Q&A: DAVID J. KUNDERT "INVESTORS DO INDEED SPREAD THE WEALTH AROUND"

Bank-run mutual funds and investment operations often garner off-the-record snickers from competing asset managers, brokerages and advisers.

But there’s no arguing with the $110 billion in assets the new Banc One Corp. will be managing once its merger with First Chicago NBD Corp. is completed this fall. That’s big league in anyone’s book.

David J. Kundert, the Banc One veteran slated to oversee the combined investment, trust and brokerage operations, believes it won’t be long before the snickers turn to worried frowns. It’s only a matter of time, he argues, before some of the nation’s largest banks develop investment operations formidable enough to attract assets from outside advisers, as well as their large internal customer bases.

Mr. Kundert, 55, took over the trust and investment operations of Banc One in the 1980s after it acquired the Wisconsin bank where he began his investment career. His job was to mesh Banc One’s far-flung investment units — at one time the Columbus, Ohio-based company had 24 different franchises around the country — into a single business. He accomplished that in 1992 with the creation of Banc One Investment Advisors.

So it wasn’t a surprise when Mr. Kundert moved quickly to meld the investment businesses of Banc One and First Chicago, naming the managers of the various segments within two months of being named chief executive of investments.

A lawyer by training, Mr. Kundert employs a measured, diplomatic tone when addressing sensitive questions. But those who have dealt with him say he is a decisive manager who moves quickly to accomplish his aims.

Q Now that banks achieved some scale in mutual funds and are beefing up their broker-dealers, what must they do to compete with the Schwabs and Fidelities?

A In today’s environment, there is great power in being what I would call an advisory intermediary. The intermediary is increasingly being seen by the client as the relationship point. For example, Charles Schwab Corp. has uniquely placed itself between the fund company and the clients — who consider themselves clients of Schwab, not of, say, Fidelity.

The same is true of a registered investment adviser, who adds value in helping clients sort through the myriad fund selections and investment selections out there. I would argue that it’s the same thing we’re trying to do — help clients sort through the various options that are suitable to their needs, as opposed to pushing product, pushing funds, pushing transactions.

It wasn’t too long ago you’d hear a lot of bank-fund folks say the real essence of the mutual fund business was being an investment adviser. My view is, that’s only one ingredient. Yes, being an adviser is critical in terms of how you make money, but if you’re really going to compete, you have to be very good at wholesaling, marketing, product development, at broker-dealer support, shareholder servicing.

Q How do you explain Banc One’s in-house funds’ high percantge of sales?

A Roughly 75% of total products sold is our proprietary funds, whereas as recently as maybe five years ago, it was probably single-digit percentages. But there are no arbitrary financial incentives or stipulations that force that to happen. I think what’s happened more than anything is we’ve become a good partner

First of all, we’ve always taken the position with our mutual fund folks saying, look, we’re not going to badger our brokers into selling our funds. I think that’s another bank misnomer, where there was this sort of Pollyanna approach that said “our people will sell our funds just because it’s us.” I don’t think that’s credible, either from the broker’s standpoint or the customer’s standpoint.

And it’s not just about performance and price. We believe that if you base your sales on performance and price, you’ll always lose — because somebody will always outperform you and somebody will always undercut your pricing. So you’ve got to build on something more than that.

We’ve always believed you support that value proposition with great wholesaling, great marketing, great support of the people selling your product. Now, do you get there overnight? No. But we certainly have made inroads.

Q What does First Chicago bring you in terms of investment operations?

A Obviously, it brings us a much bigger distribution force, No. 1. It brings us a doubling virtually of assets under management, so we’ll probably be, by the time the deal closes, somewhere near $120 billion in assets under management and about a $55 billion fund complex, which should in both cases put us in or around the top 25 in the nation. So all of a sudden you move to a very different plane in size, you move to a different plane in franchise strength — meaning households, meaning distribution opportunity within franchise. And, I guess, thirdly you move to a position — at least within the immediate larger Midwestern area — where a fairly significant brand opportunity certainly can give you some leverage.

