More ‘Advisory’ Mutual Funds In Banks’ Future

Feature Article - Winter 2012 | By Andrew Singer


FINDING INCOME for investors is “the biggest challenge today,” says Tony Fadool, and while it is an imperative on both the brokerage and bank sides, that challenge is “more emphatic on the bank side.”

After all, many bank customers are invested in CDs that are paying negligible rates. “There is a large group of CD investors who are saying, ‘This isn’t working for me,’” observes Fadool, senior vice president and chief sales strategist, Federated Investors (Pittsburgh).

Hence, the need—and opportunity—for bank-sold mutual funds.

Rich Keri, senior vice president at OppenheimerFunds, Inc. (New York), agrees. The traditional bank model of loans and deposits has been “challenged” in recent years, in particular “with the low rate environment” where money is earning little more than zero. That means “mutual funds are one area that is attractive to banks” and their investors.

Outflows in equity funds in 2011

Fund results were mixed in 2011. Suppliers to the bank channel that specialized in fixed-income mutual funds experienced growth; manufacturers of equity-based funds had net outflows given stock market volatility, the European debt crisis, an earthquake in Japan, and other unsettling economic news. That’s carried over to early 2012.

Pamela Dawson, Russell Investments


“Equities are not as strong as they have been, with the volatility in the market,” which has been the case at banks for several years now, says Maurice Schriever, senior consultant, Wealth Management and Mutual Funds, Securities America (Omaha, NE).

Securities America is selling more fixed-income funds, including short duration bond funds and multi-sector bond funds. Only about 25 percent of bank sales are in equity funds, compared with 75 percent in fixed-income funds. This is the reverse of where things stood three to five years ago, Schriever reports. Lately there has been some pickup in precious metals, real estate, and other ‘alternatives.’

‘You need to recruit the right talent, provide good training, and grow the advisory business.’ — Pamela Dawson, Russell Investments

2011 was a “flat” year in banks for Transamerica Capital (Denver), an Aegon company, which specializes in fund of funds. That’s no surprise given that equity funds had outflows generally, COO Blake Bostwick told us.

At Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, mutual fund flows in the bank channel were flat or slightly down over the past 12 months, says Jeff Schwantz, vice president and relationship manager for the bank channel. Sales were strong, but outflows increased. “Banks are more conservative by nature,” observes Schwantz, and no doubt the economic news in the second part of 2011 spooked some bank investors.

Those who specialize more in fixed-income products fared better. 2011 was a “record year in gross sales” in the bank channel for Federated, says Fadool. It was driven largely by their short duration fixed-income product, which notched some “big trades.” The average ticket size in this product area was $500,000, and million-dollar-plus sales were not uncommon.

Robert M. Geppner, Franklin Templeton Distributors

Russell Investments (Seattle) is relatively new to banks, but “2011 was a breakthrough year for us in the bank channel,” in large part because of their success with U.S. Bancorp’s brokerage program, says Pamela Dawson, director, Bank Channel Distribution, Russell Investments, PCS Division. The firm sold “significantly more” mutual funds than in 2010.

As for Franklin Templeton’s bank business, 2011 was a “very solid year,” according to Robert M. Geppner, senior vice president, National Sales Manager, Franklin Templeton Distributors (San Mateo, CA), although challenges arose in the tax-free product area given the focus on possible defaults?i.e., news stories about local governments possibly defaulting on their obligations. That “definitely slowed down” growth in 2011, says Geppner, who notes that money is now returning to tax-frees.

More banks have moved from transactional mutual funds sales to the advisory platform. ‘No question, that’s the biggest trend’ in the last five to seven years. — Robert M. Geppner, Franklin Templeton Distributors

Investors will need eventually to focus again on the long term and return to established principles of investing, like asset allocation, says Federated’s Fadool. Advisors, for their part, can’t shy away from reallocating clients’ holdings to the equity side, even in the face of customer skittishness vis-à-vis the stock market. “That’s what a responsible advisor has to do,” says Fadool. Fixed-income funds aren’t going to outperform equities indefinitely, after all.

Mutual fund wrap accounts

Market instability in 2011 may have overshadowed several secular trends that have been developing for several years.

Tyler Carr, John Hancock

“There’s definitely a trend toward the advisory platform,” notes Franklin Templeton’s Geppner, to more fee-based products like mutual fund wrap accounts.

Mutual fund wraps accounts, in fact, are now Pershing’s fastest growing segment among bank-sold mutual funds.

