Mutual funds are today's second-largest financial industry in the United States, second only to commercial banks. Since 1990, mutual fund assets have more than doubled to $2.3 trillion. Such rapid growth, coupled with the desire of banks to expand into new financial services, has prompted up to one-fourth of all U.S. commercial banks to begin selling mutual funds and annuities. Some banks have even begun to manage and provide investment advice to their own mutual fund companies. This article shows that many commercial banks in the Tenth District states are following the national trend, with large banks leading the way.Mutual funds ; Federal Reserve District, 10th

Corey M. Koenig

English

Research Papers in Economics

Mutual Funds and Annuities 
at Tenth District Banks
By Corey M. Koenig
M
utual funds are today’s second-largest finan-
cial industry in the United States, second only
to commercial banks. Since 1990, mutual fund assets
have more than doubled to $2.3 trillion. Such rapid
growth, coupled with the desire of banks to expand
into new financial services, has prompted up to one-
fourth of all U.S. commercial banks to begin selling
mutual funds and annuities. Some banks have even
begun to manage and provide investment advice to
their own mutual fund companies. This article shows
that many commercial banks in the Tenth District
states are following the national trend, with large
banks leading the way.
What are mutual funds and annuities?
Mutual funds are a type of investment company
in which funds from investors are pooled and in-
vested in a number of different securities. Each share
of the fund represents a proportionate interest in the
securities pool. Some banks sell proprietary mutual
funds—funds that are managed and advised by the
bank or its holding company.  Because a mutual fund
must be large in order to be profitable, small banks
are seldom able to build a fund to reach this critical
mass. As a result, only large banks usually offer
proprietary funds.
Smaller banks typically get involved with
mutual funds by selling third-party mutual funds—
funds that are managed and advised by an unaffiliated
third party. These funds are sold either by an em-
ployee of the bank who acts as an agent for the
unaffiliated mutual fund company, or by a broker
of the mutual fund company who sells the funds on
the bank’s premises. Two trade associations, the
Independent Bankers Association of America and
the American Bankers Association, have initiated
programs that make it easier for small banks to sell
mutual funds.
Annuities are a tax-deferred investment in mu-
tual funds and other securities designed to generate a
future stream of income for an investor, typically at
retirement.1  Historically, annuities have been sold
only by insurance companies. More recently, banks
have sold annuities that are managed by an unaffili-
ated third party, such as an insurance company or
mutual fund company. A few banks have launched
their own annuity products.
Why banks sell and manage mutual funds
and annuities
Commercial banks have started mutual fund
and annuity programs for three primary reasons.
First, banks have experienced increased competition
from nonbank financial institutions for the invest-
ment dollars of their customers. Since 1990, for ex-
ample, mutual fund assets have increased sharply,
while bank deposits have remained relatively con-
stant (Chart 1). This trend has led many banks to start
offering mutual funds and annuities to regain these
investment dollars.
Second, many commercial banks have decided
to broaden their range of financial services. Invest-
ment and insurance services are a growing part of the
financial needs of many bank customers. As baby
boomers move out of their spending years and into
their saving and investing years, banks want to be
able to tap this customer base by offering mutual
funds and annuities. While the Glass-Steagall Act
1 Although banks are allowed to sell and manage annuities, annuities
have traditionally  been viewed as insurance products. Congress is cur-
rently debating whether banks should be allowed to sell these products.
15limits the investment and insurance activities of banks,
a series of legal interpretations since 1980 have
allowed banks to sell and manage mutual funds and
annuities in compliance with the law.2 In addition,
Congress is considering legislation to repeal the
Glass-Steagall Act, which would open the door for
