April 20, 1989
TO: DIRECT MARKETING COMMITTEE NO. 13-89
RE: Marketing to the Bank Trust Department Marketplace
__________________________________________________________
On April 5, 1989, the Institute met with a small group of direct-
marketed fund groups who are interested in marketing their funds
to bank trust departments. Also attending this meeting were rep-
resentatives from the National Securities Clearing Corporation
(NSCC) and the Depository Trust Company (DTC), as well as several
bank trust departments from a task force formed by the Fiduciary
and Securities Operations Division of the American Bankers Asso-
ciation (ABA). The purpose of the meeting was to brief them on
marketing/operations issues that will significantly affect the
ability of direct-marketed fund groups to market their funds to
bank trust departments and their clients. This memorandum
outlines the basic issues discussed at the meeting.
Recently, the ABA formed the above-mentioned task force of their
members to look into ways of overcoming ongoing operational
difficulties that bank trust departments have been having in the
clearance, settlement, and general recordkeeping of mutual fund
purchases for their clients. Bank trust departments, which
purchase primarily direct-marketed funds for their clients,
currently handle their trading and recordkeeping manually.
As a way to improve these operations, the ABA task force has been
working with NSCC and DTC to develop an electronic system to
standardize the settlement and recordkeeping procedures for bank
trust departments dealing with direct-marketed mutual funds. The
system that is being developed will utilize DTC as a direct link
to NSCC's FUNDSERV and Networking systems. FUNDSERV is a
centralized order-entry, registration, settlement, and
verification system already in use by many sales force-
distributed fund groups and their broker-dealers. Networking is
the electronic transmission system whereby funds' transfer agent
and shareholder records can be passed through NSCC to
participants (i.e. banks, broker-dealers, etc.) and allow them to
update their books and records in order to give their clients a
combined confirmation statement. When the DTC/NSCC link is
complete (later this year), it will simplify the bank trust
departments' recordkeeping process to such an extent that many
will begin to use it and to phase out most of the manual
recordkeeping systems currently in use.
From a marketing standpoint, this has one very serious
implication: when bank trust departments begin to use the new
system developed by NSCC and DTC, and phase out their current
recordkeeping and settlement functions, they will be able to
accommodate purchases of mutual funds that also use the NSCC
system. The ultimate result will be that bank trust departments
will not handle client purchases of direct-marketed mutual funds
unless the fund group is also an NSCC participant.
The chairman of the ABA task force, Frank Ware of United Missouri
Bank of Kansas City, told those who attended the April 5 meeting
that there is tremendous potential for direct-marketed mutual
funds to increase their sales to bank trust department clients.
For instance, his bank currently charges their trust department
clients a $100 fee to handle each trade with a direct-marketed
mutual fund. He said that the fee is needed to cover the labor-
intensive, manual recordkeeping process. Despite the fee, which
he feels tends to discourage mutual fund trading, United Missouri
Bank of Kansas City handles over 40,000 shareholder accounts (in
non-money market funds) with direct-marketed mutual funds. Ware
suggested that, if the new automated system makes it easier and
less expensive to handle fund recordkeeping, bank trust depart-
ments would make more of an effort to promote fund trading,
rather than penalizing their clients for owning mutual funds.
The Institute's Operations Department and Broker-dealer Advisory
Committee worked with NSCC to create the FUNDSERV and Networking
systems. In addition, the Institute assisted the ABA in setting
up the DTC/NSCC link and in drafting a questionnaire to send to
its members. Attached is a copy of the results of that survey.
To ensure that the needs of the direct-marketed fund groups are
taken into consideration in the development of the DTC/NSCC link
with bank trust departments, the Institute is in the process of
forming a separate task force comprised of direct-marketed fund
group members and bank trust department representatives. If you
are interested in working on the task force (participation is
limited), you may call me at 202/955-3536. To learn more about
the DTC/NSCC link, please contact Bob Schultz at NSCC 212/510-
0418.
Stephanie Brown
Marketing Director