Financial institutions have beefed up efforts to ensure that their brokerage employees inform customers about investment risk, according to a study by American Brokerage Consultants Inc.
Between 1994 and 1996, the proportion of financial institutions that hired mystery shoppers to monitor compliance more than doubled, jumping from 18% to 47%.
Financial institutions also nearly doubled their reliance on outside audits of their investment sales programs. Sixty-one percent used them in 1996, up from 33% two years earlier.
American Brokerage Consultants, St. Petersburg, Fla., based its findings on a survey of 1,489 banks, savings and loans, and federal credit unions.
Banks increased their self-monitoring in 1994 after studies showed that many bank brokers were not making the required disclosures, said Anita Volkomer, president of Bank Compliance Associates, Los Angeles. That year, a number of lawsuits were filed, charging bank brokerages did not properly disclose investment risk, Ms. Volkomer said.
"There was a lot of defensive action on the part of banks to find out if their people were actually making disclosures or not," Ms. Volkomer said. "They thought it was better to find out for themselves rather than someone else coming in."
The jury is still out on how banks are doing. Jonathan Alpert, a Tampa lawyer who is leading class actions against several big banks, says increased monitoring of compliance practices is encouraging, but he sees room for improvement. Many banks fail to recognize that investment sales are governed by securities laws as well as banking laws, he maintained.
Bankers, however, insist that they are doing plenty to make sure customers receive clear information about investments. James McElroy, chief investment officer at Hibernia National Bank, New Orleans, said his company puts its brokerage arm through an exhaustive-and sometimes exhausting- compliance drill.
"We use internal audits, external audits, audits from the Securities and Exchange Commission, the Office of the Comptroller of the Currency, an audit from our fund distributor, we use mystery shoppers," Mr. McElroy said. "It's overkill, if you ask me. But that's the price of doing business."
The brokerage arm of Great Western Financial Corp., which has come under scrutiny from consumers and regulators, has expanded its disclosure and compliance checks, said spokesman Ian Campbell.
The Chatsworth, Calif.-based company has increased its use of mystery shoppers in the last two years, conducts internal and external audits, and calls customers back after an investment sale to be sure they understand the purchase.
In 1995, Great Western brought a panel of consumer advocates into its branches to evaluate the layout and signage of the brokerage areas. Among the changes made in response to the panel's recommendations: Brokers' work areas are now identifiable by distinctive signs and color schemes. The thrift continues to tap the consumer advocates for additional ideas, surveys customers, and uses mystery shoppers, Mr. Campbell said.
Mystery shoppers, the most popular evaluation tool after internal and external audits, are also used to evaluate customer service, said Lee Lodes, president of Prophet Marketing and Research, San Francisco, a mystery shopping firm. Prophet's business with banks significantly increased over the last two years, Mr. Lodes said. As banks' investment sales businesses mature, they want to evaluate service like the wirehouses do, as well as check on compliance procedures.