Q Do banks have a reputation of being middling money managers who take few risks, and if so, how does one overcome that reputation?

A There is that perception out there. I don’t think the perception is accurate but there are players that have looked at this business and have gotten very serious about competing with the best in the industry. I think there are some examples, and I’d like to think we’ve been able to demonstrate our ability with numbers that are as good as many of what I would call the branded competitors. I think it’s a gradual thing. I’m a believer in incrementalism, that you don’t overcome that (perception) overnight. I don’t think it’s easy to say, “Here I am, love me, I’m in the mutual fund business, I can do this as well as anybody.” I think you have to prove yourself.

Q Which banks do you feel will be forces to be reckoned with in this area? Any particular ones you think are doing things right?

A First Union has done a great job of putting a lot of top-down emphasis on being a player in the mutual fund industry. They’ve done a good job of maximizing their distribution opportunities and have been pretty innovative and creative. Chase certainly was an early leader — I’m not sure where that stands today.

Q What about the Citigroup model, and the whole notion of a one-stop fund shop and cross-selling?

A I don’t think that’s as easy as it may be made out to be. My experience has been that investors do indeed spread the wealth around. I think it’s easier on the retail end where you’re dealing simply with what I would call a front-end buyer of a mutual fund, or a fixed or variable annuity, where their product needs are relatively in line with deposit needs and insurance needs, whatever it might be.

But as clients migrate up the wealth chain, their needs become more diverse, the competition with other managers becomes more diverse, and I think it becomes harder. I also believe it’s very important that you have a menu of capabilities that can face off with clients no matter where they happen to fall on the financial life cycle.

Q Advisers and others are of the opinion that banks can’t or won’t compete with the independent mutual fund firms in terms of compensation — particularly for portfolio managers — and therefore the level of talent they’re attracting tends to be lower. Do you agree, and how do you compensate your folks?

A I think compensation of investment professionals is a critical issue for banks. But there is a tendency for fund complexes, including banks’, to become too fund-manager-centric, as opposed to how you manage money. We think there’s a middle road where you in effect create appropriate principles around how you manage money, and then you get people in those roles who can contribute a lot of value.

We have created a package of financial benefits for investment people that would include competitive base salaries, but more importantly competitive at-risk pay, so that if they add value — both at the performance level and the third-party validation level — they can earn pay competitive with what they might get elsewhere in the industry. We believe you have to do that.

Q Banc One has said that in terms of other banks they’ll be in that market once the First Chicago merger is digested. How about on the brokerage and investment side?

A We would look at virtually everything out there. I think we would be sensitive to a variety of issues. No. 1, price: Can we make this work for our shareholders? And secondly, does it fit philosophically? Does it add incremental value to our franchise? Does it bring to the table something that we don’t do today that enhances our overall capabilities, or does it create redundancies, in which case price becomes a major consideration? So we would heavily focus, I think, on the ability to increase our investment-management franchise. International expertise would clearly be something we’d be interested in.

Q In 10 years, what percentage of bank revenues will come from investment, trust, brokerage, etc.?

A I think it will be one of the fastest growing components, and I think it’s very reasonable to assume it will garner at least a 25% share of underlying profitability at some point.

Q Will a bank ever be thought of in the same vein as, say, a Fidelity?

A I think you’re going to find some banks that will very successfully position themselves among the five or 10 largest money management franchises in the country.

Vitae

David J. Kundert, chairman and CEO, Banc One Investment Management Group

Banc One Corp., Columbus, Ohio, Total assets under management (Banc One and First Chicago NBD combined): $110 billion

Combined assets in mutual funds: $55 billion

Brokerage (Banc One only): Series 6 reps: 2,000, Series 7 reps: 300

Private asset management consultants: 110

Brokerage (First Chicago): Series 7 reps: 225; Roney & Co. (acquired in May): 300

Source: Banc One Corp. and First Chicago NBD Corp.