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3Q Bank Mutual Fund Sales Off 7%, As Sales Recovery Erodes

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3Q Bank Mutual Fund Sales Off 7%, As Sales Recovery Erodes


Banks sold $8.7 billion of retail mutual funds in the third quarter, a 7% decline from the second quarter. The sales setback, while not surprising given the falling equity markets during the quarter, undermined what was something of a comeback for bank sales of mutual funds.

Last year, bank mutual fund sales fell to $32 billion, their lowest level since 1995 and 31% below the high water mark of $46.3 billion posted in 1998.

After a devastating first quarter of 2001, banks gradually increased their fund sales quarter by quarter through the first quarter of 2002, despite dreadfully low sales last September in the wake of the terrorist attacks and the closing of the financial markets. Sales tapered off in the second quarter and were dragged down by the equity markets in the most recent quarter.

According to the Investment Company Institute, U.S. sales of long-term mutual funds were down 6% during the third quarter, so bank sales essentially mimicked the broader industry.

Associates estimates annual bank mutual fund sales from the annual Kehrer-Essex Bank Investment Program Benchmarking Study, a survey of banks that last year accounted for two-thirds of all bank investment sales. Monthly and quarterly sales are estimated from the Kehrer-AXA Monthly Bank Investment Services Monitor, a smaller monthly survey of bank brokerages.

Mutual Funds versus VAs. Over the course of the 1990s, bank customers bought an increasing share of their mutual funds inside variable annuities. The share of VA sales of total registered product (mutual fund and variable annuity) sales jumped from 9% to 21% in 1993, and then gradually increased before rising to 31% in 1999 and 36% in 2000.

According to research by the Kehrer Bank vaWatch, the big shift to VAs at the end of the decade was the result of the introduction of new policy features that emphasized high fixed rates (in the form of enhanced dollar cost averaging promotions) and guarantees against downside risk (through enhanced death benefits and guaranteed accumulation rates if the contract owner annuitized).

That trend was reversed in 2001, as VAs captured only 25% of bank registered product sales. Our research indicates that the abrupt drop in bank VA sales was largely due to bank aversion to the “extra credit” or bonus VA products, which topped off the contract owners investment with a deposit by the insurance company.

The extra credit products were a key driver of variable annuity sales in the wire house, broker/dealer, and independent rep channels in 2001.

The VA share of registered product sales declined quarter by quarter during 2001, but has been climbing back up during 2002, as once again customers who invest where they bank are buying an increasing share of their mutual funds inside VAs. According to the Kehrer Bank vaWatch, this shift is being driven by the new features in variable annuity contracts that protect against downside risk, including guaranteed accumulation options.

Looking ahead, with the recent resurgence of equity prices, we expect that bank sales of both mutual funds and variable annuities will expand in the fourth quarter. However, we expect that the conservative consumers who invest where they bank will continue to buy an increasing share of their mutual funds inside variable annuities to take advantage of their downside protection features.

While these features have put the profitability of the VA underwriters under stress–given the unprecedented long bear market–they are an ideal product for the times for conservative investors, who are anxious about missing out on the resurgence of the stock markets, but are more concerned over whether the recent run up is another sucker rally.

is the principal of Associates, a Princeton, N.J.-based research and consulting company that focuses on bank distribution of insurance and investments. His firm will be launching a monthly bank mutual fund sales information service in the coming months. He can be reached via e-mail at [email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.