FOR NOW, ANYWAY, AS THEY TELL WIREHOUSES TO TAKE A HIKE: THE BROKERS WHO’LL NEVER SAY ‘YES’

Scott McCuaig can say “no” until he’s blue in the face, but he knows salespeople from Prudential Investments will soon return to the brokerage he heads for a small securities firm in St. Louis.

Representatives from the mutual fund arm of Prudential Insurance Co. of America come calling every few months to try to persuade him that the 270 brokers at Stifel Nicholas & Co. should sell Pru mutual funds and investment services alongside such names as MFS and American funds.

Mr. McCuaig’s opinion is similar to those of many of his peers at smaller brokerages.

“Proprietary is a bad word around here,” Mr. McCuaig says. “Wirehouses don’t even make it in the door. They have nothing to offer us that we can’t get from a mutual fund company that’s been around forever and has a proven track record.”

Despite the considerable resistance, the asset management divisions of Prudential Securities and other big brokerages like Paine Webber Group Inc., Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. Inc. — which in the past have relied primarily on their own staffs — are looking to smaller brokerages, banks and independent financial planners for new sales.

Driving the country’s largest brokerages to call on their smaller competitors is a simple fact: Their own brokers aren’t selling their mutual funds.

It’s estimated that less than 40% of brokers’ fund sales at Merrill Lynch are of funds managed by Merrill Lynch, down from 60% a few years ago. Only 35% of total sales at Prudential Securities are in Pru mutual funds, and at Paine Webber in-house funds account for just 20% of total sales.

Of course, most wirehouses are training their brokers to be more objective about what they sell customers, so the clients won’t feel they’re getting funds pushed on them. The problem is that many wirehouse brokers believe that if the product comes from headquarters it can’t be that good. And for the most part, they’re right.

About 75% of the funds managed by the five major brokerages (Morgan Stanley, Paine Webber, Pru, Salomon Smith Barney Inc. and Merrill) rate three stars or less from Morningstar Inc., according to research from DeReemer & Associates Inc., a mutual fund consultant based in Rentham, Mass.

“The wirehouses think the nirvana is to sell their underachieving funds to third parties,” says Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I. “This is not a battle they can hope to fight, let alone win.”

It’s not as if brokerages have no hot funds to market.

Pru’s top-selling portfolio, Jennison Growth fund, brought in $1.02 billion in 1998 and had a one-year return of 37.8%. Merrill’s biggest seller was its Fundamental Growth fund, which had sales of $1.27 billion in 1998 and a return of 34.8%.

Paine Webber’s Tactical Allocation fund, its best seller, had net sales of $666 million in 1998 and a return of 27.7%, while the American Value fund was one of Morgan Stanley Dean Witter’s most popular, with net sales of $645 million and a return of 31.8%.

But even with a few high-fliers, most brokers are still loath to push the funds of a competing brokerage.

“We’re not going to sell a whole lot of proprietary funds here, because that’s just not the way we do things,” says Thomas Miltenberger, managing director and mutual fund gatekeeper at Edward Jones in St. Louis.

Mr. Miltenberger notes, however, that Jones would hold other brokerages’ fund accounts for its customers, but that so far none of the big brokerages have agreed to this arrangement. (Clients must liquidate their funds when switching to Jones.)

Yet other industry executives say consolidation in the asset-management industry is blurring the line between proprietary and non-proprietary funds, making the wirehouse efforts worthwhile in the long run.

distribution is king

“Companies are buying other entities which were once competitors,” says Timothy Curtin, national sales manager for external distribution at Charlotte, N.C.-based First Union’s Evergreen funds. “Distribution is the name of the game.”

Prudential Investments has been perhaps the most aggressive in its external marketing thus far.

Under former president Brian Storms — who in March joined Paine Webber as president of its mutual fund arm (Investment News, March 15) — Pru hired 10 wholesalers to market its portfolios exclusively to banks, brokerages and independent advisers.

After about a year, the effort has shown limited success in terms of sales, but Prudential remains optimistic.

“With nearly 400 broker-dealer agreements signed in less than a year, we are seeing growing interest in our products among regional broker-dealers,” says a Pru spokesman.

Merrill Lynch is becoming aggressive, too. It’s trying to hire James McCall, co-manager of Pilgrim Large-Cap Growth and Select Equity at Pilgrim Baxter & Associates, to help start a large-cap growth fund. (Pilgrim, which is trying to sell itself and doesn’t want to lose a valuable manager, is involved in a lawsuit with Mr. McCall, accusing him of violating a non-compete agreement if he helps Merrill start such a fund.)

Merrill Lynch also is expected to make a serious effort to market its Mercury Asset Management funds to financial middlemen. It recently hired Chris Blunt from Goldman Sachs Asset Management to head the effort, and a source close to the company says he is planning to hire 30 to 50 wholesalers.

Merrill Lynch officials did not return phone calls seeking comment.

Morgan Stanley, which traditionally has resisted letting its own brokers sell outside mutual funds (about 75% of fund sales are in-house products), is now considering outside distribution for its Van Kampen Funds, sources say.

A company spokeswoman was unable to confirm or provide details on Morgan Stanley’s effort.

At Paine Webber’s Mitchell Hutchins Asset Management Inc., Mr. Storms is in the process of recruiting executives for its external distribution team.

“To try to compete in this industry by relying on one area of the marketplace is a strategy that’s doomed to fail,” he argues.

Mr. Storms stresses that unlike other fund companies owned by brokerages — which tend to hire executives from the securities industry — he is looking to hire executives with more experience in the asset management industry to run Mitchell Hutchins. Last week, he tapped three executives from Prudential: Robert Sullivan, to head both retail and institutional sales; Mary Ellen Ledwith, to be chief marketing officer; and Steven Fisher, to direct product management and development.

must blow out the lights

Mr. Storms says his plans for outside distribution go along with his most important goal for the next year, which is to get more Paine Webber funds sold by Paine Webber brokers.

“If I can’t demonstrate to our own brokers that Mitchell Hutchins can add as much value as any fund company,” he says, “it’s unlikely we’ll be able to prove it to other brokers in the open marketplace.”

While it may be tough sledding for the big five initially, technology will likely drive brokerages to carry their competitors’ funds, says mutual fund consultant Darlene DeReemer.

After all, if individuals can buy these brands themselves from fund supermarkets and websites, brokerages may feel they have to carry them as well.

Tim Bray, a mutual fund marketer at Minneapolis-based Piper Jaffray Inc., says Piper is already interested in drafting selling agreements with more big brokerages (so far, it has an agreement only with Pru) to complement its own U.S. Bancorp Piper Jaffray funds.

“Some reps may not want to sell another firm’s fund,” he says, “but we’d like to have them available, and let them make the decision.”

Mr. Bray may foresee the inevitable. It’s likely that the major brokerages, which have already been acquiring competing mutual fund companies, will start buying the bigger names that folks like Mr. Bray and Stifel’s Mr. McCuaig are selling now.

Independent financial planners may be the first to take the plunge by buying the better-performing brokerage funds through the institutional side of supermarkets, says Burton Greenwald, a mutual fund consultant in Philadephia.

“But they’re not going to do it for four-star funds,” he adds. “The funds must have blow-the-lights-out performance.”