Banks Beat Brokers in Disclosure Survey

In recent years, banks have taken it on the chin from Congress, regulators, and consumer groups for questionable investment sales practices.

But what about stock brokerages, institutions that undergo less regulatory scrutiny than their bank competitors?

Earlier this year, American Banker asked Market Trends Inc., a Bellevue, Wash., market research firm, to telephone five nationwide nonbank brokerages and rate them on how well they comply with regulations concerning risk disclosure and product suitability.

Market Trends concluded that banks are doing a better job at disclosing risk than their nonbank counterparts.

"We were surprised at the brokerage companies' lack of disclosure over the telephone," said Jeffrey Liekhus, director of marketing for Market Trends.

To help create an even playing field with bank brokerages, a group of mystery shoppers hired by Market Trends asked the nonbank brokers the same questions that the research firm is currently asking sales reps at 800 banking institutions for a separate study slated for release in September.

The results - when compared with the preliminary data of the study on bank brokers - should prove heartening to bank brokerage chiefs in their efforts to gain legitimacy for their practices.

Among Market Trends' findings:

*Nonbank brokers were less likely than bank brokers to tell potential customers about investment risk. More than a third of the shoppers weren't told by the nonbank brokers that investments were subject to market risk, 90% weren't told the investments were not guaranteed by the brokerage, and 18% of the shoppers were not given any risk disclosure at all.

*Less than a third of the callers to nonbank brokerages were asked about their risk tolerance, their retirement savings, or their other assets. Less than half of the shoppers were asked about their employment status.

*Only 40% of the nonbank brokers were rated by the shoppers as having a very good or excellent understanding of the products being offered. In the bank study, which is being sponsored by the Federal Deposit Insurance Corp., anecdotal evidence points to about half the bank brokers being rated as very good or excellent.

*Less than half of the shoppers at nonbank brokerages were given product recommendations. One-third of the recommendations were given without any prompting by the shopper.

These conclusions conform to those of a recent study by another marketing firm, Prophet Market Research, which showed that banks do a better job than stock brokerages and insurance firms in educating customers about investment risk.

Shoppers who have contacted both bank and nonbank brokers said "the bank-based securities representatives appeared to be much better at conducting sales presentations and dealing with disclosure issues than the brokerage houses," Mr. Liekhus said.

Bank brokerages also rated higher than nonbank brokerages in terms of interviewing their potential customers and compiling risk profiles, Mr. Liekhus said.

"It's our gut feeling that the banks are more gun-shy," he said. "Since nonbank brokers haven't been under any scrutiny lately, they're not as adept at disclosures and suitability requirements as banks."

Anecdotal evidence suggests that many bank brokers do make a big point of talking about risk, in accordance with joint guidelines by the bank regulatory agencies requiring sales reps to state up-front that investment products are not FDIC-insured, are not guaranteed by the bank, and could involve loss of principal.

"Our representatives are instructed to say up-front, right when they introduce themselves, that we are a broker-dealer and a subsidiary of the bank, but that our products are not FDIC insured," said Elizabeth Fisher, head of the broker-dealer subsidiary at Union Bank in Los Angeles. "After that, they profile the customer."

However, nonbank brokers may be more forthcoming about investment risks when they meet with customers in person, Mr. Liekhus said. About three- quarters of the nonbank brokers tried to set up meetings to discuss investments in person.

The study, released last week, was based on telephone calls to 50 brokers by professional researchers posing as investors. The calls, each of which lasted an average of 15 minutes, were made between April 12 and May 11.

Mr. Liekhus added that the survey's sample was too small for statistical accuracy.

Several nonbank brokers seized on that issue and others to condemn the study.

"This really does fly in the face of the evidence of other studies," said the chief of a leading brokerage firm, who requested his name and institution not be used. Risk disclosure "is the law, and it's the basis of our training."

But Stuart Kaswell, general counsel of the Securities Industry Association, the trade group of the traditional brokerage industry, conceded that "if you are a bank affiliate broker-dealer, you may be facing different expectations and you may have a greater burden to make sure your customers don't get confused."

Bank brokers agreed there is a heightened emphasis on risk disclosure at their companies, but they were reluctant to criticize their nonbank counterparts.

In other survey findings, nearly all - 94% - of the brokers asked the shoppers about their investment objectives. About 88% of the brokers questioned did not mention anything about the firm that offers, underwrites, or sponsors the securities product.

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