How much choice is enough when it comes to mutual funds?

In recent years, the answer from banks has been that less is more. They have relentlessly trimmed the number of mutual fund families on their "short lists" - the rosters of products that they recommend to investors. The idea was to avoid overwhelming both investors and brokers with a vast array of products.

But fund company executives are becoming increasingly critical of the practice. They say competition for berths on short lists has gotten out of hand, with banks demanding everything from computer software to a slice of the revenues. What's more, fund executives maintain, the practice may actually be hurting consumers.

"Banks are limiting the availability of products to the client base and are forcing the product on the sales force," said Elie Genadry, president of the institutional services division at Mellon's Dreyfus Corp., New York. He maintained in a recent interview that lack of selection has been a factor in the decline in mutual fund sales at banks.

Another fund executive, speaking on condition of anonymity, put it more forcefully: the practice of short-listing "is having a whiplash effect at the customer level."

Several mutual fund executives said the selection of funds at some banks is so limited that banks may be unable to help customers diversify their holdings adequately. As a result, customers may find it hard to ride out the market's ups and downs.

And some fund managers are walking away from deals in which banks are demanding a slice of a fund's revenues.

"There are a couple of programs we're not in because we weren't willing to step up to the plate and pay what other companies were paying," said Toby Mumford, vice president and national sales manager for the bank division of Franklin-Templeton Group, San Mateo, Calif.

Despite the criticism from fund executives, only a handful of banks are moving to expand their product lists. BayBanks Inc., for instance, has added to an already-extensive list of mutual funds. And Great Western Financial Corp. is considering increasing its short list of eight funds.

"What we're basically looking for is the opportunity to round out the list of products we offer through our investment managers," said a spokesman for the Chatsworth, Calif., thrift.

More banks are continuing to trim their lists, citing regulatory pressures and limited staff resources.

Keycorp, for instance, plans to ax 40 of the 50 fund companies on its short list, according to Jack Kopnisky, president of Cleveland banking company's brokerage, Keycorp Investments Inc.

One reason, he said, is that it takes enormous time and energy to meet regulators' "due diligence" requirements, which demand that banks must understand such details as the derivatives exposure and management style of each fund they sell.

"There's no possible way we could effectively research 50 fund families," Mr. Kopnisky said.

Some industry consultants say it makes sense for banks to control their offerings in this way.

"If you don't short-list, what are you going to do? Let everyone sell everything? It would become complete pandemonium," said Joy Montgomery, president of Money Marketing Initiatives, Morristown, N.J.

But critics say short-listing creates many problems. For one thing, it puts pressure on banks and their customers to pick winners - mutual fund families whose products will perform the best overall in the long term.

That goes against every principle of sound financial planning, said Harold Evensky, a planner in Coral Gables, Fla.

Customers, he said "are not going to have enough choices to diversify across. And they will have an immense difficulty rebalancing their portfolio if the banks start changing the companies they are using."

One reason banks favor short lists is that they know they have something fund companies want: access to a vast customer base.

In exchange for this access, banks are frequently able to persuade fund companies to share a cut of the investment management fees. But this practice has come under fire, notably in a recent speech by Barry P. Barbash, director of the Securities and Exchange Commission's investment management division. Mr. Barbash questioned whether it's appropriate for fund companies to pay for access to sales channels with money that is ostensibly collected for the purpose of investment management and securities research.

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