Banks rushing to sell mutual funds may be pushing the wrong investment vehicle after all.

So says A. Michael Lipper, the fund industry's top guru. As Mr. Lipper sees it, banks are better equipped to sell annuities than they are to hawk mutual funds.

"Variable annuities should be a much more important product for banks [than mutual funds]," Mr. Lipper said at a recent press briefing. "It fits their distribution system much better."

While most banks are struggling to make their mutual fund programs profitable, variable annuity sales are more likely to produce profits, he said.

Face-to-Face Sales

While mutual funds can easily be sold over the telephone, annuities typically require numerous face-to-face sales visits, Mr. Lipper said. Banks, with their big branch networks, are uniquely equipped to provide that kind of sales process, giving them an edge over other sellers of annuity products.

"There's a greater level of trust through banks than through other channels," Mr. Lipper said.

Also, because annuities are somewhat complex, consumers tend to be more willing to pay sales fees for annuities than for mutual funds, he said. And compared with mutual funds, annuities lock money in for longer periods, ensuring a steady flow of income for the bank.

Mr. Lipper's comments come as banks across the country rush to join the mutual fund bandwagon. Close to 20 banks established their own family of mutual funds in 1993, bringing the total number of banks in the fund business to 109.

Success Proves Elusive

But according to Mr. Lipper, those banks have yet to meet with success. True, bank mutual funds assets grew from $158.1 billion at the end of 1992 to $221.2 billion on Nov. 30,1993. Mr. Lipper, however, maintains that most of the new money represents bank trust assets that were restructured into mutual funds.

"[Banks] seem to be adding funds regularly, but they are not filling them with assets," he said.

Moreover, according to Lipper, the average mutual fund controls $360 million in assets, while the average bank fund claims less than $200 million.

"They are not up to size yet," Mr. Lipper said.

Steady Income Stream

That is why he is encouraging bankers to nurture their increasing interest in selling variable annuities rather than focus their efforts on launching proprietary mutual funds.

Variable annuities are tax-deferred insurance contracts that invest in mutual funds or other securities to generate a steady stream of income.

Not everyone agrees with Mr. Lipper's argument.

"It's a very short-term point of view," said Edward Furash, head of Furash & Co. in Washington, D.C. "If banks accept it, they risk taking themselves out of one of the industry's fastest-growing segments."

Bankers, for their part, concur with Mr. Lipper that they could be successful purveyors of variable annuities.

But most say annuities should be just one element of a comprehensive line of products that could serve a whole range of investor needs.

Offering Alternatives

Too much focus on any one vehicle, they say, would be a mistake.

"As a distributor of products, we need to have viable alternatives available to customers," said Mark Stevens, vice president of financial services at F&M Investor Services, a unit of Farmers and Merchants Bank in Salisbury, N.C. "My big complaint with the whole financial services industry is we try to sell products rather than try to meet customers' needs."

Andrea Martin, a managing director at Comerica Investment Services, a subsidiary of Comerica Bank, Detroit, expressed similar sentiments:

"I don't think that [variable annuities and mutual funds] are mutually exclusive," she said. "Our whole approach is to meet customers' needs."

Interest Is Growing

Interest in variable annuities, which are typically seen as a source of income for retirement, is growing rapidly. Cerulli Associates Inc., a Boston-based consulting firm, estimates that there is now more than $90 billion invested in variable annuities. The firm expects that number to double in the next few years.

Annuities, both variable and fixed rate, currently account for about 7% of all bank brokerage sales, according to Cerulli. Variable annuities are believed to account for about one-third of those annuity sales.

But bank interest in selling variable annuities is on the upswing. Big mutual fund companies are creating packages of variable annuities specifically tailored for bank distribution.

And banks like Bank of Boston, Banc One, Shawmut Bank, Glenmede Trust, and National Westminster are considering launching their own variable annuity product.

In addition to fee income, variable annuities provide banks with the opportunity to expand their relationships with their existing fund clients.

"We're finding that our clients want both mutual funds and variable annuities, so we're going to give them both," said Michelle S. Lenzmeier, a senior vice president at Banc One Investment Advisors Corp.

But for banks that build a proprietary offering, there is a downside. Mutual funds can reach critical mass faster by converting trust assets. So it takes about three times longer to break even with variable annuities, one bank fund manager said.

Mr. Lipper agreed that bank proprietary mutual fund programs generally grow faster than proprietary annuity offerings.

But when it comes to proprietary funds, "some banks have kidded themselves because they've viewed conversions as sales," he said.

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