banks to participate fully in investment and insurance
sales and underwriting.
The third reason banks have started to sell and
manage mutual funds and annuities is that they pro-
vide an additional source of noninterest income.  The
additional income helps boost a bank’s profits and
stabilize earnings during periods of interest rate fluc-
tuations and declining net interest margins. Selling
third-party funds gives a bank a one-time sales com-
mission,  while selling and managing proprietary
funds give a bank both the sales commission and
annual management fees.
Bank proprietary mutual funds in the
Tenth District 
Proprietary mutual funds managed by banks in
Tenth District states account for just a fraction of the
mutual fund industry. As of March 31, 1995, only 10
of the 115 banks nationwide that manage their own
mutual funds were banks in Tenth District states.
These ten banks had just under $9 billion in assets,
amounting to 0.4 percent of the total mutual fund
market.  In contrast, banks across the nation managed
$327 billion in assets, representing 14 percent of the
mutual fund market. It is not surprising that Tenth
District banks manage such a small share of assets
since only a few banks in the district are large enough
to manage a proprietary mutual fund.
The majority of assets managed by banks in the
1,000
Bank Deposits and Mutual Fund Assets
United States
Billions of dollars
3,000
Chart 1
2,000
1990 1991 1994 1993 1992
,1500
2,500
Mutual fund assets
1995*
Bank deposits
* March 31, 1995
Source: The data for bank deposits are from “The Consolidated Reports of Condition
and Income” for all FDIC insured commercial banks, and the data for mutual fund assets
are from Lipper Analytical Services Inc.
2 The Glass-Steagall Act and the Bank Holding Company Act cur-
rently prohibit banks and their affiliates from acting as the organizer of
mutual funds and distributor of fund shares.
16district and across the nation are money market mu-
tual fund assets (Chart 2). As of March 31, 1995,
money market funds made up 62 percent of total fund
assets in the district, compared with 58 percent for
banks in the rest of the nation. The average for all
mutual fund companies was about 30 percent.
Sales of Tenth District mutual funds and
annuities
The pattern of mutual fund and annuity sales
was similar for banks in the Tenth District states and
across the nation in the first quarter of 1995. In fact,
the percentage of banks selling mutual funds, the type
of funds sold, and the fee income from the sale of
funds were nearly identical for commercial banks in
both the district and the nation.
The percentage of banks in Tenth District states
selling mutual funds or annuities in the first quarter
of 1995 was very similar to that in the nation. In
district states, 21 percent of banks sold mutual funds
or annuities, while 23 percent of banks across the
nation sold these investments. The percentage of
banks selling these products was essentially un-
changed for both groups from the first quarter of 1994.
Money market mutual funds accounted for the
vast majority of sales in district states and the nation
in the first quarter of 1995.3  For both groups of
banks, about 92 percent of total sales were from
money market mutual funds. Equity mutual funds,
debt mutual funds, and annuities each accounted for
only about 2 percent of total sales.
The fee income from the sale of mutual funds
and annuities remained low for both district banks
and U.S. banks in the first quarter of 1995.  Mutual
fund and annuity fee income accounted for only
about 2 percent of total fee income. Mutual fund and
annuity fee income, however, was a significant per-
3 The heavy concentration of money market sales is somewhat in-
flated. Banks report only gross sales of funds and do not account for
redemptions, a practice which overstates money market fund sales due to
the daily movement in and out of these funds.
Bank Proprietary Mutual Fund Assets in
Tenth District States
March 31, 1995
Chart 2
Municipal
6%
Money Market
62%
Equity
20%
Fixed Income
12%
Source: Lipper Analytical Services, Inc.
17centage of total fee income for some banks in the
district states. For example, 17 percent of the district
banks that sold mutual funds or annuities had ratios
from 5 to 30 percent.
Sales by bank size
The percentage of banks selling mutual funds
or annuities and the types of funds sold at district
banks in the first quarter of 1995 varied depending
