To hear investment sales people at banks tell it, it’s a feat to have survived the past year. They report with relief that there’s been "no panic" among customers and no stampede out of slumping mutual funds. The trick, they say, is to get people to realize that bad times are part of the cycle in investing.

"If you sell strictly on return, you have to resell every quarter," says Rusty Giles, vice president and head of the investment advisory division at Wilmington Trust Co., Delaware.

That’s especially true when the value of investments are dropping at double-digit rates. Of course, there’s no arguing that diversification in asset holdings is a good idea, and that it’s best to judge returns over the long term. But the recent tumbling market has lent urgency to the sober approach being touted by the banks. "We manage expectations for clients," says Giles.

Despite what anyone may have said to the contrary during the decade leading up to the stock market stumble last spring, bankers nowadays agree that investing should be anything but exciting. If it’s boring—depressing even—well, that’s part of the natural flow, they seem to be saying.

In general, banks report that mutual funds are holding steady, that there’s been an influx of money into money market funds and that customers have favored fixed-income investment products such as annuities (though interest rate cuts by the Fed have caused some cooling in the demand for these investments).

Sales of individual stocks through banks remain, in general, a relatively small part of bank offerings, amounting to perhaps 10% of the product mix, according to preliminary research by Cerrulli Associates, a research and consulting firm based in Boston that is preparing a study on investment products distribution by banks.

Overall, there’s a premium on stability. The market is volatile, so investors presumably want their investment managers to be steady. But though bankers point to the fact that there’s been no flight from securities investments, nobody claims the business is growing.

"Surprisingly, we haven’t seen emotional types of responses in our investment accounts, and we’ve gotten fewer calls from concerned customers than we thought we’d get—but we haven’t seen new accounts opening," says Rick Petrore, vice president of Sky Associates, the retail brokerage unit of Sky Bank, New Castle, PA. Sky Associates, part of $8.4 billion-asset Sky Financial Group, Bowling Green, OH, sells mutual funds, stocks and bonds, annuities and long-term care insurance.

"There’s financial paralysis among new investors," says Paul Merriman, president of Merriman Capital Management, Seattle, a money management firm in business since 1983. Though it’s better to buy when prices are low, he notes, "it’s hard to get that across to people because it’s counter-intuitive, like some investing strategies in general."

He says that selling investment products can be a "great" business for banks, and he’s not alone in that assessment. Certainly the mid-size banks U.S. Banker spoke with all report plans to expand the business, but the problems in the stock market are slowing things down. Sky Associates did about $100 million in sales of investment products last year, and had revenues of $6 million. Sky is predicting a 7% increase this year. "Whether we make that remains to be seen," says Petrore.

Sky outsources its clearing and broker/dealer services for securities offerings such as individual stocks and mutual funds. A customer of Sky interested in one of these investment products would deal with a Sky Bank employee who is dually licensed by third-party marketer National Planning Corp. and Sky—a fairly typical arrangement among mid-size and smaller banking companies selling investments.

"A large broker-dealer with a national clearing service can provide better service and offer economies of scale," says Petrore.

UMB Financial Corp., Kansas City, MO, early this year started offering individual stocks from an "approved" list of 60 or 70. The stocks are chosen by the bank based on their steady performance and stable outlook. Two of its own licensed brokers make recommendations and sell the stocks. "The market in the past few months hasn’t given us a fair indication of what the business could be," says R. Crosby Kemper, chief executive officer. UMB, nevertheless, is planning to assign two additional brokers to the effort.

The bank’s brokerage business, which goes by the name Scout Brokerage and which Kemper characterizes as "substantial," had revenue of $12.4 million on sales of $150 million (mutual funds and annuities) last year. This year it predicts revenue will grow to between $15 million and $20 million on sales of between $100 million and $200 million. UMB employs 30 brokers licensed to sell mutual funds and another 100 who sell annuities.

The bank likes its chances in this business and is planning to transform some branches from deposit gathering vehicles into investment centers, says the CEO.

Sales of annuities at the bank are "flat to down," while mutual funds are "strong," says Kemper. UMB looks out for its customers, he says. "We restrict our brokers on what they can offer," says Kemper, adding, "we are prudent and risk averse." The result, he says, is that "UMB is perceived as looking out for our clients more than are brokerages."

This is obviously a strategy designed to appeal to the growing number of investors who have been hurt by falling stock prices. Banks could be in a position to benefit from volatility in the market if they can attract investors who believe banks are less likely to sell them an investment that will take a tumble.

