Banks should carefully weigh whether to offer proprietary back-end load funds at a time when increased competition is causing fees to drop, Mary K. Stern, president for Society Corp.'s mutual fund products, said last week.

More and more banks are adopting the complicated fee structure, Ms. Stern told the more than 140 bankers at a Bank Securities Association Conference in Chicago.

"If you want to be premier in this industry you have to think about what will be going on after today," said Ms. Stern, who before joining the Cleveland-based bank last month had been a vice president in investment products at Norwest Corp.

Right now, the hottest ticket in mutual fund pricing appears to be contingent deferred sales charges, or CDSCs, which are back-end loads.

New Product for Banks

Under this structure, a customer pays a fee when a fund is redeemed. The fee, or load, decreases the longer the fund is held. Typically, CDSCs disappear after a fund is held five or more years.

One year ago, Ms. Stern said, there were 311 funds in the marketplace with CDSC load features, but none were bank proprietary funds. Several banks are currently rolling out back-end load funds, and she predicted that more will follow.

"We need to ask ourselves: Are we really redefining pricing methods, or are we following [brokerage houses]?" she said.

Less Customer Resistance

Ms. Stern said bank sales representatives tell her that because CDSCs are similar to certificates of deposit, which also carry fees for early withdrawal, bank customers seem to take well to back-end loads.

Customers seem to have less resistance to the back-end load structures because they don't have to pay a fee up front, she said.

But banks choosing to deal with the complexity of back-end loads must clearly explain how the loads can affect performance. The back-end structure, often with increased 12b-1 fees to finance broker payouts, can cost a customer between 50 and 100 basis points on returns.

Ms. Stern believes it's important to disclose the way fees will affect return to avoid customer backlashes later: "We have to be sure to explain that differential because it will show up."

Long Waits Possible

While general industry information is difficult to collect, Ms. Stern said the rule of thumb is that the back-end load structure is about half as profitable to banks as front-end loads.

Because the broker fees must be paid up front, the bank must find a way to finance those fees while awaiting the back-end load. It can take as long as eight years to recoup that payout, she said. The Glass Steagall Act makes it difficult for the bank to lend to its own fund distributor, she said.

In some cases, bigger distributors have the means to finance themselves. Smaller distributors might not have the resources to finance the fees -- a factor to consider when choosing distributors, she said.

Another option is to sell the 12b-1 fee stream, fees that are charged annually against fund assets, to outside firms in exchange for financing.

Accounting Problematic

This can be advantageous in removing Glass-Steagall and accounting headaches but can cost the bank market appreciation potential and flexibility.

Those selling back-end load funds have faced thorny accounting issues such as dealing with the financing broker commissions for tax purposes. Eaton Vance Corp., a Boston-based mutual fund company, has been capitalizing and amortizing commissions for financial reporting purposes while expensing them for tax purposes.

In February, the Internal Revenue Service asked Eaton Vance to capitalize the expenses on its returns. The firm is fighting that change. Ms. Stern said banks planning to offer back-end funds are watching carefully.

Overall, back-end loads require a commitment of time and resources to handle the many complications, she said.

If a fund family offers back-end loads as well as other structures like front-end loads, the specifics must be explained side by side in marketing materials.

Without clear explanations, customers can become confused when one type of load is changed or waived, she said.

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