When bankers look back on the early 1990s, many are likely to look at the world of investment securities and wish they had never entered it.

Sure, observers expect that about half of all mutual funds will be sold by banks by the turn of the century. And it is hard to read any business publication without seeing story after story about banks entering annuity sales and mutual fund distribution.

But must all banks go this route?

Community banks have built their solid place in our financial structure by doing their own job and doing it well. This means knowing the customer, giving quick answers (both yes and no) to loan requests, and handling correction of errors on the first call.

To most community banks, interest rate swaps, securitization, immunization, and the other terms that mean so much to larger institutions are merely words skimmed over in the financial press.

Fear of Being Abandoned

Sure, with interest on savings so low, many banks feel they must offer something more attractive to keep their depositors. At a recent seminar for community banks, run by BNK Advisory Group of Northampton, Pa., several speakers pointed out that up to now the cut in rates paid savers has been all to the good for the banks.

But now depositors appear to have reached the point of rebelion. They want returns. And many banks feel that turning to annuities and mutual funds is the only way to provide these returns since bank rates earned on loans and investments are so low that the institutions cannot afford to pay more on savings than they do.

Know Your Business Partners

But warnings are in order.

Do the community bankers really know the annuity issuers and mutual fund companies they are beginning to deal with?

A bank is judged just as much by the record of the affiliates it recommends to its customers as it is by its own operations.

And I have been amazed to see banks tie up with annuity issuers of far lower stature than the banks themselves. And them the banks encourage their employees to push these annuities by offering the employees a commission on each dollar switched from bank deposits into these new investments ventures.

Not only is the bank risking its name, but it is encouraging people to remove its livelihood -- deposits and IRA funds!

Remember, many banks have been able to return to profitability after the terrible time at the beginning of this decade only because of a willingness to let the bank shrink, concentrate on basics, and recognize that if the customer is not satisfied with the return the bank can afford to pay him, then the bank just has to accept the loss of footings.

Remember the halcyon days of the discount brokerage operations? Many banks thought this would be the sure route to expanded profitability, only to find that the contingent liability from every single trade exceeded the total earnings for the year from the commissions generated.

Even with regard to investing bank funds themselves in investment vehicles, the community bank needs caution and diligence. Jay Brew, managing director of BNK Advisory, reported at its Pittsburgh meeting that one community bank client came to him with the prospectus for a tax-sheltered investment fund in which the bank was thinking of placing money.

He asked Jay to read the complicated prospectus for him. Jay found that there was no appraisals of assets, sales commissions and fees for the funds promoter were allowed to go up to 69.5% of receipts, and there was no need for board approval of any transactions between the fund's promoters and the fund!

Of course, all of this is legal, just as long as it is spelled out in the prospectus.

In sum, community banks have always done well by following a different drummer. Some may find the new world of investment securities attractive to their customers and to themselves. But for others it could be a disaster.

And while most major-sized institutions feel that if everyone else is offering annuities and funds, they must go along, the community banker does not have to accept this burden.

This ability to turn away from such trends without adverse consequences is one of community bank's greatest strengths.

Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.

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