With regard to bank-sold mutual funds, ‘We are just scratching the surface.’ —Tyler Carr, John Hancock

Randy Reynolds, Pershing’s managing director, Global Customers, says he is hard-pressed to think of a bank with more than $10 billion in assets that does not have a fee-based program that typically includes mutual fund wrap accounts. Five years ago, maybe half the banks had such programs, he says.

One reason banks like fee-based products is that the business “is stickier than individual transaction sales,” notes Reynolds. Also, the more fee-based business a bank can generate overall, the higher its stock price multiple typically. Investors are rewarding banks that generate a high percentage of revenues from fee income—as opposed to net interest income—in other words.

Smaller banks, too, are looking to grow their fee-based platforms, adds Reynolds. Many of these smaller institutions work with third-party marketing firms (TPMs)—they don’t own broker/dealers themselves. These TPMs can sometimes rival what large banks offer in terms of fee-based platforms; such platforms “are a rapidly growing piece” in the TPM arsenal, says Reynolds.

Schwantz estimates that 25 percent to 35 percent of Pershing’s mutual fund sales in the bank channel are now fee-based (65 percent to 75 percent are still commission). In the independent brokerage channel, by comparison, it is the reverse—70 percent fee-based versus 30 percent commission.

The next evolution in bank-sold mutual funds is advisory, agrees Tyler Carr, managing director, Financial Institutions, John Hancock Mutual Funds & 529 Plans (Boston). Some banks—like M&I/Harris (now together), Wells Fargo, and Fifth Third—are already there, he says. Others have some work to do.

Bank reps today are clearly ‘more experienced, better trained, more professional than a decade ago.’ — Randy Reynolds, Pershing

If interest rates remain low, however, the trend toward advisory and fee-based products should continue, adds Carr. Advisors, after all, need something to sell—and fixed annuities just are not happening now.

Meanwhile, mutual fund wrap accounts are now much more accessible to investors. A typical minimum today is $50,000, with some as low as $25,000, says Russell’s Dawson, whereas five years ago it might have been $100,000-plus. Has this made advisory products available to a wider range of bank customers? “Yes, absolutely,” answers Dawson.

There are really “two tiers” in banks with regard to mutual funds, notes Fadool. There is the lower-end, less sophisticated retail segment that is often served by Series 6-licensed bank employees (LBEs) or less experienced Series 7 advisors who are selling traditional mutual funds. Then there are the larger banks, like Wells Fargo, with some “huge advisors”—indeed, advisors with some of the largest books of business in the securities industry. Much of their business is advisory.

Randy Reynolds, Pershing

Many banks have recruited seasoned advisors in recent years in an effort to go after the high net worth client. “Everyone wants a piece of the high end,” says Fadool.

Franklin Templeton’s Geppner agrees. More banks have moved from the traditional transactional mutual funds sales, like municipal bond funds, to the advisory platform. “No question, that’s the biggest trend” in the last five to seven years, says Geppner.

Still, banks lag in their embrace of advisory products compared with other distribution channels. “They’re not as strong in banks as in our independent branch world,” says Schriever.

Product for smaller investors

One question that has bedeviled bank brokerage programs in recent years: What do you do with the $5,000 client? Many bank brokers just don’t want to bother with customers who have relatively little to invest.

Yet banks really do want to serve all their customers. They don’t want to turn their backs on the mass retail client.

One answer, in the view of John Hancock’s Carr, is a ‘fund of funds,’ which allocates money across numerous stock and bond funds (the allocation is changed as the fund manager deems appropriate).

It’s perfect for the less experienced Series 6-licensed bank employee (LBE) says Carr. TransAmerica and Pacific Life, among others, are also providing ‘fund of funds’ to the bank channel.

The fund of funds, in fact, “is our lead story,” says Carr, “It’s our franchise,” an investment ‘solution’ common to all of John Hancock’s distribution channels. The John Hancock Alternative Asset Allocation Fund, for example is a fund-of-funds product that invests in alternative asset classes, including currencies, global real estate, commodities, natural resources, and emerging market debt. It enables clients to dabble in these relatively exotic investment areas with less downside risk. The minimum initial investment for the Class A and C shares of the fund is $2,500, according to the company’s website—easily in the range of the mass retail client.

It’s a “good option” for small investors, agrees Dave Paulsen, CEO of Transamerica Capital, who views his company’s fund-of-funds products, with minimums as low as $10,000, “more like a managed money account,” a sophisticated investment option for advisors who may not be able to build their own portfolios.

Tony Fadool, Federated Investors


“I would agree that it allows opportunities for less affluent customers,” adds Transamerica COO Bostwick, including a more “robust asset allocation model.” But it’s not just for those with less than $50,000 to invest, he says.

