The banks keep it simple by not offering too many funds. Their “approved” lists pick from a few well-known groups like Putnam, Franklin and Alliance. They may add their own private-label funds, managed in-house or by an outside investment adviser. Wells Fargo, based in San Francisco, sells its own Stagecoach funds almost exclusively. In a new development, banks are starting to acquire whole mutual-fund companies. Charlotte, N.C.-based First Union is going to swallow the Evergreen funds; in December, Pittsburgh’s Mellon Bank announced it would buy the Dreyfus group.
If you’re an experienced mutual-fund investor, it makes no sense to buy from banks. For starters, their funds usually carry upfront sales charges or loads-typically, 4 to 4.5 percent for stock funds and 3 to 4 percent for bond funds. If there’s Do load there’s probably a surrender charge if you sell within five to seven years. You may also pay annual charges known as 12b-1 fees. These sales expenses reduce your returns. Only a few banks sell pure no-load funds, including Mellon, BayBanks in Boston, Fleet Financial in Providence, R.I., and Firstar Corp. in Milwaukee.
Both load funds and no-loads levy annual money-management fees, and here banks have an edge. The average bank-run fund charges less than the competition. But that’s because so many bank funds are relatively small. To keep your cost reasonable, they’ve waived part of their fee-but eventually, they’ll charge you more.
Investors don’t mind paving sales loads for a winning fund. But most of the bank-managed funds fall short. Some are too new to analyze; others show mediocre returns. The diversified funds with top five-year records include two from Chase Manhattan: Vista Capital Growth and Vista Growth and Income; and two from Bank of America’s Pacific Horizon stable: Capital Income and Aggressive Growth. By contrast, most of the Stagecoach funds, sold to 95 percent of Wells Fargo’s fund customers, hang in the middle of the pack.
Novices are the buyers that bank funds might help the most. Banks pay more attention to first-timers than stockbrokers do, and should (I’ll go conditional here) be clearer about risk. Guidelines from federal regulatory agencies, backed up by a pending bill in Congress, require banks to disclose that:
Mutual funds aren’t backed by federal deposit insurance. You should learn this three ways: orally, from the salesperson; in writing, in the agreement you sign, and from the bank’s mutual fund advertising. Wells Fargo has devised a Ghostbusters emblem with a slash through the letters FDIC.
Fund performance isn’t guaranteed by the bank. To drive the point home, federal regulators warn against using the same name for both. Copycat names that already exist may not have to be changed, so NationsBank is still calling its fund group NationsFund. But the industry is avoiding new names that suggest that the bank and the fund are one.
Your income and principal are at risk. Neither stocks nor bonds are like CDs. Your savings drop when the market does.
All this might sound like overkill. Doesn’t everyone know that the stock and bond markets sometimes go down? Apparently not, if we’re to credit a telephone survey sponsored by the American Association of Retired Persons and the North American Securities Administrators Association. Working with a tiny sample, they concluded that roughly half the investors who bought their mutual funds at banks think that they’re federally insured. More than half think that they didn’t pay a sales load, although most banks charge one.
Even if these findings prove to be exaggerated, banks bear close watching when tempting customers out of their insured CDs. Guidelines proposed by six banking trade groups endorse the government rules above and add another: that banks clearly disclose all sales commissions, along with surrender charges and other fees.
It’s easy to see bow new investors might be confused about what they own. Although some banks punctiliously design clean mutual-fund programs, others pay scant attention to how their reps actually sell. Last November an industry trade paper, the American Banker, sent reporters into 10 banks posing as mutual-fund customers. Reps at eight of those banks forgot to mention that funds aren’t federally insured; only a few of them talked fee; most downplayed risk; some illegally projected double-digit gains; one even suggested that mutual funds were like CDs but with higher yields. When the Bank of America shopped, anonymously, its own and competitors’ mutual funds, “We found that everybody had written disclosures, but the tendency in oral presentations was to brush over the FDIC,” says senior vice president Debra McGinty-Poteet. Evasion seems to be locked into selling’s DNA.
Banks that sell both private-label and outside funds may push their own product over better ones. They usually require that the house fund account for 25 or 50 percent of sales, says Dave Nadig of the Boston consulting firm Cerulli Associates. To reach that goal, they may pay bonuses or commissions. So when a rep recommends a fund, ask if it belongs to the bank-and if so, compare its performance with the independent funds on the list.
Shoeshine market or not, it’s still important to invest. Keep your CDs for money you’re likely to need within four years and gradually buy stock mutual funds with money you won’t touch for five years or more. Since 1945, stocks have paid 12 percent a year with dividends reinvested. It takes the patience of a saint to hang on when stock prices fall. But you’ll be a rich saint in the end.
