It is hard to believe how quickly things change.
Just 10 years ago, the Glass-Steagall war was raging. The securities industry combed every possible source every day for information about the banks' latest battle plans.
Ten years later the Cold War is over, the Berlin wall has come down, the Soviet Union is no more, and we are gathered at a conference that does not relate to the ancient bank-mutual fund feud, but rather to bank involvement in the mutual fund business.
Over the long term, the mutual fund industry will continue to grow and prosper. This will result from a number of factors, including:
* The continued development of new mutual fund products and services.
* The long-term trend in the retirement market in favor of defined-contribution plans.
* Individuals continuing to shift from direct investments to packaged products.
* Additional purchases by existing fund shareholders.
But the key factor that will contribute to the success of the mutual fund industry the same factor that has been responsible for the industry's success over the past 50 years.
That factor is public confidence in the industry -- confidence based on the existence of a strong SEC regulatory system and vigorous Congressional oversight of that system.
A Decade of Growth
I also believe that banks will continue to be major participants in the mutual fund business, both as advisers to their own proprietary funds and as sellers of these proprietary funds and of third-party funds.
However, I do not believe that the mutual fund industry, including bank participants, will have completely smooth sailing.
The last decade has witnessed steady growth in the fund industry -- growth in the number of funds, in the number of shareholders, and in the amount of assets under management.
All segments of the industry have prospered -- large, and small; retail and institutional; equity, bond, and money market; taxable and tax-exempt; proprietary and nonproprietary; load and no-load; and broker-distributed, insurance company related, and bank affiliated.
I suspect that this rising tide has masked the fact that the mutual fund business is not immune from downturns.
The Lesson of the '70s
Those of us who have spent several decades in the industry are still scarred by the experience of the early 1970s.
In the early 1970s, sales of mutual funds stagnated. For almost 25 consecutive months, redemptions exceeded sales.
Worst of all, due to the lethal combination of net redemptions and falling portfolio values, total mutual fund assets fell 43%, from $59.8 billion in December 1972 to $34.1 billion in December 1974.
In fact, by the mid-1970s, mutual funds were so out of favor with the public that many people in the industry tried to come up with names for their products that totally avoided the words "mutual fund" or "fund."
Some might argue that the experience of the early 1970s is irrelevant today, since at that time the industry consisted almost entirely of equity funds, and thus was extremely vulnerable to downturns in the stock market.
In contrast, today the industry is far more diversified, with assets almost evenly divided among equity funds, bond and income funds, and money market funds.
However, recent experience -- events in 1987 -- should be borne in mind.
Specifically, sales of equity and bond funds fell in 1987 when interest rates rose. (I should note that the markets, and mutual fund sales, did snap back fairly quickly.)
My point in discussing the prolonged problem of the early 1970s and the bump in 1987 is simply this: Though the long-term trend for the mutual fund industry is likely to be positive, there inevitably will be down periods.
When the current tide does turn, it is likely to lower most, if not all, boats.
This warning is somewhat of a truism, and I hear it virtually every day from veterans in the fund industry. I simply repeat it since so many investors have purchased fund shares and so many banks have entered the fund business during the recent boom period.
An obvious question is: What should we in the mutual fund industry do to prepare for a downturn, and to lessen the problems that it is likely to bring?
I have represented the mutual fund industry and the investment advisory industry for over two decades, and I hope that I am in the position to offer some constructive answers.
A Spur to Uncle Sam
Economic problems tend to serve as catalysts for increased scrutiny by government, often leading to legislation.
The separation of commercial and investment banking was urged by the Pujo Committee in 1912. But it took the banking crisis of the early 1930s to produce the Glass-Steagall Act.
Similarly, a securities disclosure law was called for by Louis Brandeis in 1913. But it took the 1929 crash for Congress to pass the Securities Act of 1933.
The same pattern holds true for mutual fund legislation.
As far as I can tell, the glimmerings behind a federal investment-company law first appeared in an article by Paul Cabot in The Atlantic Monthly in March 1929. But it took the Great Depression to produce the Investment Company Act in 1940.
Similarly, the only major amendments to the Investment Company Act were enacted in 1970, after the go-go years of the late 1960s had ended and the once-glamorous equity mutual funds had fallen into disrepute.
So I would predict that when a downturn occurs in the mutual fund industry, it is likely to bring increased scrutiny of the fund industry from Congress.
Special Focus on Banks
I would also predict that Congressional scrutiny of the mutual fund industry is likely to be particularly intense in the case of bank mutual fund activities.
You may think that this would be unjustified and unfair. But my prediction is based on cold political reality, since even during the current boom period, policymakers in Washington have been expressing strong concern over bank mutual fund activities.
For example, during just a two-week period this past May, the following occurred:
* On May 12, John Dingell, chairman of the House Energy and Commerce Committee, requested that the General Accounting Office conduct an exhaustive study of bank mutual fund activities.
* That same day, the Federal Reserve Board issued a survey of retail sales of mutual funds by 56 banks, drawn from every Federal Reserve District.
* On May 20, the Senate Securities Subcommittee held oversight hearings on the financial services industry. Chairman Dodd's first question to the witnesses concerned bank sales of mutual funds.
* The following day, Henry Gonzalez, chairman of the House Banking Committee, requested that the General Accounting Office conduct a study of how the growth of the mutual fund industry, particularly of bank-sold funds, is affecting the banking system.
* Finally on May 25, at hearings before the Senate Select Committee on Aging, Sen. Cohen expressed concern that banks that are selling mutual funds may not be informing potential investors of the risks.
Since that time, a number of federal banking agencies have come out with standards governing bank sales of mutual funds.
More recently, in an unprecedented move, six bank trade associations jointly issued voluntary guidelines to govern bank sales of mutual funds.