“It works for an astute advisor as well,” argues Bostwick. Many successful advisors follow the 80/20 rule, after all. That is, 20 percent of their clients generate 80 percent of their revenues. These advisors spend most of their time with that top quintile, but a fund of funds can work for the ‘other’ 80 percent of clients. It can even offer bank clients access to some more non-traditional investments, like the John Hancock fund, cited above, or Transamerica’s Multi-Manager Alternative Strategies Portfolio, a fund of funds developed with Morningstar Associates for more sophisticated investors who want some exposure to commodities, emerging markets debt, global real estate, and some other alternative investments that generally have a low correlation with the broad U.S. stock and bond market, which can make for good portfolio diversification. It has been the company’s “fastest growing fund in the bank space,” says Bostwick.

What else is hot?

Fixed-income mutual funds continue to sell well in banks, notes Fadool, but some investors who have equities experience have been gravitating toward Federated’s “strategic value dividend fund,” which invests in equities that pay good dividends. This fund saw “huge growth” and was very popular in banks in 2011, says Fadool.

Banks still lag in their embrace of advisory products compared with other distribution channels. ‘They’re not as strong in banks as in our independent [brokerage] world,’ says Schriever.

Russell Investments has had success in banks lately with its “balanced model” fund, which has a current allocation of 52 percent equities, 38 percent fixed income, and 10 percent real assets.

Keri believes that high-yield corporate bond funds, emerging markets (both equities and debt), and municipal bond funds will gain momentum in 2012. Also, “funds with a dividend bias will be attractive,” says Keri, who leads Oppenheimer’s Private Banking Channel globally and is responsible for overall strategy and implementation. He also expects to see more “diversifying with alternatives”—gold, real estate, commodities, currencies, etc.

A more conservative customer

If one looks at Pershing’s leading fund types in the bank channel, they are headed by taxable fixed income (15 percent), municipal fixed income (14 percent), and a balanced fund. One doesn’t find high yield funds, emerging markets, or riskier funds among the bank leaders. All this suggests a more conservative investment client.

That said, ETFs, which were non-existent in banks 10 years ago, notes Schwantz, today account for 11 percent of Pershing’s bank-sold funds volume.

Advisors can’t shy away from reallocating clients’ holdings to the equity side, when appropriate, even in the face of customer skittishness. ‘That’s what a responsible advisor has to do.’ — Tony Fadool, Federated Investors

Of course, there is three times the utilization of ETFs in the independent brokerage channel, adds Schwantz, who anticipates that gap between channels will close—i.e., banks should sell more ETFs over the next 12 to 18 months. It helps that ETFs are becoming increasingly broad-based, moving beyond specialty-type ETFs, like gold funds. This aligns better with the risk profile of the bank investor.

Bank customers are indeed more conservative—they “tend to be more income-oriented,” says Geppner. He describes Franklin’s own product line as “conservative,” “simple,” “plain vanilla”—like municipal bond funds—which is one reason, perhaps, that Cogent Research wrote that “Franklin Templeton shows particular strength among regional and bank channel advisors,” in its Advisor Trends in Asset Class Mix 2010 report. Released in November 2010, the study is based on a nationally representative survey of over 1,400 registered advisors.

But even if bank investors are more conservative, bank advisors can’t let them overlook equities, suggests Transamerica’s Paulsen, which provide a hedge against the ravages of inflation. The industry as a whole [unfortunately] has gotten away from portfolio construction, away from developing investment plans, retirement plans (with the emphasis on “plans”), he says. But some banks have done a good job in this area. Chase (which is not a Transamerica client, he adds), for one, has taken a consultative, “solutions-driven” approach, as has SunTrust and Bank of America, he says.

“Advisors should be managing expectations,” says Paulsen, “and rely on someone else to manage the assets.”

A more experienced advisor

Bank reps today are clearly “more experienced, better trained, more professional than a decade ago,” says Reynolds. Ten years ago, there was often “a push to migrate people from the branches” up to the broker/dealer. And when banks did recruit from the outside, it was often a “rep who didn’t make it at a wirehouse,” recalls Reynolds. Banks figured they could turn that $100,000 producing rep into a $250,000 [annual GDC] rep.

It’s helped that there are “broader offerings” today on the bank’s product platform, most notably the above-mentioned fee-based products that move beyond the annuities and proprietary mutual funds that were sold a decade ago, adds Reynolds.

