(FORTUNE Magazine) – Ask mutual fund marketing expert Lou Harvey of the consulting firm Dalbar if investors will ever be persuaded that the best place to buy mutual funds is at a bank, and he immediately cracks up. He can't even speak, he's laughing so hard. "You've got to admit," he says finally, once he pulls himself together, "it was a funny question."

That shows you what Peter Carman is up against in his new job as chairman and chief investment officer of Citibank Global Asset Management: the perception that bank mutual funds are second-rate. Carman joined Citi in May from Putnam Investments, where he led a successful turnaround that revitalized the fund company. The move surprised his peers--fund jocks disdain banks and doubt that anyone can build a credible fund company within their stuffy confines.

With the gradual dismantling of the Glass-Steagall Act, there's no longer any law that says banks can't sell mutual funds. Now all they need are attractive products. Banks began losing assets to money market funds offered by the likes of Fidelity and Vanguard two decades ago, and have been struggling ever since to get them back. Along the way they've built a legacy of poor performance and questionable expertise. Banks have thus sat out the mutual fund revolution. Of the $3 trillion socked away in long-term mutual funds, banks control only 6%.

It's not hard to see why this is such a critical issue for banks. Already the big fund companies, with their check-writing accounts and debit cards, can pretty much handle most of what a regular bank does for its retail customers. If banks can't handle what the fund companies do, they run the risk, ultimately, of becoming irrelevant. Previous attempts by banks to break into the mutual fund business have been characterized by expensive acquisitions (Mellon Bank's purchase of Dreyfus, for example) and bloody culture wars. "There are a lot of bodies strewn along that road already," says Lee Chertavian of Affiliated Managers Group, a mutual fund holding company.

Citibank has work to do. It now manages some $120 billion around the globe, but only $8.2 billion in mutual funds, 80% of which is in low-profit money market funds. None of its 23 funds gets so much as a four-star rating from Morningstar; all four of its top-selling CitiSelect funds are among the worst-performing funds in their peer groups.

Citibank's fund market assault bears watching, however. First, it has the money to do things right, providing it has the will. "Clearly they have the resources," says Carman. "I'm convinced they have the commitment." Second, it has global name recognition plus an international distribution network. That gives Citibank a huge opportunity overseas, where privatization of vast, state-run pension systems has the whole U.S. fund industry drooling. Third, it has Carman. Under his leadership, Putnam stole market share from Fidelity with a clean, predictable investment style that everybody wants to emulate. Carman's way replaces star stock pickers with teams of managers who use computers to pare down their choices within well-defined parameters. It may not translate at Citibank. But if it does, the fund jocks will have to stop laughing.

--David Whitford