As banks keep trying to increase investment products' long-term profitability, more are turning again to making their own products and marketing them aggressively to their customers rather than trying to sell a broad selection of products from several providers and relying on transaction fees to boost the bottom line.

By creating in-house funds, they are seeking to gather assets to manage and to gain a steady stream of fee revenues, much as other fund companies do.

Though many banks and bank holding companies contacted by American Banker declined to discuss either their proprietary funds or their specific strategies, outside studies show that at most banks, sales of proprietary products, both mutual funds and annuities, is about 21% of all investment product sales, according to Ken Kehrer, president of Kenneth Kehrer Associates in Princeton, N.J.

A recent Kehrer survey said 18% of banks are currently trying to "significantly" increase proprietary investment product sales. Another 29% were trying to increase proprietary sales "somewhat"; 50% were trying to maintain the current mix; and 3% were trying to reduce such sales.

For banks, developing a successful line of proprietary investment products, whether mutual funds or annuities, remains important because the fees produced are consistent and can help banks weather a bear market, said Robert Ash, president and chief executive officer of Fleet Investment Advisers, a division of FleetBoston Financial Corp.

However, relying solely on commission revenue from the sales transaction, without the fees available from asset management, "invites trouble," he said. In a bear market, commission revenues can dry up, but assets under management offer predictable income. Institutional memory at many banks may not reach back far enough to show how important such business can be, Mr. Ash said. "Very few people in this business have been through a bear market," he said.

Banks are attracted to the kinds of revenue proprietary products can provide, but some are hitting growth barriers - even when they follow reliable strategies, such as buying an asset management specialist or a securities broker with experience in marketing investment products to help improve proprietary-product sales.

For KeyCorp in Cleveland, getting the brokers at its McDonald Investments unit to sell the banking company's proprietary products was complicated by the fact that McDonald never had a proprietary line, said Kathy Dennis, senior managing director at Key Asset Management.

KeyCorp bought McDonald in 1998 in part to push investment products to its bank unit's customers. McDonald's brokers, Ms. Dennis said, were not accustomed to pushing one over another.

As a result, sales of proprietary products hover between 20% and 25% of KeyCorp's mutual fund volume, she said. On the annuity side, proprietary product sales are even lower - about 15% of the total - largely because KeyCorp lacked a proprietary annuity until last year, Ms. Dennis said.

The success of FleetBoston's Galaxy Funds - which account for about 69% of the company's investment product sales - has to do with both the funds' performance and Fleet's constant communication with shareholders, Mr. Ash said.

He said he believes that FleetBoston's focus on managing investor expectations plays a role in the Galaxy family's low redemption rate - among the lowest in the industry. One way to manage expectations he has found effective is steadily communicating with shareholders. Monthly news notices help them keep performance expectations in line with reality, he said, and make them less inclined to cash out.

FleetBoston's brokers are given no added incentive to sell the company's Galaxy funds, Mr. Ash said. They actually make a slightly higher commission by selling outside funds.

But if a company's own portfolios make up a big percentage of its fund sales, it is not unusual for the National Association of Securities Dealers or even the Securities and Exchange Commission to take an interest, said a spokeswoman for the NASD. The concern would be that the banking company's brokers get excessive sales incentives - such as significantly higher commissions - for proprietary products and that this could be contrary to investors' best interests.

Efforts to push bank mutual funds through external channels are complicated by several factors, say bank officials. First is the continuing growth of competition, Mr. Ash said. Mutual fund and annuity wholesalers are intent on getting their products out a bank's door, he said, and the bank's own products can get lost in the shuffle.

Second, many bank-created investment products are not meant to be sold outside the bank's universe of customers, said Mike Higgins, president of Bank of New York Investment Center Inc. When banks offer these products, it is often to forestall disintermediation - to help keep depositor assets in the bank, Mr. Higgins said.

That doesn't mean that these products are inappropriate for nonbank customers - only that banks often make little effort to reach such customers, he said.

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