At the heart of the change is the explosion in mutual funds, and the trend was underlined last week when Mellon Bank, based in Pittsburgh, announced a $1.7 billion stock swap to buy Dreyfus Corp., the nation’s sixth largest fund manager. This is “a milestone in the history of financial services,” declared the heads of Mellon and Dreyfus, and no one accused them of hyperbole. Not long ago, mutual funds were a business banks could afford to ignore. Now, as Americans change the way they save, the battle for the $2 trillion mutualfund business has pitted the banks against the traditional fund operators, as well as brokerages and insurers.
For the consumer, the competition means better service at lower prices–for those who can find their way through the thicket. But that won’t be easy. The number of funds has doubled since 1988, to 5,404 this fall, almost twice the number of stocks on New York’s Big Board. Investors are flooded with pitches, not only about a fund’s performance, but about the bells, whistles and real services that come with it. Now they have to figure out not only what fund to buy, but from whom. Should they go to PaineWebber, who will give advice, but at a price? Should they get the same fund, cheaper, by dialing Vanguard’s 800 number?
There’s plenty of confusion, especially when banks are involved: a recent Securities and Exchange Commission survey found that 66 percent of people who bought funds at banks believed they were federally insured. (They’re not.) Two bills now pending would protect consumers–and taxpayers–as banks move into this riskier territory. Banks held 11 percent of all fund assets by this fall, up from 5 percent in 1988, according to Lipper Analytical. Mellon’s deal drives the point home, and Rep. John Dingell said he may hold hearings on it.
All this activity is an obvious case of “follow the dollar.” As interest rates have sunk to 25-year lows, money has fled into mutual funds from CDs and other bank offerings. “Everyone was raiding our customer base,” says Dudley Nigg of Wells Fargo Bank. So banks have gone into mutual funds with a vengeance, developing their own and peddling other brand names. Meanwhile, smaller funds are joining forces (Templeton and Franklin Resources merged a year ago), and even the most powerful funds are changing strategy to keep their position. Fidelity, the biggest firm, now allows consumers to buy 1,800 different funds, including its own 150. Janus Group, one of the strongest smaller firms, manages funds for other institutions. Within five years, predicts Roger Servison of Fidelity, about 10 firms will control 75 to 80 percent of the market.
While the companies duel for dollars, investors have to choose carefully. If they want to monitor their own funds, they can go directly to the fund manager or a discounter such as Charles Schwab. If they want someone to manage their money, they can pay for a broker. If they want one-stop shopping, they can go to a bank.
But the banks have another advantage. “Inexperienced investors are more comfortable with their bank than with a third party,” claims Wells Fargo’s Nigg. To reinforce the message that mutual funds aren’t necessarily “safe in the bank,” Wells Fargo, for example, stamps brochures with a circle-and-slash “No” symbol on top of the FDIC logo. But a spot-check by The American Banker, a trade paper, found that many banks fail even to do the basics, like tell consumers that they could lose money if stocks slide. “You can kind of smell the head-over-heels attempt to have a piece of the market,” says William Gregor of Gemini Consulting.
Pointing to these problems, the comptroller of the currency recently issued new guidelines, asking, for example, that banks make their small-print warnings more conspicuous. But some legislators say. that’s not enough. One bill in the House would, among other things, prohibit a bank from using its name on a fund, as NationsBank does with NationsFund, and require that funds be sold in separate offices. A bill proposed by Dingell and Rep. Edward Markey would tackle the larger issue: the de facto nullification of Glass-Steagall, the law that once rigidly separated banking and securities. The bill would require banks to put securities operations in separate, stringently regulated subsidiaries.
Even with such protection, consumers will find themselves yearning for the days when those nice, uncomplicated mutual funds provided relief from the vagaries of the market. As with all else in life, investing is getting more complex. The Mellon/Dreyfus affair is only the beginning.
