When the history of financial institutions in the 20th century is written, two of the most significant words in the story will be "fee income," a dull phrase that conceals the high drama of how bankers sometimes have to struggle to make ends meet.

Those of us who work outside the complex world of high finance sometimes forget that most bankers live or die by the "spread." That's the difference between what it costs a bank to borrow money and what a bank can earn when it lends that money.

Financial institutions can make a pretty good living borrowing at 7 percent and lending at 12 percent. But all too often, when interest rates spike, banks and thrifts find themselves still lending at 12 percent but being forced to borrow at 16 percent. So what can be a very profitable business one day can become a losing experience a few months later.

On the other hand, fee income is the stuff that bankers dream about.

Fee income is the kind of income that a bank or thrift gets from providing services, including originating mortgages and home equity loans. Substantial fees also come from credit card operations, trust and money management activity, and from selling mutual funds and annuities.

Unlike the interest rate "spread," which can increase or decrease, a fee is steady and dependable and it won't gyrate with interest rates. Indeed, when interest income and fee income are added together, a typical financial institution may get 20 percent to 40 percent of its total income from fees.

The attractiveness of fee income is one of the key arguments used by D. Mark Olson, executive vice president of Invest Financial Corp., when he tries to persuade managers of banks or thrifts to join the Invest program and put investment brokers to work in their front lobbies.

Invest, now eight years old, is a Tampa-based, full-service brokerage company that goes into partnerships with banks and thrifts and provides investment products, usually mutual funds, unit trusts and annuities.

There are 200 financial institutions in the Invest network, up from 135 institutions about five years ago. But there have been many changes in the types of subscribers.

In the Washington area, Invest members are Perpetual Financial Corp.; Citibank Savings Bank in the District and Citibank (National Bank) of Maryland; and Commonwealth Savings Bank of Virginia.

Five years ago, most of the members of the Invest network were thrifts. Today, half are banks. The collapse of the thrift industry has made it more difficult to keep and recruit savings and loans institutions. For some S&Ls, survival is the first priority.

Of every 10 financial institutions that sign up with Invest these days, six or seven are commercial banks, Olson said.

The 1,700 brokers who work in the Invest operation sell mostly fixed-income investments. Indeed, 90 percent of Invest sales nationally are fixed-income products, while only 10 percent are equity-related.

As for the partnership arrangement, Invest and its subscribers share the commission revenue that is produced by the sales made by Invest brokers.

While the figures will vary from institution to institution, Invest manager Richard Paciejewski at Perpetual Financial Corp. said his thrift keeps about 65 percent to 70 percent of the gross commissions while Invest keeps the rest. Perpetual pays the salaries of its brokers and the expenses of its operation.

Invest was organized in 1982 by Dan McConnell, a Canadian investment banker, who sensed that there was a major profit opportunity for financial institutions that could sell investment services or products to their customers.

As might have been expected, it was easier to come up with the idea than it was to make it work. The securities industry did not take kindly to the sight of banks and thrifts selling stocks and bonds. Bankers feared customers would take their savings out of the bank and give it to the Invest broker to put in a mutual fund.

Invest was started with seed money from several thrifts, including Perpetual Financial, and with help from the Kemper Financial Cos., which has continued to pour money into the operation. Today, after buying some of the thrifts' interests, Kemper owns 85 percent of Invest.

Kemper is one the nation's biggest investment companies, managing $62 billion in about 30 funds.

Invest gives Kemper a way to distribute its funds. In fact, Invest has become the largest single distributor of Kemper products during the last three years. However, Invest also is a heavy distributor of products from other mutual fund complexes.

Invest has had mixed success in the Washington area.

Perpetual Financial, one of the original subscribers, continues to promote the service through 12 brokers who serve its 75 branches. Perpetual uses a "hub-and-spoke" system, which means that its brokers travel from office to office.

Citibank, with 31 offices, has 12 brokers in 12 offices but can serve its other offices as well. Citibank inherited its Invest operation when it took over the old National Permanent Bank.

Commonwealth Savings Bank of Virginia, with headquarters in Manassas, runs a small two-broker Invest operation.

But others have fallen by the wayside.

Columbia First Bank of Washington gave up its Invest operation in 1988. "It was no great profit center for us," said former chairman Dewitt T. Hartwell. United Savings Bank of Vienna also gave up its Invest connection some time ago.

A recent dropout has been Loyola Capital Corp., a Baltimore-based thrift, which told shareholders that in this era of tight regulatory oversight, it was necessary to let go of its small Invest operation.

"To maintain critical capital ratios," Loyola officials wrote, "we track the profitability of each of our product lines in order to allocate resources most effectively, and maximize return to stockholders. This type of analysis was instrumental in our recent decision not to renew our contract with Invest."

What's the difference between an Invest operation that is successful and one that is not?

Paciejewski thinks the key ingredient for success is the strong support of top management, which translates into letting bank employees know that the Invest operation is important to Perpetual and that the goal is for brokers, tellers and service personnel to work together.

While bank employees cannot give advice about investments, they can refer customers to Invest brokers. In fact, bank employees are trained in ways to promote the bank's various bank and non-bank products, Paciejewski said. And the employees can be rewarded for a referral that works out.

Perpetual's Invest operation is profitable, Paciejewski said, and noted that Perpetual brokers will turn in a solid $95,000 in gross commissions for May. Business fell sharply after the October 1987 market crash, but, he said, "We've come back up to the pre-crash levels."

Perpetual does more business in stocks and bonds than most Invest offices, largely because of the nature of Washington investors, Paciejewski said. Perpetual's mix is 38 percent stocks and bonds, 62 percent packaged products.

Meanwhile, the typical broker, Paciejewski said, earns about $30,000 to $35,000, including salary and bonuses.

John C. Crittenden III, Invest manager at Commonwealth, said he believes, along with other Invest enthusiasts, that "one-stop shopping" is the future for banking institutions. He said he has been pleased with the support he has received from bank officials and employees. "They don't view it as cannibalism," he said.

In fact, to combat bankers' fears of losing deposits to mutual funds, Olson offers a study showing that 76 percent of the funds customers put into Invest products comes from outside the bank where the purchase is made. Since many customers deal with multiple banks, Olson said, the bank that has an Invest operation will get more traffic, and more fees, than the bank that doesn't.

That's an interesting argument. It may be difficult to sell in some banks, where old fears die hard. But that tempting fee income also may be hard to resist.endquad