Rich Keri, Oppenheimer

Federated’s Fadool, who was national sales manager for the company’s bank channel in the 1990s, notes that it is a “different world” in banks from the early 1990s vis-à-vis mutual funds. Since that time, BofA purchased Merrill Lynch, Wells Fargo became a brokerage giant by acquiring Wachovia Securities, wirehouse advisors flocked to banks during the economic crisis, and other things happened that have closed the gaps between bank and non-bank advisors, at least in the larger institutions. It’s now “pretty homogenous,” says Fadool.

What about mutual fund sales from current licensed bank employees? That might be tough, says Carr, who is sensitive to the return-on-investment issue—the cost of carrying licenses for bankers who don’t really sell, for instance. And, then, can you really teach an old LBE new tricks? That LBE, who for years has been rolling over CDs to fixed annuities—can he or she really sell more mutual funds now? Sometimes you just may need new people.

In the current low interest-rate environment, ‘mutual funds are one area that is attractive to banks and their investors. — Rich Keri, Oppenheimer

Banks seem to be doing the right thing with the ‘planning’ approach that they are taking increasingly these days, adds Carr. That should result in greater financial diversification, which should also mean more mutual fund sales. “A mutual fund sale is the result of a process, not the reason for it,” he says. Banks should not be asking, “How do I sell more fixed annuities?” That’s not the right question. Rather, they should ask: How do I ensure my client’s long-term financial well-being?

What can banks do better?

What can banks do better? It behooves depository institutions — as it does brokerage firms — to work to “reestablish the confidence of the customer,” says Fadool. The past few years have been “a disaster” for investor confidence. “Everyone’s confidence has been shaken.” Trillions of dollars are still waiting on the sidelines.

Banks are investing in client and broker education and training, he notes. He conducts, for banks and brokerage firms, a seminar called “The Untouchables,” about establishing client loyalty. He had already taught the seminar 12 times in the first half of January alone. The idea is, you create loyalty by developing a higher level of professionalism among your advisors. You also make a commitment to education and training. You are building trust, in other words, so no one can take that customer away from you. Those clients become “untouchables.”

Dave Paulsen, Transamerica Capital

‘Advisors should be managing expectations, and rely on someone else to manage the assets.’ — Dave Paulsen, Transamerica Capital

“It’s always an education process,” agrees Transamerica’s Bostwick, in banks—and everywhere else.

Outlook for 2012

Looking ahead, Transamerica’s Bostwick expects “more of the same” in 2012, given volatility in Europe, a U.S. presidential election, and other factors. “The average investor is still on the sidelines.”

There’s still “plenty of skittishness out there,” agrees Franklin Templeton’s Geppner.

Clients have a dilemma, notes Geppner: Money markets are paying 0 percent, CDs 1 percent, and 10-year Treasuries 2 percent. Yes, clients still have a memory of stock market losses, “but finding yield today is very tough,” says Geppner. At some point in 2012 he expects to see a shift. Investors aren’t going to lock into Treasuries that are paying 2 percent. They are going to continue to search for yield, and balanced funds may find some favor. The typical dividend yield on S&P stocks is about 2 percent, and investors may want to invest in dividend-paying stock funds that pay 2 percent to 3 percent while waiting for equity prices to rise.

Securities America’s Schriever declines to make any predictions about 2012. “I think we’re turning the corner”—with regard to equity funds—”and then there’s new volatility,” and bank investors run for cover again.

Still, Schriever sees more products being sold in the “non-correlated space,” like currency funds, and also more on the international side, including emerging markets that might hold up better when domestic equities swoon. “The globe seems to be shrinking,” says Schriever.

Carr is counting on 20 percent to 25 percent growth in the bank channel in 2012 for John Hancock, although it wouldn’t surprise him if growth is as high as 50 percent. Mutual funds are now the company’s “singular focus” in banks. (John Hancock left the variable annuity business at the end of 2011.). “We see big growth” in the bank channel. “We could see double the industry growth rate” in 2012, says Carr.

The future, of course, is outside of any single individual’s or company’s hands. When all is said and done, notes Fadool, “Nothing beats an up market for establishing confidence.”

Still, with regard to mutual fund distribution, “Banks are very important to us,” says Oppenheimer’s Keri, both at the retail bank and private bank level. There are trillions of dollars of wealth in private banks globally, much of it soon to be transferred to the next generation. That generation is more financially savvy, more demanding, and will expect more services?like real-time data. It behooves banks and others to gear up in this area.

And despite recent ups and downs, many agree with Carr’s assessment with regard to bank-sold mutual funds: “We are just scratching the surface.”


Andrew Singer is editor-in-chief and publisher of Bank Insurance & Securities Marketing magazine. He can be reached at asinger@bisanet.org

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