All things being equal, though, bankers are as likely to guess wrong as the guys down the block in the wire house. And banks, in particular, need to address the issue of guilt by association when their customers lose money on investments purchased at the bank. For people who never ventured into deeper financial waters than that represented by a certificate of deposit the shock of losing money could turn into anger. To avoid such fallout, banks will obviously want to spell out the risks involved, but it will also affect the products they offer.

According to Merriman, "banks will sell what moves, will take the path of least resistance."

"Packaged products like mutual funds and annuities make sense to middle America," says Rachel Malatesta, a consultant at Cerrulli. At the same time, banks feel compelled by competition from nonbanks to offer more products. In addition, bankers are, of course, highly motivated by the potential for earnings.

The CEO of Wayne, NJ-based Valley National Bancorp, Gerald Lipkin, says bluntly: "we think we can make money on investment offerings; that’s the only reason we’re in the business."

At the same time, the products are something Valley customers request, he says. He calls the business a "natural" for the bank, adding that customers will buy an investment product at Valley as a matter of convenience. Importantly for banks, in general, their customers may be more inclined to let their money sit in the banks through the ups and downs of investment cycles, given that banks are not the natural haunts of financial wheeler-dealers. In fact, net redemptions of mutual funds at banks have been less than was expected.

Lipkin says his customers simply want to be relieved of the job of evaluating individual stocks or mutual funds. "It’s not fancy or flashy. People just want sound management of their money," he says.

The bank has approximately $350 million under management and expects revenue in 2001 to amount to about $3 million. "It’s a small business, especially in relation to other businesses at Valley, but we’re looking to grow it through acquisitions," says Lipkin. Last year Valley purchased Hallmark Capital Management Inc., an investment management firm. In 1999, Valley acquired New Century Asset Management, which caters to high net-worth individuals and small corporate accounts. Hallmark, which invests in individual stocks, "is up slightly this year," says Lipkin, while, New Century "has taken a little bit of a beating."

Valley, which acquired Merchants New York Bancorp in January, has $7.8 billion in assets and operates 125 branches in northern New Jersey and Manhattan.

The investment products business has "performed as we expected," says Lipkin. Valley, which has $7.8 billion in assets, uses Invest Financial Corp. for third-party brokerage services and financial planning services. According to Cerrulli Associates, there are about 2,500 banking companies selling investment products, but fewer than 200 do the business exclusively in-house.

The rest use a third-party marketer like broker-dealer Invest Financial. That company’s president and CEO, Robert Blagojevich, says investment products are not part of a typical bank’s core business and are best handed off to an operation like Invest, which knows the ins and outs of selling investments better than most bankers ever will. It also costs a lot to create and maintain a retail brokerage operation, he says. On top of this, there are serious regulatory issues pertaining to investments, regulations that are unfamiliar to bankers. While many large banks operate their own broker-dealers, third-party marketers aim to serve the mid-size and smaller banks.

"We see a big opportunity developing for third-party broker-dealer marketers at banks over the next 12 to 18 months, as earnings pressure on banks combines with a volatile stock market," says Blagojevich. A third-party marketer offers some cover for banks in the event a customer loses money on an investment, he says. He predicts that some banks that have attempted to sell investments on their own will abandon the effort, handing it over to a third-party marketer. Last year Invest, which began in 1982, sold more than $3.2 billion in mutual funds, stocks and bonds, annuities and other life insurance products. According to Invest, over 60% of banks offer investment products, with most outsourcing at least a part of that work.

The turmoil since the spring of last year has investment sales people at banks stressing the importance of "educating" investors. Giles of Wilmington says there are two kinds of customers: those who focus on returns and those who trust Wilmington to see to their interests over the long haul. "Our customers ask: ‘Am I going to be where I want to be in 20 years?’," says Giles. Wilmington has about $4.5 billion under management and reports that fee income makes up about 48% of total income.

In general, the public trusts the corner bank more than it does some brokerage house, giving banks the chance to assume the role of financial counselor. [This trust may sometimes be misplaced, according to Merriman, who asserts: "We have seen rotten things done to clients of banks just as with clients of brokerages. Bank salesmen are not immune to the temptation to make a fast buck."]

When deposits slowed a few years ago (they have since picked up as the market has dropped) banks turned their attention to other revenue sources, among them investment products. At the same time, investment products came to seem less of a threat to the deposit base. According to Malatesta, "disintermediation is not as big a concern as it was."

Meanwhile, there’s already an established financial relationship, one that banks can further cement with the sale of investment products to a customer. "Investment products are another way to build customer relationships, and Sky sees them as critical to its success," says Petrore.


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