A steady decline in referrals from banking employees to investment staffs has some experts concerned that profit margins might follow.

Bank-generated investment referrals averaged 1.1 per $1 million of retail deposits last year, according to the Consumer Bankers Association's 2000 Consumer Investment Study. This number has declined steadily since 1994 when referrals averaged 2.1 per $1 million of deposits, according to the 1995 study. For a bank with $30 billion of deposits, this would mean that referrals fell from 63,000 in 1994 to 33,000 last year.

Ken Kehrer, president of Kenneth Kehrer Associates of Princeton, N.J., which did the survey, said the decline indicates how banking has changed in those five years. With more people doing "convenience store" banking and seeking investment products online, banks have fewer opportunities.

He also said that for some banks referrals have fallen because bank employees now sell directly rather than referring depositors to an investment products specialist. "Banks have licensed bankers now who can sell investment products,'' Mr. Kehrer said.

Mr. Kehrer said that, with fewer referrals, investment managers must spend more time cold-calling potential investors and profit margins will thin out. The result will be higher broker turnover, he said. "Declining referrals will cause turnover to spike when sales become sluggish due to market conditions," he said.

With a stable market in 1999, broker turnover was down for the fifth consecutive year. Broker turnover declined 10% during 1999. In 1994 and 1995 after the bond market crash, the broker turnover rate was 21%.

The survey indicated that, though they are down, referrals remain the most popular way to identify investment prospects. Many banks have begun expanding other marketing efforts, particularly direct mail and telemarketing to solicit investments. Of the 466 financial institutions surveyed, 87% indicated that they use direct mail this year, up from 72% in 1999, and 60% indicated they use telemarketing, up from 48%.

Three-fourths of the participating banks have advertising programs this year, up from two-thirds last year and fewer than half in 1998.

The only marketing method that banks have backed away from is branch merchandising, down for the third straight year. In 1997, 95% of banks used branch merchandising, but this year only 80% use it.

Banks have tried to increase referrals by reducing the standard for banking employees to collect incentives. In order to qualify for the incentive, usually a cash award of $5 to $25, the referral must result in a kept appointment with an investment salesperson at just 57% of banks; last year 75% of banks required a kept appointment.

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