One of the mutual fund industry's feistiest competitors has some advice for banks in the business: Get out.
In a study it co-wrote with a New York consulting firm, Smith Barney Inc. says banks are not devoting enough resources to building their proprietary mutual fund assets. It calls on banks to change their ways - or sell their fund businesses.
Smith Barney, which manages its own $69.9 billion-asset family of mutual funds, has much to gain from giving such advice.
For one thing, bankers say, the brokerage firm would be a likely acquirer of their mutual fund complexes. The firm would also benefit if banks hired its investment bankers to help complete a sale.
Still, bankers say Smith Barney is not completely off base.
"The study might be self-serving to a certain degree," said David Kundert, chief executive of Banc One Investment Management and Trust Group, Columbus, Ohio. "But I don't think people can disagree with a lot of the findings."
A preliminary draft of the study, which Smith Barney co-wrote with Financial Institutions Consulting, points out that few banks have a clearly defined strategy for their fund businesses. And it identifies areas where banks are falling behind.
The Smith Barney draft says banks need to advertise more, stress their funds' performance, broaden their product offerings, target affluent customers, and give their money managers greater independence.
Banks unwilling to take this advice should consider "divesting current asset management operations" or not entering the business at all, the study concluded.
Smith Barney and Financial Institutions executives declined to discuss the study, saying the findings are preliminary.
James T. Richards, vice president in charge of Brenton Banks Inc.'s $109 million-asset Brenton Funds family, said he's not interested in selling his business and is "committed to building our funds."
Mr. Richards said small banks like Brenton can find a profitable niche by marketing the fact that their funds are managed locally.
But the study showed that in 1995, at a time when most banks in the business were trying to build up a market presence, they cut advertising spending 29%, while mutual fund companies trimmed ad spending by 20%.
Smith Barney recommends that banks aggressively promote their funds' performance, which on average is competitive with those of the nonbanks. It added that banks should use television ads to target affluent customers, who invest in higher-margin products.
"Should we do more advertising? asked Hunting F. Deutsch, chief executive of the trust and investment services group of SunTrust Banks, Orlando. "Yeah, we have to do more to position our fund complex among the likes of Putnam and Fidelity."
But he said many bank programs are young and haven't built a track record they could tout.
Mr. Deutsch added that SunTrust and many big banks have done a good job of attracting talented money managers and fostering an entrepreneurial spirit.
"We recognize the importance of giving portfolio managers flexibility," Mr. Deutsch said. "So far, we've done a good job of retaining them."
