George Saffaye would love the convenience of buying mutual funds at his bank. But banks haven't exactly offered the 29-year-old Manhattan sales manager the kinds of products he wants. "They're all dogs," says Saffaye, echoing a common view held by many investors. Indeed, mutual funds sold by banks have traditionally been heavy on loads and light on providing investors with consistently strong long-term results.

Now banks are trying to change all that--by both managing their proprietary mutual funds and selling independent funds at a discount. NationsBank, for example, recently introduced a mutual-funds supermarket, called Fund Solutions, that's similar to Charles Schwab's OneSource service. Through Fund Solutions, investors can choose from over 400 no-load funds, ranging from the bank's own NationsFunds family to a variety of funds managed by others, including Dreyfus, Janus, and Crabbe Huson. Later this year, customers who use Fund Solutions will also be able to get an account that bundles banking and investment services. It will include such perks as free checking and breaks on credit-card fees.

WIDER SELECTION. Meanwhile, Wachovia Investments, the brokerage unit of Wachovia Corp. in Winston-Salem, N.C., plans to unveil a similar service in mid-1997. "We have customers who might bank with us but do their investing with a Schwab," says Ellen Sartin, senior vice-president. "We want them to do it all with us."

Other banks share that objective. In December, KeyCorp of Cleveland began offering Schwab's OneSource mutual-fund service to give clients a wider selection of popular no-load options. The bank's clients can also open a cash-management account that pro-vides checking, brokerage and margin-account options so customers can bank and invest at once. Some CMA clients also get a break on annual fees for credit cards and deposit accounts. "It's definitely appealing to be able to invest and bank in one place, rather than having to deal with several different companies," says Saffaye.

To compete against the Fidelitys and Vanguards of the world, banks are also starting to eliminate costly loads. "Bank funds have to be price competitive," says John Pascucci, a Manhattan accountant and investor who buys mutual funds from Dreyfus. Currently about two-thirds of the 1,418 proprietary funds offered by banks carry loads, but banks are increasingly dropping these fees. Just last year, for example, NationsBank axed loads from its funds and Barnett Banks followed suit with its Emerald family of funds.

It's a start, but the banks' most arduous task lies ahead: convincing investors who have witnessed shoddy service to reconsider buying funds at the bank. For example, Frank Presson, a certified financial planner in Tucson, recalls that when his mother died in 1992, a NationsBank vice-president advised Presson's 85-year-old stepfather to liquidate some of his stock holdings and put the proceeds in two Nations funds. One was an unrated NationsBank fund that invested in bonds. The other, called Nations Value, was an equity growth and income fund with a performance track record of less than three years. Presson, now 58, nixed the idea--but he's still skeptical about the advice the bank gave his dad. "They were pushing funds with no concern for my father. Why else would anyone recommend unproven funds to an old man?" he fumes. A NationsBank spokeswoman responds: "We stand by the professionalism of our people."

Aware that consumers often mistrust a bank's registered sales reps, many institutions are trying to sell proprietary funds through independent financial planners and other more credible sources. Chase Manhattan, for instance, is focusing on sales of its Vista funds via the Schwab service that's available only to financial planners. The planners can then recommend the funds to their customers. Harold Evensky, a certified planner in Coral Gables, Fla., often buys bank-managed funds. "The question of bank or nonbank is immaterial: What's important is who picks the fund's holdings. Who says `buy' or `sell,"' he says. "It's kind of naive to stay away from bank funds if they're doing well."

In general, banks actually do an adequate job of managing domestic equity funds, says Evensky. He compared the three-year and five-year performance of 33 bank-managed domestic equity funds against a universe of 1,000 general retail equity funds. The results: Bank funds performed on par with funds rated three stars or better (on a five-star scale) by Morningstar, the fund rating service. Thus, while many domestic bank funds aren't stellar performers, they're not all dreadful, either.

The same can't be said of many international equity bank funds. Evensky compared 10 international bank-managed funds against a group of three-star or better Morningstar-rated funds. Here, the bank group's three-year return for the period ended Jan. 31 (3.5%) underperformed all other nonbank international equity funds, (6.5%) and the Schwab International Index (5.5%).

But some bank funds that follow particular indexes merit attention. One worth a look is State Street Bank's index hybrid fund called SSgA Small Cap, run for the past two years by Jeff Adams. He used a computerized stock-selection program to achieve his goal of outperforming the Russell 2000, without taking on more risk. In the past three years, SSgA has met that goal. According to Lipper Analytical Services, its 21.9% annualized total return for the period placed it second among the top 20 bank retail fund families, behind only BT Investment Small Cap, and earned it five stars from Morningstar. During the same period, the Russell 2000 returned 13.7%.

If you're thinking of purchasing a bank-managed fund, there are several things to keep in mind. Of the more than 1,000 funds available, over half are under three years old. Steer clear of those "flashes in the pan," says financial planner Tom Grzymala, unless you're willing to take a risk.

CAVEAT. One top-performing bank fund Grzymala likes is the no-load BT Investment Small Cap, which has a three-year return of 26.5%. BT's operating expense ratio of 1.25% is also appealing (Grzymala recommends keeping expense ratios to 1.4% or less). "It's a good, aggressive small-cap growth fund for those who can withstand volatility." One big caveat: BT's fund manager Mary Lisanti left in August, so as when any manager departs, you'll need to feel comfortable with her replacements' investment style. And of course, there's no guarantee her replacements, Tim Woods and Mary Dugan, can replicate Lisanti's performance.

You'll also want to look beyond strong returns. Take First Union's Evergreen Growth & Income fund, which ranked highest among a universe of bank-managed funds that have at least $1 billion in assets and aren't heavily invested in money market or institutional funds. Its five-year return is impressive but some of its share classes carry higher fees than others. Only Evergreen's Y shares have lower than average operating expense ratios and no load. But those shares aren't for sale to retail customers now. Anyone who wants to purchase Evergreen these days must choose funds with either an A share designation (1.45% expense ratio and 4.75% up-front load), B shares (2.2% ratio and up to 5% back-end load), or C shares (2.15% ratio and load of up to 1%). "When I see expenses like that, I think somebody's making a lot of money," says Grzymala.

As with buying any mutual fund, investors need to consider whether the service and performance a bank provides justifies a load. "Investors often pay sales charges without getting corresponding benefits," says Hope Feinglass, director of tax and financial planning at Money Minds in Lombard, Ill. "If you're going to make a $20,000 investment with a 5.75% load, you're looking at fees of $1,150." That's real money, especially when you consider the many no-load and low-expense funds investors can choose. Luckily, banks are finally offering cheaper funds and a far greater selection than ever before. Still, investors would be wise to check out a variety of sources before banking on a winner.

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