Last year, mutual fund and variable annuity sales through third-party marketers at banks dropped, but fixed annuities had a boom year, according to a report from Ken Kehrer Associates, a consulting and research firm in Princeton, N.J. The report tracked sales of funds and annuities solely through third-party marketers at banks; many banks, particularly large banks, still sell these products through their own broker/dealers

Among the top 15 third-party marketers of mutual funds, sales fell 14% from $8.7 billion in 2000 to $7.5 billion in 2001. Of the top 15 third-party marketers of variable annuities, sales dropped 18%, from a total of $5.73 billion in 2000 to $4.7 billion in 2001. However, fixed annuities among the 15 top third-party marketers rose 82% to $11.1 billion from $6.1 billion the year before.

Due to the strong figures for fixed annuities, sales of variable and fixed annuities combined rose 23% to $16.5 billion, up from sales of $11.8 billion in 2000.

In terms of mutual fund sales alone, LPL Financial Services rose in the rankings to first place, with sales of $1 billion last year. The Boston and San Diego-based third-party marketer suffered only a slight loss in sales volume from 2000, unlike competitor INVEST Financial Corp. of Tampa, Fla., which experienced a 42% decline in sales, dropping from first place in 2000 to fifth place in 2001.

The top third-party seller of fixed and variable annuities through bank third-party marketers was Independent Financial Marketing Group of Purchase, N.Y. The firm sold $3.9 billion of annuities through the channel in 2001, up 50% from sales of $2.6 billion the year before. In fixed annuity sales alone, the firm sold $2.7 billion, a 143% increase from sales of $1.1 billion the year before. However, in terms of annuity and equity sales combined, the firm suffered a 16% decline in sales.

Ken Kehrer, president of Ken Kehrer Associates, attributed much of Independent Financial's success in the fixed annuity arena to the company's integration into Sun Life Financial Services of Canada. The merger netted Independent Financial two major clients: FleetBoston Financial of Boston and U.S. Bank of Minneapolis.

Kehrer predicted that sales from Independent Financial's new clients will have an even more pronounced effect on the firm's growth throughout 2002.

New Life for Third Parties

Independent Financial's results signal that fund and annuity sales through third-party marketers are on the upswing at banks, Kehrer said.

"They're in an upward trend right now. Their business has gone through some significant shifts over the last decade," he added.

In the late 1980's through the mid 1990's, banks could sell mutual funds internally, but brokers had to be part of a separate broker/dealer affiliated with the bank holding company. At the same time, many banks used third-party marketers to sell annuities within branches. In 1995, banks won the right to sell annuity contracts "within the business of banking" after the Supreme Court's decision in the case of NationsBank vs. Variable Annuity Life Insurance Co.

Larger banks saw the opportunity to earn more profits by disposing of the middleman and establishing or purchasing a proprietary broker/dealer. "They disassociated themselves from third-party marketers and started on their own, so that meant that third-party marketers had to start dealing with smaller [regional] banks. Through that transition, their market share went down," Kehrer explained.

Eventually, regional banks did the same, forcing most third-party marketers to look toward local and community banks for business, again downsizing market share.

Only now has the bank marketplace stabilized, with third-party marketers finding new market niches and offering a variety of different products and services, Kehrer said. Furthermore, some of the banks that decided to go it alone have since concluded that the brokerage business is not part of their core competency and serves as an unnecessary distraction.

"In the last few years, third-party marketers' market share has been increasing again after hitting a low point. That's because they have been adopting different strategies ," said Kehrer, explaining that the third-party marketing business model now ranges from retail brokerage, to pure wholesaling, to broker-dealer back-office and compliance services.

This change in the nature of the business of third-party marketers has complicated tracking, Kehrer said. In the case of companies that provide primarily wholesaling services, their sales figures reflect sales that have flowed through their firms, yet not originated with them.

This potential for double counting has raised the question of whether the increase in market share for third-party marketers is real or phantom, but Kehrer insisted that the consistent rise in numbers indicates true growth in the market. "As reported by the companies, their market share for fixed and variables combined was 27% in 1998, 32% in 1999, 39% in 2000, and 44% in 2001," Kehrer said.

Different Strokes

Models for success among third-party marketers vary considerably. Whereas other investment firms lost mutual fund business in the bank channel, Raymond James Services Financial of St. Petersburg, Fla., increased its fund sales by 25% last year. Selling nearly $1 billion in mutual funds at banks in 2001, Raymond James was the third-largest third-party seller of these products in the channel.

Furthermore, while many third-party marketers gained significant ground with fixed annuities and lost some with variable annuities, Raymond James reported flat sales for both products.

Raymond James' strategy is different from other firms for a number of reasons. First, the firm focuses on banks that see investment services as a key market segment rather than an incidental part of their businesses.

Second, the firm provides full-service brokerage through its broker/dealer subsidiary Raymond James Associates, giving banks the ability to serve wealthier clients who would otherwise shun the limited services typically offered by a bank.

"Banks that chose to do business with us are the ones that like the ability to offer a very broad scope of resources and services to their customer base," said Jim Fulp, president of the financial institutions division of Raymond James.

Banks do not typically market their investment services aggressively, he said. Instead, they tend to rely on walk-in business, Fulp said. As a result, many bank-sold investment products focus on security and preservation, suiting the needs of an older, conservative group naturally drawn to a bank.

Raymond James helps its banking partners turn this model around, Fulp said. Because of the full-service capabilities of the banks with which Raymond James does business, many of these banks tend to have staff from big brokerage firms, Fulp said. It is easier for Raymond James' third-party marketers to work with these seasoned brokers because they are more adept at drawing in accounts, Fulp said.

However, Fulp cautioned that mutual fund sales are difficult to report accurately. In trying to determine net flow, he explained, Raymond James often cannot tell whether a customer's money is moving from securities into mutual funds, for instance. The same problem does not impact annuities as much, since transfers between annuity policies are tracked through 1035 exchanges.

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