It's become axiomatic in recent years: Banks that want to be serious players in the mutual fund industry need to move beyond their traditional reliance on money market funds.

Indeed, the conventional wisdom holds that fund programs with a higher percentage of stock, bond, and mixed offerings - long-term funds - are more profitable than programs heavily weighted toward shorter-term money market portfolios. That's because long-term funds command higher fees and their asset base is more stable.

But this wisdom overlooks a lot.

The mere fact that a bank has a high percentage of its assets in long- term funds does not necessarily mean it will be highly profitable or highly competitive.

More than 70% of bank equity funds, for example, waive a large portion of their fees, either to build business or because they can't afford to charge the full advisory fee.

Often the funds don't have sufficient assets to offset their fixed costs.

Even if a bank has achieved economies of scale, it can have trouble marketing to customers if its brokerage network is inadequate.

"Long-term funds represent greater profitability, but only for the bank that has big enough scale so that it can charge the average fee for a given category," said Ann Figueredo, a principal at the Spectrem Group, a bank consulting firm in San Francisco.

Currently, about 60% of bank mutual fund assets are in money market funds. That's largely because most assets in bank mutual fund programs came from conversions of trust accounts.

By contrast, the mutual fund industry as a whole has only about 20% of its assets in money market funds.

Because long-term funds are viewed as both more profitable and more stable, banks are eager to expand such fund assets.

Only a handful of banks have a high proportion of mutual fund assets in long-term funds. Of the top 10 bank sellers of long-term funds in 1994, only NationsBank Corp. and SunTrust Banks Inc. sold more long-term funds than short-term funds.

Among the top 20 bank-managed funds in terms of asset size, only those of First Union Corp., NBD Bancorp, SunTrust, and First of America Bank Corp. had at least 50% of their assets in long-term funds at the end of 1994.

Are these banks more profitable than others?

Some industry experts say that, with a more stable asset base and higher fees, they ought to be.

"Put it this way," said Ms. Figueredo. "The revenue stream is there, so the profitability should be there."

But one bank consultant said the mix between long-term and short-term funds is irrelevant.

Most of these banks have in their product families a handful of very small funds that waive fees. A few of NationsBank's equity funds waive some fees; several of the other banks have bond funds that waive substantial fees.

Banks reduce fees either because the fund is not large enough or because the returns in a given market environment are very low.

Unless a fund is large enough so that the fixed costs of administration and technology can be spread over a large asset base, banks are forced to reduce fees in order to keep the returns on their funds competitive. Analysts' estimates of "critical mass" for an equity fund range from $80 million to more than $100 million.

Average equity fund fees range from 70 to 120 basis points. Fees for fixed-income funds are 40 to 60 basis points; for money market funds, 10 to 25 points.

About 73% of bank equity funds waived an average of 30 basis points in 1994, according to Lipper Analytical Services, Summit, N.J. That was up from 69% of funds in 1993, waiving an average of 23 basis points, Lipper said.

While profitability cannot always be gauged, bankers do say that selling long-term funds opens doors to them that selling money market funds cannot.

"You can't be a major player in the mutual fund business just with money funds," said George Able, chief investment officer for NBD's investment management division. "You can't go, (or) even think of going, outside the traditional market without a complete family of offerings."

NBD's goal "is to really grow the long-term instruments," he added. Currently, about 45% of the $6.3 billion of assets in NBD's Woodward Funds is in long-term funds. Mr. Able said he'd be happy if this proportion was 75%.

But A. Michael Lipper, president of Lipper Analytical Services, said that product alone is not enough. "NBD does not have as strong a brokerage as First Union and NationsBank do, so it's not likely to be attracting large amounts of outside money," he said.

Banks such as SunTrust, Chase Manhattan, and First of America have attracted customers from outside their banks because of the strong performance of some of their funds, said Geoffrey Bobroff, president of Bobroff Consulting, East Greenwich, R.I.

Still, he said, no one bank stands out because of its profitability and competitiveness. "There is no Putnam of the banking industry," he said.

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