BOSTON — For most banks, selling mutual funds has not been all it was cracked up to be.
Ever since banks jumped into the industry nearly a decade ago in an effort to hold on to customers in search of higher returns, they have struggled to compete with industry heavyweights like Fidelity Investments and Vanguard Group in what has become a $3 trillion business, in terms of assets under management.
On the surface, the picture looks rosy.
Bank mutual-fund sales increased 12.6 percent in 1995, up from the 10 percent growth in 1994, according to a report by Cerulli Associates Inc., a Boston-based consulting firm, and Lipper Analytical Services Inc. of New York. Sales in 1996, however, are expected to remain relatively flat.
Total assets for bank-advised mutual funds increased 30 percent to $306 billion in 1995, according to the report.
But after "peeling away the skin," as one analyst put it, banks' performance in this arena looks less impressive.
For one, bank-run funds have not had a lot of success in terms of collecting new cash from investors. Instead they have depended considerably over the years on converting money managed in their trust departments for well-to-do customers.
Since 1985, 17.6 percent or $53.8 billion of the total assets for bank-advised mutual funds is from banks converting money into their funds from other assets in the bank, according to Cerulli.
Moreover, bank-advised funds are still weighted heavily in low-fee money-market mutual funds, rather than stock and bond funds. Money-market funds make up 60 percent of bank-managed funds, according to the Cerulli-Lipper study, compared with 28 percent for nonbank funds.
Bank holdings of stock and bond mutual funds have declined over the past few years from 3.4 percent of total mutual-fund assets in 1993 to 3.2 percent in '95.
In order to compete effectively, analysts say, banks' asset mix must more closely resemble the mutual-fund industry.
Faced with tough competition, the number of new funds banks have introduced has fallen significantly. The banking industry created only four new fund families last year, the lowest level since the mid-1980s when bank funds first surfaced.
There is some good news. While many banks have struggled to sell their own mutual funds - mostly because of marketing problems - some banks are generating respectable revenues by selling outside top-name funds.
"Banks are doing a credible job selling mutual funds," says Andrew Guillette, a consultant at Cerulli. "But they are doing a better job selling other people's funds rather than their own."
Half of the major fund companies saw an increase in sales of their mutual funds by banks in 1995, while half did not, according to the Cerulli-Lipper report.
Currently, 112 banks sell their own mutual funds. That compares with more than 480 banks that sell third-party funds, according to Mr. Guillette.
Regarding performance, some analysts contend that bank-run funds don't have the returns that some hot funds have. But others contend that on average, with exceptions, bank-run funds perform about the same as nonbank funds.
In the past five years, bank-managed funds with a growth objective averaged an annual return of 15.96 percent compared with 16.44 percent for nonbank funds, according to the Cerulli-Lipper report.
Much of the problem is cultural. Banks' core business has been deposits and loans, and now they are moving into an investment business, analysts say. In addition, bank-run funds are new and don't have the name recognition or the long-time track records that the big funds have. Many banks also don't provide hefty budgets to market and sell their funds.
Another problem is public perception. "Banks just aren't thought of as investment managers as other groups are," says Neil Bathon, president of Financial Research Corp., a Chicago-based firm that tracks fund assets.
Banks do have a convenience advantage over other mutual-fund distributors, industry watchers say. But in order to capitalize on it, banks must do a better job tying their funds into other services.
Analysts say they see a widening gap between the big banks that are proving they can diversify their offerings and the lower-tiered banks fighting an uphill battle.
In the near future, many analysts see a shakeout. Some banks will decide to get management advice from larger funds. Others will shift to selling more outside mutual funds or exit the business.
Among the banks that have done a good job attracting investors are Wells Fargo & Co. (with its Stage Coach and Overland fund families), PNC Bank Corp. (Compass), and BankAmerica, industry watchers say. Some institutions, like Chase Manhattan Corp. with its Vista funds, are starting to sell their funds through outside distributors such as Merrill Lynch.
For consumers, fees tend to be roughly the same whether buying funds through a brokerage firm or a bank, analysts say. The key is to be sure to understand what you are buying and what your goals are.
Also, understand the risks. Some banks have been the focus of regulatory scrutiny for failing to disclose that mutual funds, unlike bank deposits, are not guaranteed by the Federal Deposit Insurance Corp. Bank-advised mutual funds must comply with the same rules as nonbank funds.