The no-load predicament.

By many measures, banks have managed a successful entry into the retail investment services business. In the decade and a half since the first banks began offering annuities, mutual funds, and discount brokerage services, banks have expanded their presence so that last year banks accounted

According to the Kehrer-Alliance Capital Bank Investment Program Benchmarking Study, the typical bank investment program has a profit margin of 31%, which is high by traditional securities industry standards [Chart A, p.44]. Banks have achieved these margins by focusing on the most profitable part of the retail securities business -- selling load mutual funds and especially annuities to customers with substantial savings that can be converted to other investments.

While so far bank retail investment programs contribute only about 4% to the overall banking enterprise's net income, the investment services unit appears to have accomplished its other main objectives of helping stem the loss of customers to securities and insurance firms.

Too late to the party?

On the other hand, a skeptic might argue that banks have embraced the traditional retail securities business just as it was dying. While banks have been building up sales forces to sell load mutual funds, investors have been increasingly turning to no-load mutual funds and fee based planners.

While mutual fund sales have been booming overall, no-load mutual fund sales have been growing much faster than load mutual fund sales. Since 1986 (around the time many banks were starting to sell load funds), assets in no-load funds have grown by 23% a year, compared to an average annual growth rate of 16% for load funds. By 1996 no-load funds accounted for 53% of all mutual fund sales.

While full-commission brokerage firms such as Merrill Lynch and Smith Barney still control about 38% of all investable assets, the picture is changing. In 1995 (the latest year such information is available), mutual fund assets grew 31%, compared to growth of only 12% for full service brokers. The assets in discount brokers, driven by the no-load mutual fund supermarkets at Charles Schwab, Fidelity Investments, and Jack White, grew even more -- 35% [Chart B].