Banks, S & Ls Move Into Mutual Funds : Investments: The financial institutions hope to win back and retain depositors. Analysts say there are cheaper alternatives.

By SHARON BERNSTEIN

Dec. 1, 1992 12 AM PT

TIMES STAFF WRITER

With interest rates so low, investors are fleeing traditional bank deposit accounts and certificates of deposit in droves, turning instead to mutual funds and other securities-based products.

But local banks and savings-and-loans are determined to win back those deposits--and prevent more cash from leaving. Many, from large institutions such as Great Western Financial Corp. to tiny Bank of A. Levy in Ventura, have hired in-house brokers and moved into the mutual fund business themselves.

At Chatsworth-based Great Western, fee and commission income from sales of mutual funds and other securities reached $9.3 million in its third quarter, up 80% from last year. For the first nine months of this year, securities income at Great Western increased 115%, to $26.7 million.

The savings-and-loan’s investment management division has grown from 16 employees when it opened six years ago, to 800 today, said Brian Cerini, president and chief executive officer of Great Western Investment Management. Great Western currently offers 11 stock and bond mutual funds, with a total portfolio of $2.1 billion.

Assets in Great Western’s funds are growing at the rate of $125 million a month, Cerini said, and the company hopes to double the size of its fund business next year.

“It has definitely become a hot topic in the banking community within the last year or so,” said David Weymouth, senior vice president and head of consumer financial services for Bank of America.

Through its mutual fund division, the San Francisco-based bank currently offers eight mutual fund products, including money market accounts, and plans to add several more in January.

“Customers have looked at the various financial alternatives, and while there is still a place for bank accounts and CDs, they also want to have better access to other investment products,” Weymouth said.

But there’s a catch. Most of the funds sold by banking institutions charge high commission rates--known in securities jargon as “loads”--and many advisers say investors can find better deals elsewhere. A typical fund sold by Great Western has a 4.5% sales charge, which is incurred each time customers add to their accounts.

“Don’t buy it there,” said George Benigno, research analyst for the Florida-based Mutual Fund Forecaster newsletter. “It’s cheaper to pick up a Money magazine or go to the local library and read up on investing in mutual funds and learn to do it yourself.” Benigno recommended that investors study some of the many available surveys done on mutual funds, and consider successful no-load funds.

To a degree, the banking institutions are competing for investment customers with large mutual fund firms such as the Vanguard Group and Fidelity Management and Research Co., which offer many no-load funds.

“It’s hard for banks to compete on costs because they have the brick-and-mortar structure and salespeople” to pay for, said John Woerth, a spokesman for Vanguard. “No-load companies can do business through the mail and over telephone lines.”

Selling mutual funds--particularly money market accounts--through banking institutions is not entirely new. Bank of America, for example, started selling them five years ago, and the program at Bank of A. Levy was set up in 1990.

But in the past year, the idea has really taken off. Most financial institutions say their primary goal is to win back the long-term investment dollars of customers who may currently maintain only checking or other small deposit accounts. “Our strategy today is to get existing customers the products they want,” said Dudley Nigg, executive vice president of the Wells Fargo Savings and Investment group. “Over time, we want to challenge the brokerage industry.

“Frankly, what has happened over the years is the more sophisticated customers have gone for their investment needs to brokers and mutual fund companies,” said Nigg.

So in January, Nigg said, Wells began selling 11 mutual funds that are invested by the bank and sold by licensed brokers who operate out of local branches.

The idea, according to bankers, is to provide a safe environment for current customers--many of whom are not investment savvy--to work with a financial adviser to make appropriate investments.

Nigg said Wells Fargo views brokers and independent mutual fund companies, not other banking institutions, as competition, because customers of one institution are not likely to buy mutual funds from another bank.

The mutual funds available through banking institutions differ. At Great Western, for example, the day-to-day decisions about how to invest the money in the funds is handled by six investment firms, including New York-based Alliance Capital Management and J. P. Morgan Investment Management Inc. Great Western’s own company, Sierra Investment Advisers, administers and services accounts, and sets long-term investment strategies for the funds.

Wells Fargo and Bank of America, on the other hand, manage and sell their own funds.

Because antitrust laws prohibit banking institutions from handling all aspects of securities transactions, institutions that sell their own mutual funds must use outside companies to handle the actual purchases of shares in the funds. At Wells Fargo, for example, the in-house brokers are employees of the bank, but are licensed through a brokerage based in Portland, Ore.

That company, in turn, funnels customer investments through Stephens Inc., a brokerage based in Little Rock, Ark., which conducts and records the actual transaction.

Bank of A. Levy has not set up its own fund. The bank does employ brokers to work with customers, but they sell various load and no-load funds that are not proprietary to the bank.

Rod Dillehay, vice president and marketing director for Bank of A. Levy, said the company does not expect to realize significant income from the sales of mutual funds, but rather hopes mostly to retain and serve existing customers.

“This was not something we developed to become its own profit center,” Dillehay said. “Fundamentally, a bank makes money by accepting deposits and making loans, and that’s not going to change,” he said. “But in order to be perceived as a full-service financial adviser, we have to provide more than a checking account and certificate of deposit.”

Most banking institutions rely on advertising and direct-mail solicitations customers get with their statements for checking and other accounts. Because banking institutions see their current customers as fairly conservative and unsophisticated in regard to investments, part of the marketing approach is to stress the conservative nature of banks.

“We would be considered a little more conservative than the average broker,” said Bank of America’s Weymouth. “We want to keep the relationship between the bank and our customers very positive, and that might not be the case for a firm that is simply selling one particular niche product.”

The cautious advice meant to guide customers who invest through their banks is paid for, the bankers say, through the commissions or loads charged on investments.