on bank size (Table 1). Large banks were more likely
than medium-sized and small banks to sell mutual
funds and annuities. While large banks sold the vast
majority of funds, the income from the sale of funds
was greater as a percent of total fee income for small
banks.  In addition, small banks sold a much higher
percent of annuities, equity funds, and debt funds as
a percent of total sales.  Large and medium-sized
banks sold high percentages of money market funds.
Small banks (<$100 million in assets). Only 14
percent of small banks sold mutual funds or annuities
in the first quarter of 1995 (Chart 3). The sale of
annuities accounted for 42 percent of total sales,
while money market funds accounted for 19 percent,
equity funds 17 percent, and debt funds 13 percent.
Fee income from the sale of mutual funds and annui-
ties averaged 3.3 percent of total fee income, the
largest ratio among the three size groups of banks.
Small banks accounted for seven of the top ten banks
for this ratio. Moreover, 60 percent of banks with
greater than 10 percent ratios were small banks.
Medium banks ($100 million to $1 billion in
assets).  The percent of medium-sized banks that sold
mutual funds or annuities in the first quarter of 1995
was 52 percent. Money market funds dominated sales
for this group at 83 percent of total sales. Equity fund,
debt fund, and annuity sales each made up less than
10 percent of total sales. Fee income from the sale of
mutual funds and annuities as a percent of total fee
income was the smallest for medium-sized banks at
only 1.8 percent of total fee income.
Large banks (>$1 billion in assets).  About 83
percent of large banks sold mutual funds or annuities
in the first quarter of 1995. In addition, large banks
accounted for 90 percent of all mutual fund and
annuity sales by banks in the district. Money market
Table 1
Mutual Fund and Annuity Sales
Tenth District states, first quarter 1995
Small banks Medium-sized banks Large banks
($ millions) (% of total) ($ millions) (% of total) ($ millions) (% of total)
Total mutual fund and annuity sales 42.9 – 377.2 – 4,078.6 –
Money market funds 8.2 19 311.7 83 3,805.5 93
Equity funds 7.4 17 13.2 3 81.6 2
Debt funds 5.7 13 17.7 5 57.3 1
Other funds 3.7 9 4.9 1 38.4 1
Annuities 17.8 42 29.8 8 95.9 3
Total fee income 24.0 – 112.9 – 382.8 –
Mutual fund and annuity fee income .8 3.3 2.0 1.8 8.4 2.2
Note: Small banks have assets of less than $100 million; medium-sized banks have assets from $100 million to $1 billion; large
banks have assets of more than $1 billion.  Total mutual fund and annuity sales may not equal the sum of the components due to
roundoff error.
Source: “The Consolidated Reports of Condition and Income” for all FDIC-insured commercial banks in the seven states of the
Tenth Federal Reserve District.
18fund sales accounted for 93 percent of total sales. The
fee income from mutual fund and annuity sales was
only 2.2 percent of total fee income for large banks.
Moreover, only two large banks in the district had
ratios greater than 10 percent, and none of the large
banks were on the top ten list of fee income from fund
and annuity sales to total fee income.
Conclusion
Many commercial banks in Tenth District states
are following the national trend of selling mutual
funds and annuities.  Large banks account for the
majority of mutual fund and annuity sales by banks
in district states.  The fee income from the sale of
mutual funds and annuities remained small in the first
quarter of 1995.  Nevertheless, mutual funds and
annuities have become important for many banks of
all sizes to retain customer relationships and meet
customer needs.
Corey M.  Koenig is an assistant economist at the Federal Reserve Bank
of Kansas City.
0
Banks Selling Mutual Funds or Annuities in 
Tenth District States
March 31, 1995
Percent
100
Chart 3
60
Small banks
Note: Small banks have assets of less than $100 million; medium-sized banks have
assets from $100 million to $1 billion; large banks have assets of more than $1 billion.
Source: “The Consolidated Reports of Condition and Income” for all FDIC insured
commercial banks in the seven states of the Tenth Federal Reserve District.
40
80
20
Medium-sized banks Large banks
19

Mutual funds and annuities at Tenth District banks

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Mutual funds and annuities at Tenth District banks

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