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Outsourced Bank Sales Down Slightly in 01


Investors are more willing to retain their assets with banks because they have a stronger relationship with them than with other financial firms, according to industry analysts. While net flows into mutual funds dropped nearly 45% in 2001, net flows of funds sold by banks through outside distributors decreased only 14%, according to a study by Kenneth Kehrer Associates, a consulting firm in Princeton, N.J.

Investors' devotion to banks may come as something of a surprise. Banks have had a difficult time growing as a mutual fund distribution channel, accounting for only 9% of mutual fund sales in 2000, according to Cerulli Associates, a mutual fund research and consulting firm based in Boston.

Of the roughly 2,100 bank brokerages throughout the country, only about 120 have internalized brokerages, while the rest outsource their brokerage services to a third party broker/dealer, according to Cerulli. Unless a bank is very large, it does not make economical sense for it to have its own brokerage unit, said Kenneth Kehrer. Since the early 1980's, the Securities and Exchange Commission has allowed banks to outsource brokerage services to "networked" broker/dealers, more commonly referred to in the industry as third-party marketers or third-party broker/dealers, Kehrer said.

While larger banks with internalized brokerage units dominate the bank channel for mutual funds, third-party marketers are set up at nearly 2,000 banks and are poised to grow, said Rachel Malatesta, an analyst at Cerulli. As banking services become commoditized, banks will look to diversify into brokerage, and Cerulli has predicted that 29% will do so by 2003 and that banking-only entities will be a minority by 2010. Today, 26% of banks have diversified into brokerage, according to Cerulli.

Stronger Ties

The mere 14% decline in mutual fund bank sales through third-party marketers, compared with the 45% overall industry decline, can be attributed to the fact that banks have longer-standing relationships with their investors, Malatesta said.

"The redemption rate of funds sold through the bank channel is much more steady than through any other channel," she said. Banks' share of mutual fund redemptions has remained stable at 10% over the last decade, she said. "We've found that about 70% of bank brokerage customers already are customers at the banks and have relationships with them," she added. "That has a very sticky affect on assets."

Another reason for the stronger retention of assets at banks is that in 2001, investors turned to financial intermediaries more than ever before, according to Malatesta, Although overall industry fund flows fell by 45% last year, the direct channel lost even more assets, according to Financial Research Corp. of Boston.

Mutual fund wholesalers work with banks in two types of arrangements. In a "managed arrangement," a wholesaler places a registered rep at a bank under the independent broker/dealer's oversight. In a "dual arrangement," the registered rep is employed both by the broker/dealer and the bank. In this type of arrangement, because the rep is partially employed by the bank, the bank has a stake in the deal. This makes it easier for the fund wholesaler to develop a relationship with the bank.

In fact, dual arrangements have grown in recent years, according to Cerulli. Ten years ago, the employment agreements were split 50/50 between dual and managed arrangements. Today, roughly 80% are dual arrangements, according to Cerulli.

In 2001, LPL Financial Services led all third party marketers in terms of mutual fund sales, selling just over $1 billion of mutual fund shares, according to Kenneth Kehrer Associates. PrimeVest Financial Services, Inc. was second with $963 million in sales. The biggest gainer, however, was Raymond James Financial, which sold $766 million in mutual funds in 2000, and $957 million in 2001, an increase of 25%.

Although Duerr Financial Corp. experienced the largest percentage drop in mutual fund assets in 2001, with a decline of 50% to $229 million, INVEST Financial Corp. lost even more of these assets last year. The firm had ranked first in 2000, with mutual fund sales of nearly $1.2 billion. In 2001, INVEST's total fund sales dropped to $690 million, a decrease of 42%.