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Banks Employ Gatekeepers to Aid Distribution

For years, observers have known that the bank channel suffers a unique brand of problems that makes it difficult for the institutions to become a sizable distribution channel for mutual funds.

The channel has been marked by infighting between trust departments, which typically form tighter relationships with investors, and newer brokerage units, which typically provide investors with quick transactions.

Both departments face competitive pressures, observers say, and so they often slug it out over who will get to serve individual investors. To mitigate the problem, the departments have sometimes forged agreements with each other: Accounts of $75,000 or more will go to the trust department, for example, and smaller accounts will be serviced by brokerage units. The problem is that in many cases the agreements are not honored as executives quietly keep accounts in their own departments so that they can report solid sales gains to their superiors.

But a small bank operating out of Chester County, Pa., is employing an increasingly common strategy to ensure that such infighting doesn't take shape.

First Financial Investments, a unit of Chester Valley Bancorp, announced earlier this month a new relationship with broker-dealer UVEST that will allow it to provide its clients with mutual funds and other financial services without having to direct them to its trust department. UVEST will also ensure First Financial's compliance with SEC and other regulations, a common tactic used by banks to navigate complex regulatory issues.

First Financial already owns a brokerage unit called Philadelphia Corporation for Investment Services, which it bought in 1998. But that unit deals with more high-net-worth investors and isn't equipped to address the high transaction volumes that come with more consumer-oriented retail mutual fund sales.

Bringing in a Third-Party Referee

To cool tensions between the new brokerage unit and the bank's trust department, First Financial has promoted Michael DiStefano, who, in a role commonly referred to as the "gatekeeper," will decide whether new investment accounts are channeled to the trust or brokerage units as they come through the branch network. DiStefano had originally been employed by First Financial. He has been in his new position for four months.

DiStefano, who declined to comment for this story, works under a seemingly unusual charter. He is employed by both UVEST and First Financial. Such arrangements are far from new to the business, but observers say the method of using so-called dual-employed gatekeepers is gaining prevalence in the bank-sold fund business.

The tactic doesn't guarantee that bank and trust channels won't end up slugging it out over business, said Donna Coughey, the bank's CEO. DiStefano will roam the bank's nine branches providing advice to individual investors by appointment, and he will run his own book of business, which makes him far from a neutral party in disputes.

But Coughey said DiStefano was hand-picked as someone the bank believes will fairly divvy business between the two departments with the clients' interests in mind. That attention to the hiring process, she hopes, will help prevent infighting.

"You have to manage it through," she said. "You have to stay on top of it."

So far, she said, the departments seem to be referring new business to each other without any hitches.

"We haven't had one incident at all where somebody said It should have gone here. It was mine,'" she said.

In addition, Coughey said managers at the bank are driven by profit-sharing incentives to ensure that both units do well.

Historically, many banks that sell mutual funds have employed a different version of the gatekeeper strategy. In those cases, an executive who works in the institution's trust department decides which unit gets a new account based on the amount of assets involved in the transaction.

A Popular Option

But Rachael Malatesta, a senior analyst at the financial researcher Cerulli Associates, says such arrangements are declining in popularity. The reason, she said, is that without a stake in the brokerage side of the business, gatekeepers on the trust side have trouble keeping the peace. "He has to have skin in the game to institute those gatekeeping roles," she said.

Banks have recognized the shortcomings of that method, Malatesta said, and dual-employed gatekeepers like DiStefano are on the rise. Seventy-five percent of third-party firms, such as UVEST, say they are using dual-employed gatekeepers, according to Cerulli.

In general, banks have been moving for more than a decade to provide more investment-related services. The reason, analysts say, is that banks are afraid of losing market share to brokers, who increasingly provide bank-like products.

Banks also see an opportunity to market new products, such as mutual funds, to a client base with which they already have strong ties. In fact, more than 80% of the investors who use a bank's brokerage services have already been customers of the institution, Cerulli said.

But smaller banks like First Financial are in for a challenge. Fifteen giants control 80% of the bank-driven brokerage business, making it difficult for smaller institutions to gain market share, according to Cerulli. And a report from that research group, issued late last year, says that the stakes are high for small banks, who need to come up with new strategies to "integrate both bank and brokerage business lines" if they're going to gain market share.