Sales productivity from brokers working in banks and from bank employees ballooned during the first quarter driven by increased sales of annuities, according to a survey of 26 bank brokerages prepared for the Bank Securities Association by Ken Kehrer Associates, a consulting firm based in Princeton, N.J.

Meanwhile, mutual fund sales in the channel during the period were flat and sales of bank-sponsored mutual funds declined, the report said.

In an unexpected development, the tie between variable annuities and mutual fund sales appears to have been broken, the report said.

"The variable annuity sales mix has traditionally moved in the same direction as mutual funds. This linkage seems to have been broken by the aggressive fixed-rate promotions for dollar-cost-averaging in many VA products. These promotions have attracted investors who have been spooked by market volatility but do not want to miss out on any market recovery," the report said.

These dollar-cost-averaging annuities allow an investor to place his principle amount in a fixed-return account, where it will earn interest substantially above money-market rates, and make installment investments from the fixed account into the variable annuity over a six- or 12-month period.

Signs of an erosion of the linkage between mutual fund and variable annuity performance have appeared over the last three quarters, Kehrer said in an interview.

"Because of all the special features in variable annuities, they now have more of a life apart from mutual funds," he said.

The average bank broker generated gross commission revenues of $24,018 a month during the first quarter of 1999, 14 percent more than in the previous quarter and 11 percent more than in the first quarter of 1998, Kehrer's report said.

The average bank employee selling securities earned gross commissions of $1,332 a month during the period, an increase of 39 percent over the last quarter of 1998, the report said. Bank staffers have improved their productivity in four of the last five quarters and are now producing at 2.2 times their fourth quarter, 1997 levels.

"It was surprising and encouraging to see how quickly the bank broker/dealers bounced back from the setbacks in the equity market last summer and fall," Kehrer said. "Volatility during that period caused broker/dealer productivity and sales to plummet, but now we've recovered to where we were before that period."

It took the bank broker/dealers three years to recover from the market correction in 1994, Kehrer said. That the bank industry could rebound so quickly from the events of last summer and fall shows that the industry has matured and is better equipped to deal with market volatility, he said.

"It's also a sign that investors are more confident working with banks," he said.

Revenue in the channel from mutual fund sales was 38 percent of total bank broker/dealer revenue during the quarter, the same as it was in the first and last quarters of 1998, the report said. However, sales of bank-advised funds accounted for only eight percent of first quarter 1999 revenues, down from 13 percent during the same period a year ago and 11 percent in the previous quarter.

That development indicates that during the period of extreme volatility that has characterized the equity markets, people were gravitating toward brand names to give them a sense of security, Kehrer said.

Sales trends for bank-sponsored mutual funds are not that different from industry-wide trends, said Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, RI.

"The first quarter was a tough quarter for a lot of people," he said. "If you look at fund sales overall, they were half of what they were during the first quarter last year. Sales growth has been anemic since the market correction last fall." Bank-backed funds tend to be value-oriented, he said.

"And it's been a very tough period in the marketplace for value investors," he said.

Consolidation within the banking industry may have also played a part inbank-sponsored mutual funds' sluggish sales performance, Kehrer said.

"When banks consolidate, they tend to consolidate their funds so they keep changing the brand name of the funds," he said. "That's bound to dilute whatever branding they've been able to establish."

Bobroff agreed.

"If I were a First of Chicago investor, my funds would have gone through four name changes in the last five years," he said. "What affinity can I have to that institution or those funds?"

When banks consolidate, they also begin lopping off broker/dealers, which can have an adverse impact on sales of funds, he said.

Variable annuity sales were 20 percent of bank securities revenues during the first quarter of 1999, two percent better than the previous quarter, but unchanged from the first quarter of 1998, the report said.

Fixed annuities accounted for 19 percent of bank securities revenues during the period, up from 16 percent in the previous quarter and 11 percent in the first quarter of 1998, the report said.

"While fixed annuities now account for eight percentage points more of B/D revenue than they did in the first quarter a year ago, they remain well below the one-third share they enjoyed two years ago," the report said.

Fixed annuities had been losing market share to variable annuities and mutual funds because the hot equity markets steered investors away from fixed products and towards variable ones, the report said. In addition, fixed annuities' returns compared to certificates of deposits have been marginal at best.

However, the report said, "The last three quarters witnessed a reversal of those trends, as conservative investors sought safety in fixed-return investments. The aggressive enhanced bonus rate promotions by several insurers also helped to fuel the shift to fixed annuities."

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