Bank Funds Are No Better Than Others

An account statement from your bank arrives in the mail. It contains bad news--and good.

The bad news, of course, is that your certificate of deposit is about to mature, and you’ll have to accept a yield of perhaps 3% or so if you want to renew it.

But the good news is that a representative at your local bank branch would be more than happy to discuss various other investments offering a higher earnings potential.

Sound familiar? It should. Banks are paying decades-low rates on CDs, passbook savings and other mainstay products. To retain customers, they are increasingly having to roll out investments that pack a bit more punch--especially mutual funds.

Banks and other savings institutions have been marketing or managing mutual funds for at least a dozen years, but they’ve stepped up their involvement more recently to cash in on the general mutual fund craze.

A survey of 201 banks late last year by Boston-based Liberty Financial Cos. found that 55% of those institutions already offered mutual funds in their branches, and another 14% intended to start soon. About 71% of the banks expected their mutual fund sales to grow during the next 12 months, forecasting an average sales increase of 25%, according to the survey.

All told, bank-related funds numbered 850 as of Sept. 30, roughly one-fifth of the 4,300 mutual funds in total, according to Lipper Analytical Services of Summit, N.J. But bank-related funds are smaller than average, accounting for just 10% of industry assets.

As a bank customer, should you consider buying mutual funds through a bank?

Sure, assuming you like your bank and want to keep your financial affairs consolidated under one roof. But it is important to understand what a bank-sold fund can and cannot do for you. Consider the following points:

* Bank funds are no safer than regular mutual funds.

All stock and bond funds require investors to assume at least some risk of loss. Bank representatives typically sell the same products that stockbrokers and financial planners do.

In the Liberty Financial survey, for instance, 65% of the banks said they offer funds from independent mutual fund companies such as Franklin, Putnam and Nuveen.

About 33% feature “private label” funds--portfolios managed by an outside firm but that carry the bank’s name. But only 24% have truly proprietary products. (Some banks in the survey offered more than one category of funds.)

The main point to keep in mind is that no bank-marketed mutual funds offer federal deposit insurance. Uncle Sam’s guarantee ends when you walk over to the “platform,” the area in the bank where loans are made and investments are sold.

* Banks do not offer special or superior funds that you can’t find elsewhere.

Certain bank-run portfolios are first-rate, but it is questionable whether they’re better as a group than other mutual funds.

More to the point, you generally do not have to be a bank customer to invest in the best bank-managed products. Most of these funds can be purchased through outside brokerage or financial-planning firms; others are no-loads, which you can obtain through a toll-free 800 number.

Top-rated bank portfolios include Pacific Horizon Capital Income (Bank of America, 800-332-3863); Portico Special Growth (First Wisconsin Trust, 800-228-1024); Stagecoach Asset Allocation (Wells Fargo, 800-222-8222); Vista Growth & Income (Chase Manhattan, 800-348-4782), and Westcore Midco Growth (First Interstate Bank of Denver, 800-392-2673).

* Bank representatives are not necessarily superior to outside investment brokers.

In fact, it’s important to realize that the people who sell mutual funds at a bank are brokers.

This is true whether a salesperson actually works for the bank or is employed by an outside brokerage that essentially rents space in a branch in return for a split of the commissions generated.

Many non-bank brokers say they’re better trained and more capable than bank representatives, while the latter insist they can serve customers just fine.

“Brokers are probably more knowledgeable about products in general” than bank reps, says Lacy B. Herrmann, president of Aquila Management, a New York fund company that sells tax-free portfolios through both brokerages and banks.

Outside brokers also tend to be better trained than bank representatives, in his view.

“But people tend to trust their banker rather than their broker,” Herrmann says.

Such trust could be misguided if it results in people letting their guard down on investments they don’t truly understand.

“It should be ‘Buyer beware’ with bank funds as with anything else,” Herrmann says.

Banks and Mutual Funds

Banks and other savings institutions regard mutual funds as an increasingly important part of their business. Here are some highlights of an October 1992 survey of 201 U.S. banks sponsored by Liberty Financial Cos. of New York:

55% sell mutual funds; 14% plan to start soon.

71% expect to increase their fund sales within the next year.

36% sell variable annuities, an insurance product that resembles mutual funds; 16% plan to start soon.

Six is the median number of mutual funds offered by banks.

Government-bond portfolios are the most popular fund type offered by banks.

94% of banks say non-traditional products, including mutual funds, are a good way to boost profits.

78% say non-traditional products are a good way to reduce deposit outflow.