When banks look for new retail markets, they inevitably focus on insurance and investments. Since regulatory market entrance barriers began falling in the 1980s, banks have been able to take advantage of new opportunities in both areas.

Investment sales have brought the greatest success so far. Banks have managed to capture 14% of the mutual funds market, compared with only 1% for life insurance. Much of this growth derives from acquisitions, however, rather than internal expansion. Mellon Bank Corp., for example, won a place among the top 20 mutual fund companies only by purchasing Dreyfus Corp. A recent joint study by the Bank Administration Institute and Boston Consulting Group concludes that investments should be seen primarily as a defensive opportunity for banks, a way to shield existing customers from nonbank competition and generate incremental revenue.

One problem is that banks came late to the money management game. By the time depository institutions got serious about the market, nonbank players such as Fidelity Investments and Vanguard were already entrenched and skilled at national mass marketing. Mutual fund companies and brokerage firms also aggressively segment the market on the basis of price, as witnessed by $8 trades in the deep discount brokerage market and VanguardÕs low mutual fund expense ratios. While banks may still be able to leverage systems by incorporating investments businesses, they will find less overall opportunity to reduce costs than is the case with insurance.

At the same time, our research suggests that banks could make major inroads with under-served customer segments. In focus groups, consumers express frustration with the polarized choices forced on them: manage investments themselves or hand over everything to a professional. The first option generates anxieties about managing the process and achieving adequate returns. But dealing with a professional raises issues of cost, control and trust.

Banks could make a difference by marketing a hybrid option, one that provides customers with both control and advice, some cost advantages and a sense of security about investment planning and performance. We found many consumers, particularly novice investors, receptive to the idea of purchasing investment products from their banks. Banks are a known quantity and still enjoy a high level of public trust. "My bank wouldnÕt get into a new business it couldn't handle well" was a commonly expressed sentiment.

Banks should focus on two key opportunities. The first is leveraging incumbency and helping first-time investors get started. Many Generation X investors find the world of investments daunting; banks are perfectly positioned to help them navigate through complicated choices. In so doing, banks gain a better shot at preventing subsequent customer defections to nonbank competitors. Since the present value of a mass market Generation X financial services relationship is $7,400, this early investment in the customer is likely to pay dividends. Banks can offer low cost, trustworthy, face-to-face advice that allows consumers to retain some control while ameliorating anxiety about outcomes.

The second opportunity for banks lies in product innovation. Banks are uniquely positioned to create universal products that integrate wealth management, borrowing and transaction needs. Banks could develop products similar to the Merrill Lynch wrap account, for example, which offers reduced mortgage rates if the customer maintains a certain level of assets with Merrill.

Though best described as a defensive opportunity, the investments market offers much room for banks to create value for customers and protect market share.

-- John Garabedian and David Taylor