as subadministrator for its Rodney Square Funds.

Classic Decision

Perhaps it was inevitable that as the bank mutual fund industry matures, banks face a classic business decision: to lease; subcontract, or do the job in house.

The servicing and support operations of mutual funds has become big business.

A typical large fund family, such as Oppenheimer Management Co.'s, needs a huge servicing organization to support its sales efforts. Oppenheimer employs nearly 1,000 people in its Denver shareholder-services operation. Employees do everything from answer telephones to support the broker network to filling and mailing unsolicited information requests.

Banks can't do everything themselves. Bank-advised funds need a separate legal entity called a distributor to pitch its funds because the Glass-Steagall Act forbids banks to directly sell investment products.

But now banks are recognizing that most aspects of servicing a fund are commodity-type services, in some cases things they could easily adapt to with their present staffs, such as fund accounting, fund transfer and custodial services.

A Push to Diversify

If they do take over those functions themselves, it might force the whole supplier industry to greener pastures, said Ned Burke, national sales manager for Alps Mutual Fund Services in Denver. "That's why it would be risky for us to do business with a Banc One," he said. "It pushes us to diversify our business. We'll go to nonbanks."

Mr. Burke wouldn't comment, but it has been rumored that Alps is close to signing a servicing contract for a major bond insurer that is starting a national insured municipal bond fund. Alps also is reportedly close to signing a church-controlled mutual fund. Such funds are called affinity funds.

While some distributors have long-term contracts with their bank clients, bank distributors are also counting on some banks not wanting to get involved with servicing their funds with their own employees.

First Interstate Bancorp of Los Angeles, an Alps client, has expressed no wish to service its own funds, Mr. Burke said. "They don't want to bother with it."

Settling for Less

The other scenario is for servicers to be left with pieces of the business. SEI said it couldn't make money with limited duties, but others, such as Concord, are reputed to be willing to take what they can get. So is Alps.

Another Alps client, Marine Midland Bank, a unit of HSBC Holdings PLC, already does its own servicing and administration. Alps acts as distributor and backs sales up with wholesale marketing support.

Much will depend on an individual bank's situation. Mr. Burke points out that banks will find they may not be able to service their own funds as cheaply and as well as third parties can. Alps, for example, charges about 8 basis points to distribute and service an account. Alps makes its money on the 50 basis points it receives from sales loads.

"We think they're getting a lot for their money," Mr. Burke said.

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