Investment services report card: Higher growth, lower profits.

Research shows fixed annuities make a comeback. Branch referrals remain biggest source of investment sales leads

The bank investment services business had a banner year in 1999. Sales, gross revenue, and sales force productivity all increased in the typical bank retail investment sales

Sales of investment products--mutual funds and annuities--averaged 3.3% of a bank's retail deposits last year, up 14% from 1998 and 22% higher than the 2.7% sales penetration of deposits in 1997.

The typical bank consumer investment program had annual gross revenue of $1,786 per million in retail bank deposits in 1999, compared to $1,645 in 1998, a 9% improvement (Chart A). Revenue penetration of deposits measures revenue from mutual funds, annuities, and securities brokerage that the bank achieves, relative to the size of the retail bank.

Revenue mix

Fixed annuities accounted for 21% of bank consumer investment services revenue in 1999, up from 17% in 1998 (Chart B). Fixed annuities used to account for the lion's share of revenue, but slipped from 40% in 1995 to 25% in 1997 and 17% in 1998. Between 1995 and mid 1999, low interest rates and the flat yield curve made fixed annuities relatively unattractive to retail investors, who were becoming more attracted to the booming equity market. The growing popularity of mutual funds and then variable annuities coaxed conservative investors away from fixed annuities. Those that were leery of the stock market could earn higher nominal interest in short-term CDs. The investing environment changed with the stock market volatility during the last half of 1999 and a steepening yield curve, which combined to make fixed annuities a safe harbor for skittish investors.

Mutual fund sales were strong during the first half of 1999, but fell sharply in the second half. As a result, mutual fund revenue was down to 36% of total consumer investment revenue in 1999, compared to 43% in 1998. The share of third party mutual funds fell from 39% to 33%, while bank proprietary mutual funds also lost revenue share, falling one percentage point to 3%.