Banks, S&Ls; Altering Tactics to Stem Decline in Share of IRA Funds
Lured by higher yields and a need to diversify their growing accounts, investors this year are continuing to place a greater proportion of their individual retirement account money in mutual funds and brokerage firms at the expense of banks and savings and loan associations, industry experts say.
But banks and S&Ls;, still the leading depositories of the popular tax-deferred accounts, are not sitting still. To keep from losing market share, many savings institutions are offering an increasing diversity of products and marketing tactics, including their own mutual funds and self-directed accounts, IRA loans and interest-rate bonuses.
This proliferation of IRA products, from a growing number of IRA providers, is helping to blur the distinctions between banks and securities firms, a process already begun by financial deregulation in the early 1980s.
Investors increasingly are finding that they can get many of the same IRA investment choices--such as money-market accounts, stocks, bonds and real estate--from banks, S&Ls;, credit unions, brokerage houses, mutual-fund companies or insurance firms.
Direct Marketing
Because of the similarities, IRA customers’ decisions “are really going to come down to who offers better services and better investment returns,” says Roger E. Harris, vice president of retail marketing at Boston-based Fidelity Investments, a leading mutual-fund company.
Many IRA providers also are wooing investors with a wider array of marketing tactics, such as direct mail, toll-free “hotline” numbers and investment seminars. While IRA firms still rely heavily on mass-market newspaper and broadcast advertising, many say they are finding these approaches to be less effective, partly because the growing number of IRA holders have less need for basic education about the accounts.
“There is a bigger emphasis on direct marketing because it’s more economic,” says Jim Dorsey, financial editor for the IRA Reporter, a Cleveland-based newsletter. “They (banks and other IRA providers) now know who their customers are.”
While many IRA providers say these new products and marketing strategies will benefit consumers by offering them more attractive rates and better service, others say consumers might be confounded by the whole process.
‘Merging Together’
“It is going to be confusing for consumers trying to figure out the differences between what institutions are offering,” says Lisa Nesbitt, a vice president for Los Angeles-based Security Pacific National Bank who oversees its IRA products.
“Everything is merging together, although there still are going to be some significant but not obvious differences” between IRA providers, Dorsey says.
He notes, for example, that banks generally offer no-load (non-commission) mutual funds, while brokerage houses by and large still charge commissions for their mutual funds.
It’s not hard to see why institutions are fighting so hard for IRA money. Funds in IRAs nationwide are expected to grow about 30% this year to as much as $180 billion, making them one of the nation’s fastest growing savings pools.
Commercial banks, mutual savings banks and S&Ls;, with about 59.3% of total IRA funds at the end of 1984, still lead all institutions with the most IRA funds. They appeal primarily to conservative consumers who find certificates of deposit (CDs) attractive because of their federal insurance and guaranteed yields.
But while the total amount of money in banks and S&Ls; continues to grow, their share of the total market has declined, down from 63.7% at the end of 1983--the second year after Congress spurred the phenomenal growth of IRAs by allowing consumers to have them even if they already had a company pension or other “qualified” retirement plan.
Mutual funds and self-directed plans, which are primarily offered by brokerage houses and allow investors to buy and sell stocks and other securities as they please, together had 24.2% of the IRA market at the end of 1984, up from 20.9% at the end of 1983, according to the Investment Company Institute, a trade organization for the mutual-fund industry.
They are growing largely because investors have been attracted to the generally higher yields in stocks and equity mutual funds, some of which have produced gains of as much as 30% since the beginning of the year, compared to annual yields of 10% to 11% on many bank CDs.
Investors also are increasingly willing to take risks with their growing account balances, investing in real estate limited partnerships and bond mutual funds, for example.
“When investors only had $1,000 or $2,000 in their IRAs, they were willing to leave the money in a savings account. But when they have $6,000 or $8,000, they can afford to diversify,” says Jonna La Toure, vice president of product development at San Diego-based Home Federal Savings & Loan Assn., which, like many other savings institutions, reports that some depositors are transferring IRA funds from CDs into mutual funds or self-directed accounts.
