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Want a Fund Along with That Bank CD? Fund Sales at Banks Jump 7.8% in 2002 to $34.5B

Investors are turning less frequently to financial advisers and brokers to purchase mutual funds, and more frequently to the safe haven of banks.

While sales of long-term mutual funds through all channels increased only 4% last year, sales of mutual funds through banks increased 7.8% last year to $34.5 billion from $32 billion in 2001. The lion's share of sales were in the first half of the year, particularly in the first quarter, when sales reached a two-year high of $9.6 billion, according to the Kehrer-Invest Bank Mutual Fund Sales Survey.

"Bank customers are more focused on conservative funds - fixed-income funds, balanced funds - than a typical customer who invests through a stockbroker," said Ken Kehrer, whose research and consulting firm, Kenneth Kehrer Associates, Princeton, N.J., conducted the survey.

"Advisers kept telling their customers, Don't worry. There has never been three down years in a row,'" Kehrer said. "Then, as the third down year in a row materialized, people became discouraged. They said, I can't go with this historical stuff anymore.'"

It's getting more and more difficult to persuade clients to be in the market, observed Lynn Niedermeier, president of Invest Financial Corp., a Tampa, Fla., broker/dealer that supports banks and independent financial advisers.

"People are leaving the market because they can't stand the pain anymore," she said. "People are afraid. They're more concerned with preserving principal than with getting any kind of high return over the long-term."

That kind of thinking is a major attitude adjustment for many investors, according to Peter Wall, senior vice president for Chase Personal Financial Services in New York. "Customers still remember the days when they could get double-digit returns. They're trying to adjust their investment strategies to cope with the prospect of single-digit returns on an annual basis."

"Clients want extra TLC. We're seeing more interest in fee-based business in the bank channel," Niedermeier said.

In one sense, the bank channel isn't any different than any other financial service channel, contended Gordon Forrester, director of marketing for Putnam Retail Management in Boston. "The bank channel saw a flight to cash into money market mutual funds, CDs and fixed income funds," he said.

That appears to be the experience of Chase, which saw a dramatic shift in fund sales at its banks. In 2001, sales of equity and fixed-income funds were evenly divided, but in the first half of 2002, 75% of those sales were for fixed-income funds and only 35% equity.

While fixed-income products made a strong showing during the first half of 2002, declining interest rates took their toll on those products in the second half of the year, Wall explained. "Rates were so low, even fixed products became unattractive to investors," he said.

As investors look for safe harbor, Niedermeier predicted that more principal-protection products will be introduced into the bank channel this year.

"We are seeing some interest in principle-protection mutual funds," Wall concurred. Chase currently sells principal-protection funds from ING and Scudder.

However, it remains to be seen if principal-protection products will have a broad reach in the bank channel. Forrester said he does not expect them to become mainstream. "Some banks may participate in them, but they're a fairly complicated product. And banks don't like complicated products."

Tepid sales during last year's fourth quarter appear to be continuing into this year. Wall said that first quarter sales of funds are substantially below last year's first frame and flat compared to the last quarter of 2002.

Kehrer maintained that mutual fund sales in banks will remain weak until there is a sustained rally in the stock markets. "There were a couple of sucker rallies in 2002 that coaxed some people to come back," he noted. "I expect that fewer people will invest in what looks like the beginning of a trend and will wait until the markets are moving up more regularly."

But pulling those investors in from the sidelines will be a chore this year. "People are waiting to see what will happen in Iraq," Forrester said. "Once that resolves itself, there'll be a clearer road ahead for investors.

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