Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, makes no secret of his concerns about the banking industry's push into mutual funds.

Mr. Guenther doubts that banks can market mutual funds without eating into core deposits.

Mevertheless, in a concession that bank customers want mutual funds, the IBAA recently announced that it would develop fund-sales programs for community banks in collaboration with Massachusetts Financial Services, a Boston-based fund company.

Mr. Guenther's concerns are shared by Robert Hawkins president of the $200 million-asset Southern Commercial Bank, St. Louis. Mr. Hawkins, president this year of the IBAA, doesn't sell uninsured investment products to his customers.

Denver bureau chief Keith DuBay caught up with Mr. Guenther and Mr. Hawkins at a recent industry gathering in Breckenridge, Colo.

Q: Why did it take so long for independent bankers to get into the investment business?

HAWKINS: We rarely do things quickly. We examine all sides of an issue. The IBAA has always said, if we put our imprimatur on something, we think it's our obligation to fully investigate it. We strive not to do anything that's an embarrassment to our association or banks.

GUENTHER: We had no resistance from our members. We're going into it defensively. For the small bank, moving money out of core deposits into investment products is against what they're all about. If bankers had their 'druthers, mutual funds would not be attractive to customers. This is all a customer-driven movement.

Q: Mr. Hawkins, your bank does not sell funds and other such products. Why?

HAWKINS: We don't at present because we've never had a level of comfort with it. It has to do with the provider. Ultimately, the bank's responsible for the performance of whoever invests the customer's money.

If you really look at the providers, you find relatively few of these funds have managers with a really long track record. Mostly, they have 18 months', two years' experience. The so-called hot hands don't have a larger view of things [nor have] experienced a down market.

GUENTHER: This is a big step for your community banks. These are products where you can lose your principal. For three years, there's a vast consumer base that thinks there's no risk. It's upward and onward. They're in for a fall. When interest rates go up and the bond market goes down, they're going to lose principle.

The interest rate sensitivity is the big variable. Markets depend on (one) interest rates and (two) the performance of the economy. The Fed is concerned about speculative froth in the bond market.

Q: You sound as if you are being pulled kicking and screaming into investment products.

GUENTHER: That's not an unfair statement. It's not an upper for the banking industry to lose core deposits to mutual funds.

HAWKINS: When the recession goes away, the banks will be called on to fund the recovery, and I'm not sure we'll be able to do that, so many deposits will have left.

Q: Some have argued that selling mutual fund investments isn't a creation of the bull market.

HAWKINS: Just to take it a step further - the truth is, if a banker can make money he's borrowing from you and lending out, he doesn't care if he pays 4% or 10%. He's just interested in making a profit on the spread.

GUENTHER: That's where the long-term viability of a bank is, the interest rate spread, not on mutual fund fees.

Q: Will the big banks stub their toe on investment products?

HAWKINS: How can they stub their toe? It's not their money. Unlike leveraged buyouts or commercial real estate or other fads, they have no money at risk. That's one of the things that concerns me about investment products - how can we minimize the risk for our customers?

Q: What about using mutual funds to retain the relationship with the customer?

HAWKINS: Most of our banks consider it that way.

Q: But under your scenario, the relationship would be a bad one. Why have an investment products program if you think this way?

GUENTHER: The IBAA has made the change because that's what the customer wants. And we'll do it with limitations and proper safeguards.

When the market goes down, whether you've disclosed it or not, there's going to be people in the bank saying, "You let me down."

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