As banks waive management fees to help draw fresh assets into their fledgling mutual funds, they may also be waving goodbye to the promised revenue that motivated their ventures.

The difference between what fund prospectuses allow the industry to levy and what is actually being charged could amount to more than $150 million a year, according to Geoffrey R. Bobroff, a mutual fund consultant in East Warwick, R.I.

That may seem like small change in the U.S. banking industry, but considering that total advisory revenue for all bank-managed mutual funds stood at only $946 million for the year ended March 1995, it's clear that a sizable percentage of fees are being sacrificed.

Many fund experts are alarmed that banks are waiving fees at levels that exceed their nonbank counterparts. They argue that this practice undercuts the reason these institutions flocked into the fund business in the first place: to generate fee income.

"Fee waivers are the Achilles' heel of the bank proprietary fund business," said Mr. Bobroff. Bank executives ought to be "rattling cages saying, where's that revenue you promised me?"

For instance, more than four in five fixed-income mutual funds from banks waived expenses a median of 23 basis points, or 0.23%, for the year ended in March, according to Lipper Analytical Services Inc., Summit, N.J.

That's a whopping one-quarter of the median expense fee of 0.8% of assets for the category.

By comparison, only 43% of nonbank funds in the category waived expenses over the same period, and the median waiver was just 15 basis points of a median expense ratio of 1.03%.

But fund executives view fee waivers as a potentially valuable tool for corralling the assets of price-conscious consumers.

"It's just a standard pricing strategy," said Lee Chase, vice president, brokerage and investment products at Norwest Corp., Minneapolis. "We will waive fees in order to deliver a more competitive product to the investor."

She said that about half of Norwest's funds come with management fee waivers.

By reducing expenses as little as 10 basis points in yield-sensitive products such as fixed-income or money market funds, a manager may push the fund rating into the next higher quintile, a valuable marketing advantage, Mr. Bobroff said.

But eventually weaning funds from the waiver without sacrificing assets lured through boosted returns can be difficult.

"Once you've taken that drug, can you get off?" asked Kenneth R. Hoffman, president of the Optima Group, a Fairfield, Conn.-based consulting firm. "Yes, you can, but it can have a marked effect on assets in your portfolio."

Building a fund from scratch frequently means offsetting expenses until assets grow large enough to defray costs. An infusion of converted trust assets can help, but the slow rise in assets in many bank funds imperils the presumption that waivers are temporary.

"Fund groups at banks haven't grown to the point where they don't need waivers," Mr. Bobroff said. "It's a critical-mass problem."

Many fund executives see waivers as a necessary evil, the price of admission to the increasingly crowded market.

Dreyfus Corp., which pioneered fee waivers in 1974 - two decades before it was acquired by Mellon Bank Corp. - often reduces new fund expenses for six months or a year, said Daniel C. Maclean, the fund giant's general counsel.

"If you're introducing the seventh municipal bond fund into a market, and your expenses are at 2% and the others are at 0.7% or 0.8%," fee waivers are a successful marketing technique, he added.

Running counter to competitive pressures are concerns for fund profitability that push executives to remove the waiver crutch.

"We acknowledge the fact that there's a need" for fee waivers, said Craig Miller, controller at Great Western Investment Management, adviser to the Sierra Funds. "But we try to get away from them as soon as possible. You hope it doesn't go more than two and a half years."

Great Western recently reduced the dividend yields for five of its funds by 11 to 35 basis after deciding that it was subsidizing more than its competitors.

At Dreyfus, executives meet monthly to compare a fund with its peers and determine whether a fee waiver can be scaled back.

"It's a touchy-feely empirical thing," Mr. Maclean said. "There's no absolute rule."

Some experts say that persistent fee waiving can sap a bank's earning power, and what starts as a temporary marketing gambit can develop into a full-fledged bad habit. An overreliance on fee waivers as the primary means to build those assets is especially troubling.

"For the majority of bank proprietary mutual funds, the warning lights should be on right now," Mr. Hoffman said. "Those banks that are smaller and trying to use fee waivers in the hopes that it will help them amass assets are fooling themselves."

For the last five years, banks with proprietary funds have focused on incremental growth, Mr. Hoffman said. "But by and large banks have not grown their funds at rates equal to the rest of the industry, so their market share is declining each year."

He counsels his clients to spend more on distribution and sales or to develop unique products, such as regional or sector funds, that could distinguish them from the crowd.

Mutual fund guru A. Michael Lipper, president of Lipper Analytical Services, said that lingering fee waivers are "a barometer of perceived competition." Cutting fund expenses through fee givebacks is only one way to compete, Mr. Lipper said.

He, too, counsels banks to invest more in sales and marketing - especially shelling out for top management and sales talent. Inadequate attention to product sales is hard to overcome through price chopping alone. "Part of the problem is, there's no sense creating a competitive yield if you can't sell it."

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