Lure Bank Customers
Some mutual funds and insurance companies have specifically tried to lure away bank customers in their advertising. Merrill Lynch & Co., for example, ran ads this year that urged readers to “Manage your IRA like an investment instead of a bank deposit.”
“We’re frankly trying to preempt the bank business,” says Don Underwood, a Merrill Lynch vice president and manager of retirement plans and services.
Of course, banks and S&Ls; could reverse their market-share losses if the stock market turns sour and interest rates rise.
“If interest rates shoot through the roof and you have 15% CDs while the stock market falls 30%, those who stayed in banks and never opened self-directed accounts might be sitting pretty,” Dorsey of the IRA Reporter says.
But, for the time being, an increasing number of banks, particularly larger ones like San Francisco-based Bank of America and New York-based Citibank, are offering more of the same products as their non-bank rivals.
They are offering their own mutual funds, usually through their discount-brokerage firms or cooperative ventures with mutual fund companies.
In California, for example, Security Pacific offers mutual funds through its Security Pacific Brokers unit and through a distribution arrangement with New York-based Dreyfus Corp., a leading mutual-fund firm. Similarly, Bank of America offers funds through its Charles Schwab & Co. discount brokerage affiliate.
‘We Save a Good Number’
An increasing number of banks and S&Ls; also are offering their own self-directed accounts, usually through their discount-brokerage units.
“When a customer says, ‘I want to switch to Merrill Lynch,’ we say we can offer the same product,” says E. John Doyle, senior vice president of consumer financial services at Los Angeles-based California Federal Savings & Loan Assn., one of several local S&Ls; that offers its own self-directed accounts.
“We don’t save everybody but we save a good number,” he adds, referring to customers who decide to transfer their accounts to brokerage firms or mutual funds.
Banks also are offering interest-rate bonuses, paying above-market rates for a certain period. Some institutions, such as First National Bank of Chicago, were paying bonuses of as much as 2 percentage points above the market rate.
Some banks also report strong growth in their IRA loan programs. They say demand for loans has grown partly because the Tax Reform Act of 1984 prohibited consumers from delaying IRA contributions beyond April 15 for the previous tax year, thus forcing consumers to come up with the cash for an IRA sooner.
Home Federal of San Diego, for example, reports strong demand for its 16% fixed-rate IRA loans, payable in one year. The S&L; touted the loans with ads urging readers to “Start an IRA with no money down.”
The S&L; also says that although the 16% rate on the loan exceeds the current 11% yield on a typical long-term CD, the borrower still ends up ahead on a pretax basis because as payments are made on the loan, the principal is reduced and thus the 16% interest charge applies to a gradually smaller amount. Thus, the borrower pays a total of $178 in interest on a $2,000 loan in that year, but will earn $220 pretax, Home Federal’s La Toure explains.
Many banks and S&Ls; also are increasing their use of seminars and other less traditional lures to attract IRA depositors. First National Bank of Chicago, for example, placed computer terminals in certain offices that enabled customers to figure their IRA accumulations.
Many institutions also have simplified their IRA application procedures, with good results. San Francisco-based Crocker National Bank, for example, attributes a sharp increase in its IRA accounts to its “Easy Open IRA” promotion, featuring a simplified application form.
Some banks, such as San Francisco-based Wells Fargo Bank, are using toll-free numbers to woo customers. Bank of America has been test marketing a program in San Francisco whereby customers call in with account information and bank officials fill out the applications for them, so that all the customer then needs to do is write a check for the deposit and mail it in.
IRA FUNDS: THE CHANGING MARKET SHARE
1982 1983 1984 Commercial banks: 37.4% 29.0% 28.1% Savings and loans: 20.6 27.6 24.8 Mutual funds: 11.2 11.7 12.1 Self-directed accounts: 13.6 9.2 12.1 Life insurance firms: 8.8 9.9 10.6 Mutual savings banks: 4.5 7.1 6.4 Credit unions: 3.9 5.5 5.9
Source: Investment Company Institute
