H. Jay Sarles, who recently began a one-year stint as chairman of the Consumer Bankers Association, is determined to see to it that banks can compete in the investment products business.
And as vice chairman of Fleet Financial Group, Mr. Sarles is unusually well versed on the subject.
Fleet, with $47 billion in assets, has made mutual fund sales and management a top corporate priority.
In 1992, Fleet became one of the first banking companies to launch a no- load family of mutual funds. The Galaxy Funds now boast $5.2 billion in assets, making them the 13th-largest bank-managed mutual fund family, according to Lipper Analytical Services, Summit, N.J.
Mr. Sarles has been directly involved in the funds' success. His wide- ranging duties include overseeing the company's investment services, brokerage, and private banking units. In a recent interview, he voiced concern over mounting regulation of bank mutual fund activities, and discussed his vision of the fund business.
Q.: What are the CBA's priorities on the investment products front?
SARLES: We want to make sure we're not negatively impacted with any legislation that would make it more difficult for banks to compete in the investment management and mutual fund business.
We'll work to make sure we get regulations from banking regulators and groups such as the National Association of Securities Dealers that don't penalize banks. And we want to try to work with both banks and the public to explain exactly what investing in mutual funds means.
Q.: What specific plans do you have?
SARLES: The American Bankers Association, Consumer Bankers Association, and Bankers Roundtable are cooperating to pull together an industry response to the rules the NASD recently proposed.
We're already highly regulated by the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp. All of a sudden, the NASD wants to come in and propose regulations for banks. And a number of states are suggesting they want to propose regulations.
Q.: Why is that an issue?
SARLES: We find ourselves subject to regulations from a number of different parties, and often those regulations conflict. And we've got a lot more people regulating us than mutual funds that aren't affiliated with banks have.
Often, we get held to a higher standard. I think it's reasonable to ask banks to make it very clear these instruments are not deposits. But to subject them to multiple regulation, to conflicting regulation, and to a higher standard of qualification than nonbanks is, in my mind, unfair to the banking industry.
People are saying you've got to segregate where you sell the mutual funds. If it's a small office, that can be difficult, if not impossible. They're saying tellers and desk people can't be paid a referral fee. It's even been advanced that we should be held to a higher standard in terms of disclosures.
We clearly want to make sure the industry does a good job of telling the consumer what the product is and what the risks are, but we don't want to have one arm tied behind our back.
The banking agencies and the NASD are going to work together to coordinate regulatory exams. That's a step in the right direction, although I am concerned that that allows the NASD to get into our house before we've made sure we understand what that means.
Q.: What effect will the down market in mutual funds in 1994 have on activities in 1995?
SARLES: Banks are going to be dealing with customers who in some cases may be unhappy. But I think the disclosures have been pretty good, and the effort by the banks to stay pretty close to the customers is good, so I think we'll come through this in good shape.
Q.: Do you expect to see some banks getting out of the business?
SARLES: When something becomes a hot product, everyone gets into it. Then we find out not everybody is going to be large enough or have the technology or the people resources to make a go of it.
Over the next year or so, you'll see some change. Some banks will become major players through a combination of growth and acquisitions. Others will become niche players and pick particular areas of expertise. You'll see other banks exiting the business and simply offering mutual funds through other distributors.
But there are enormous amounts of wealth out there, and that wealth needs to be invested. As long as the mutual fund business is a good way to invest it, then banks want to be part of that business.
Q.: How successful has Fleet's no-load strategy been? Will you charge fees in the future?
SARLES: When Fleet got into the mutual fund business, we thought long and hard about how to position ourselves. We recognized we were in a very competitive area for mutual funds, just down the street from Boston, where many mutual fund companies are based.
To compete effectively and offer real value to our customers, we settled on a no-load approach. We felt that over the long term, no-load funds would give customers value, enabling us to grow faster.
After nearly nine years in the business, we think it's a very workable approach. We've reached more than critical mass, with mutual funds under management of more than $5 billion. It's become a profitable business for Fleet, and we think we're continuing to grow at a good pace, so at this point I think we're very happy with that approach.
Longer term, we think that's the right approach. But we obviously reassess the business continually to make sure we're positioned to give value to our customers and to do so in a profitable way for Fleet. We recognize we're in the minority in the banking industry, but we think that's going to be a real advantage, and we'll find out three or four years out.
Ms. Iida is a freelance writer based in New York.