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By CLAIRE SCHECHTER; Times Leader Business Editor
Sunday, December 26, 1993 Page: 32G QUICK WORDS: BANKS PUSH MUTUAL
FUNDS TO KEEP HOLD OF YOUR MONEY
Bankers aren’t talking pen sets and toasters anymore.
They’re pushing mutual funds.
Tired of watching from the sidelines as customers pulled more and more
money out of low-interest-paying accounts and certificates of deposit, banks
across the country and throughout Northeastern Pennsylvania are fighting back.
Gifts and giveaways won’t stop the dollar drain, bankers concede. But
mutual funds — which pool individuals’ money and invest it in stock, bonds
and money markets — may do the trick.
For the past several years as interest rates slumped, bank customers have
run to mutual funds which offered, and most often delivered, much higher
investment returns. If banks offer the same products, their theory goes, more
customers will move money across the bank lobby to the mutual fund desk, not
out the door to a brokerage house or mutual fund firm.
That explains the recent mutual fund advertising blitz by PNC Bank and
First Eastern. That’s why the Franklin First Federal, First Fidelity and
Commonwealth Banks have all found outside investment firms to sell a variety
of mutual funds for them.
And that’s why Mellon Bank took a gigantic step earlier this month when it
decided to spend $1.85 billion in stock to purchase The Dreyfus Fund, the
sixth largest mutual fund firm in the country.
“Clearly the consumer’s appetite for mutual funds is enormous,” says Tom
Butch a Mellon spokesman.
The fund frenzy
In numbers, the rush to mutual funds looks like this:
Money in bank CDs (which now average near a 3 percent return for one year)
fell 34 percent from $1.2 trillion at the end of 1990 to $788 billion at the
end of November.
At the same time, dollars in mutual funds (the top 25 stock mutual funds
averaged over 25 percent total return in 1992) swelled 86 percent from $1.02
trillion in 1990 to $1.9 trillion now. During 1993 alone, mutual fund assets
increased 27 percent.
In the words of a candid banker, the stampede looks like this:
“They’ve voted with their feet,” Mellon Bank Corp. Chairman Frank Cahouet
said recently, admitting that hoards of long-time customers have walked away
from banks in favor of brokers, insurance agents, and even their own telephone
from where they can buy their favorite mutual fund, sometimes without a sales
charge.
Mellon grabbed the attention of the financial world two weeks ago when it
announced plans to buy The Dreyfus Fund. But like many other banks, Mellon has
been selling mutual funds for some time. The Dreyfus deal re-emphasized their
importance.
First Eastern and PNC Bank have also been in the mutual fund business for
years. Both, however, have recently begun heavy newspaper and magazine
advertising campaigns to step up sales. Commonwealth Bank started selling
mutual funds through a third party in June 1992 and First Fidelity and
Franklin First Financial jumped in within the last six months.
“Our objective is to provide our customers with expanded financial
services,” says Richard Mebane of Franklin. “We want to give them what they
want so the won’t go across the street.”
When the Mellon-Dreyfus deal is complete, Mellon will have $78.7 billion in
mutual funds under its sponsorship, by far the largest amount of money managed
by any U.S. bank.
And after the Dreyfus purchase, Mellon expect fees from mutual fund
purchases and from other financial services offered by the bank to bring in as
much as half the company’s $3 billion annual revenues.
Still, Butch says that Mellon’s approach to mutual funds will continue to
be “measured and judicious.”
The bank now sells funds through investment counselors and Invest Net, a
licensed broker. “We do personal needs assessments for everyone,” Butch says.
Four counselors serve Northeastern Pennsylvania and will set up
appointments at Mellon branches or meet with customers at home, Butch says.
Consumers beware
It may take more than house calls, however, to clear up some confusion
among mutual fund buyers.
A recent Securities and Exchange Commission survey reported that more than
half the 1,000 people polled believe that some mutual funds sold by banks are
insured by the federal government. Twenty-eight percent thought mutual funds
are backed by the assets of the bank.
Both beliefs are false.
Mutual funds, unlike bank savings accounts and certificates of deposit, are
not insured up to $100,000 by the federal government, nor are they guaranteed
by banks that sell them.
Federal regulators have issued some guidelines for banks to follow when
selling and marketing the uninsured funds and Congress has suggested more
stringent rules.
But bankers here say they already go out of their way to make sure
customers realize they get no insurance with a mutual fund purchase.
Jim Poehlman, who sells PNC Funds for PNC Bank, says customers are alerted
to the no-insurance fund provisions by signs, documents and lectures.
Representatives of PNC’s third-party broker sit down with mutual fund buyers
and “take great pains to make sure they understand,” Poehlman says.
First Eastern spokesman Edward Vergari says “We don’t want a customer to
think the bank or the government is guaranteeing this in any way. If they want
a higher rate, they have know they are accepting some risk.”
Competition heats up
Banks’ increasing interest in mutual funds is no surprise to stockbrokers
who have pulled in mutual fund sales commissions for years.
“Sure they want a part of it,” says Ray Crisci, manager of Wilkes-Barre’s
Merrill Lynch office, “Mutual funds are an absolute long-term trend. It won’t
let up over the next decade.”
Crisci and many bankers say the emerging battle over mutual fund customers
is only a part of a larger struggle between banks and other financial service
companies as differences between the two fade.
“Our biggest push right now is mortgages,” Crisci says. “And we offer
credit cards, checking, lines of credit. We want their (bank) customers and
they want ours.”
Bankers says they are counting on several advantages because of long
relationships with consumers and extensive branch networks.
“Our view is that we have a have a very large distribution system in place
— more than 600 branches — and a high level of confidence (from customers),”
says Paul Levine, spokesman for First Fidelity.
In the future, Americans will likely want to use “all-purpose financial
centers,” Levine predicts. “Banks will be the place.”