Financial institutions have been expanding into the retail investments business at breakneck speed for more than 12 years.
More than half of all financial institutions now offer some kind of investment services to their customers either directly through a brokerage subsidiary or through a third-party relationship.
The Investment Company Institute, the mutual fund trade association, estimates that almost 25% of all banks offer mutual funds and that banks accounted for about $60 billion of the $500 billion of fund sales in 1993.
Today, approximately 115 banks sell theft own proprietary mutual funds. Clearly financial institutions are in the securities business and are here to stay.
Many factors worked to push financial institutions to enter the investment services business. Particularly during the late 1980s and until very recently, the so-called "interest rate shock" that customers experienced was a powerful force behind the growth of the business.
At the same time, customers were becoming more informed about investment alternatives.
As loan demand slowed, financial institutions were also driven to seek out new sources of fee income. These factors, along with a relatively accommodating regulatory environment all worked in favor of financial institutions' investment programs. In many subtle and not so subtle ways the landscape is changing. There are signs that the very forces that have worked to fuel growth may now be working to slow and perhaps change the direction of financial institutions' investment programs. The first, and most obvious, change is interest rates.
No longer are customers flocking to higher yielding mutual funds. In fact, data indicate that mutual fund redemptions have skyrocketed in recent months.
Another dangerous sign is the amount of switching from conservative to more aggressive funds as customers eye higher returns.
The regulatory environment is also shifting. For more than 10 years, financial institutions' investment programs have mostly been treated with benign neglect.
Now, at times it seems that the banking regulators, the National Association of Securities Dealers, the Securities and Exchange Commission, and state securities and insurance commissioners are trying to outregulate one another.
The industry agrees that it is of paramount importance to protect customers and to fully disclose all the risks associated with securities sales. The problem is that the rules seem to change daily and that financial institutions have an unfair burden not shouldered by other financial services players.
After a seemingly unstoppable trend toward increasing revenues, many banks' investment programs are experiencing their first downturns. Sales at many programs are down or flat.
Financial institutions' brokerages and third-party providers must now look at their capital position to be certain they have the financial strength to survive an extended flow of red ink.
After building programs on marketing to existing customers, banks are now wondering how to reach outside their own base. New strategies and products are necessary to reach more sophisticated and affluent customers.
These changes are causing many financial institutions to reevaluate their investment programs and more importantly, to look deeper into their long-term strategic objectives for the program and the entire organization.
This decision should be solely dependent on how the institution views itself and its mission. If the mission is to meet the true savings, lending, and investment needs of the community, the answer is a resounding yes. But if management can't get over issues such as disintermediation or capital for the long term to build a solid organization, the answer may be no.
Personnel turnover, decreasing profit margins, increased regulatory requirements, increased liability, and the need for new and expensive technology are all issues that need to be addressed if financial institutions want to move forward.
In short, financial institutions must have the vision, capital, and guts to stick it out and bring their programs to the next level.