AARP 'mystery shoppers' to police over-50 fund risks.

WASHINGTON -- The American Association of Retired Persons is planning to send "mystery shoppers" to banks to monitor sales of uninsured investments, such as mutual funds.

The powerful lobbying group is concerned that banks are aiming their mutual fund sales pitches at the 50-and-older crowd and may be winning over customers who don't understand investment risks.

Many people in this age bracket depend on investment income to build their retirement nest eggs or to supplement income from pensions and social security. The worry is that a sudden shock in the markets could interfere with their ability to cover routine expenses, such as food and shelter.

The testing program, which will begin in two cities this year, could be expanded to 10 cities, said W. Kent Brunette, legislative representative for the 34 million-member association.

Intense Scrutiny

The AARP's plan is the latest in a series of efforts by consumer advocates and regulators to gauge whether banks are clearly explaining investment risks to consumers. The development underscores that as banks wade deeper into mutual funds, they continue to face intense scrutiny of their sales practices.

Mr. Brunette said that the AARP intends to conduct an ongoing, national program to test if banks are helping older consumers distinguish between insured deposits and uninsured investments.

While mutual fund companies and brokerages are also marketing investment products to older Americans, Mr. Brunette maintains that the potential for customer confusion is "particularly acute in banks."

"We've spent every year since the Great Depression trying to restore the public's confidence in the integrity of banks," so people are likely to trust them without question, he said.

Higher Returns Sought

He maintained that banks are pushing uninsured investment products to older Americans because they hold 75% of deposits and have more CDs maturing than other consumers. And in the face of low yields on deposits, "everyone is scampering for better returns," he said.

Indeed, several recent surveys have shown that consumers have trouble telling the difference between insured deposits and uninsured investments, even after they read detailed disclosures. And two well-regarded consumer publications - Consumer Reports and Money - recently published critical reviews of banks' fund sales practices.

Banking regulators have responded by announcing plans to conduct mystery shopping programs of their own.

Michael Sullivan, a North Carolina-based consultant who counsels banks on dealing with their older customers, said retirees are especially vulnerable to bad investment advice from banks.

That's because older consumers tend to put banks on a pedestal, on a par with members of the clergy, Mr. Sullivan said. The thinking goes, "'As long as it's my [bank] saying this, I'm O.K.,'" he explained.

The AARP is such a potent lobby that its findings are likely to carry considerable weight in Washington.

For one thing, lawmakers vividly remember Charles Keating's scam that targeted elderly depositors, hawking junk bonds for Lincoln Savings and Loan, while passing them off as insured deposits, said a House banking committee staff member.

For their part, bankers reacted warily to news of yet another testing program that could dent their credibility.

Robert Shurman, senior vice president for mutual funds at the Boston bank unit of Shawmut National Corp. questioned whether the group will spend enough on the project to develop valid results.

He expressed concern that good banks would be lumped in with the bad if the sample of banks surveyed were not broad enough.

"To give the impression that an entire industry is not informing its clients is not fair," Mr. Shurman said.

In addition to monitoring whether bank salespeople disclose the investment risks of mutual funds, AARP's testers will focus on whether banks make suitable investment recommendations and do a good job of disclosing fees.

The association is in discussions with Prophet Market Research and Consulting, San Francisco, to run the mystery shopping program. The company conducts such programs for banks, and ran a testing program for Money magazine earlier this year.

Separately, Prophet is working on an extensive mystery shopping program that will cover 50 banks. Its findings, to be available by mid-July, will be sold directly to the banks.

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