In the mid-1990s, the suggestion that banks would one day come to dominate the mutual fund industry probably would have been met with laughter and scorn. Yet today, they are doing just that, a development that serves as both a cautionary tale and an instructive one.

It took the banks years to get it right, but they are finally flexing their muscles in the fund industry. They routinely lead industry net sales — and they can boast some decent investment performances, as well.

This should serve as a warning to anyone arrogant enough to believe that the bureaucratic banks could never be nimble enough to compete in a high-touch business such as retail investing, nor flexible enough to deliver decent money management.

Moreover, their sales success has come, in part, thanks to the efforts of independent dealers. Once bitter adversaries are now partners. Dealer consolidation helped make this possible, but the banks also had to earn this trust — demonstrating that they won’t poach clients if they hope to have all-important access to independent distribution.

Tally up the winners and losers, and the fair-minded conclusion is that growing bank hegemony in the fund business has been a good thing.

Apart from the banks themselves and their shareholders, the big winners may be retail investors. They enjoy lower fees in many bank funds, creating pressure for lower fees at other firms, along with greater efforts at governance and product innovation.

Some credit for this must go to dealers that didn’t let irrational fear of the big banks overwhelm their clients’ interests.

The real losers are the slew of mediocre fund companies that can’t compete with these powerful rivals, having grown fat and complacent on bloated management fees.

The lesson in all of this is that competition is critical in financial services. The banks shouldn’t be excluded from industry niches just because they are big, powerful players. Regulators must ensure that financial conglomerates don’t abuse their market power. At the same time, the banks themselves shouldn’t be as protected as they are from foreign rivals.

Consumers and shareholders can both win if markets are allowed to function efficiently. IE