For nearly three years, bank-based brokers have heard a steady drumbeat of warnings about the need to explain mutual fund risks to consumers. Regulators, lawmakers, investors, and banks themselves joined the chorus.

So when a survey was released this week concluding that bank brokers are getting worse at disclosing risks and evaluating customers' needs, bankers were floored. They winced, they worried, and they quickly pointed fingers at the hordes of brokers hired at banks in recent years.

Bankers said turnover among brokers has been a constant problem, averaging 30% a year at many institutions. Brokers are also struggling to deal with the batteries of rules they must follow. And by their nature, brokers are a different breed than bankers, pushing hard to make their sales.

To be sure, bankers stopped far short of agreeing with the findings by Prophet Market Research, a San Francisco company that specializes in "mystery shopping" financial institutions.

"The survey's a bit of a cheap shot, painting everyone in the business with a broad brush," said John S. McCune, president of Norwest Investment Services, Minneapolis. "A lot of banks are doing a good job, but it's like we're guilty by association."

However, one consumer advocate said banks have plenty to answer for.

"In hindsight, the results aren't that surprising," said Stephen Brobeck, executive director of the Consumer Federation of America. Banks, he said, stepped up their disclosure efforts in recent years because they "were responding to public and governmental pressure. Once that eased, they relaxed their commitment to providing this essential information."

In a key finding, Prophet concluded that 27% of brokers - compared with 20% in 1994 - failed to tell customers that mutual funds lack federal deposit insurance. This disclosure is a cornerstone of bank brokerage regulation.

Prophet also found that 11% of brokers did not say investment value could fluctuate, up from 6% in 1994.

Though some banks are doing a solid job, "the industry as a whole is clearly backsliding," said Scott Galloway, Prophet's founder.

Bankers, however, took issue with the survey's scope, which was based on 400 visits at 50 large banks. They also said Prophet's mystery shoppers may have criticized brokers for neglecting to do something that isn't a requirement: brokers, they noted, aren't expected to explain the ins and outs of an investment until they are ready to close a sale.

And a key regulator backed up the bankers. "We haven't seen any trend at all that would indicate a leap or increase in customer complaints," said R. Clark Hooper, vice president of advertising at the National Association of Securities Dealers.

Even so, the survey findings were clearly a stinging blow to bankers, who have been pushing in recent years to be accepted as full-fledged members of the brokerage community.

Most bankers contacted this week said they were angry about the survey, doubted its conclusions, and felt singled out for criticism.

"I'd want to know how banks compare to our friends in the brokerage community," said James Overholt, president of BankSouth Investment Services, Atlanta. "My belief is banks on a bad day are like brokers on a good day."

Still, the survey also provoked a round of soul-searching, with many bankers admitting that lingering problems do exist.

One of the biggest issues for most banks is that their brokerage programs are relatively young.

It takes time to build a strong program, said Thomas Howe, executive vice president of Fleet Investment Services, Providence, R.I. "It seems to me that five years is a reasonable time frame for a retail bank program to have the right controls, procedures, and staffing."

While bank brokerages are developing rapidly, many still rely heavily on salespeople with limited experience, said Wayne Flanagan, a vice president at Oppenheimer Management Corp., New York.

Mr. Flanagan pointed out that it is common for banks to use their own platform employees to sell mutual funds after equipping them with Series 6 licenses from the NASD. The Series 6 is a less rigorous credential than the full-fledged brokerage license known as a Series 7.

Even the banks that chiefly hire Series 7 brokers - mainly big banks - can encounter headaches with the sales force, however.

Paul Werlin, president of Human Capital Resources, a Clearwater, Fla.- based broker search firm, estimated that turnover at bank brokerages runs as high as 30% a year.

"Turnover is a problem," acknowledged Norwest's Mr. McCune. The result is that brokerages are constantly having to train new people, he said. "If you continually have green brokers in your program, then you can run into problems."

Still, he said, banks may be no worse in this regard than other companies that operate brokerages. "Our turnover rate is below the industry standard, I'm sure of it." Norwest, he added, is making its compensation more competitive to put a lid on turnover.

A New York-based brokerage recruiter said low pay is clearly a drawback to working at bank brokerage.

"A good salesman doesn't want a salary - they want to be paid for how much they sell," said the recruiter, who did not want her name used. She added that while many banks have made investment sales a priority and have poured resources into building bigger sales forces, some haven't hired enough people to train and manage their new reps.

Managing brokers who operate from far-flung locations is a problem, bankers said.

"Brokers travel from branch to branch, and it's difficult to have supervision on site," said Jack Cussen, executive vice president of Summit Financial Services, a unit of Summit Bancorp.

The company has 20 brokers covering 90 branches - but only one sales manager at its Chatham, N.J., headquarters, Mr. Cussen said.

Brokers are also groaning under the weight of regulations, which have swelled in recent years, bankers maintain. Some of the rules run as long as 1,200 pages.

"I can see in certain circumstances where a broker may have difficulty remembering all the regulations in place," said B. Randolph Bateman, senior vice president in charge of investments for Cincinnati-based Star Bank.

Regulations governing bank brokerage activities have indeed been piling up in recent years. In steady succession, banking and securities regulators have issued guidelines and rules aimed at avoiding customer confusion. A key issue has been making sure that bank brokerage customers understand that mutual funds and other securities lack the federal deposit insurance protection that extends to retail deposits.

"We were quite concerned about this issue two years ago, and then were encouraged by surveys that showed a growing majority of banks were disclosing information," said Mr. Brobeck.

But now, he said, "It appears that banks' commitment to adequately disclosing information about noninsured products is lagging."

Guidelines from the banking regulators require brokers who sell mutual funds at banks to disclose the lack of deposit insurance; discuss the risk of principal loss; explain fees; and inquire about customers' finances and goals.

The NASD has proposed rules that would go further, limiting referral fees and exchanges of information between banks and their brokerage affiliates. This proposal is awaiting approval from the Securities and Exchange Commission.

While banking regulators examine banks for compliance with these guidelines, they can't detect every misstep, said C. Rachel Romyn, a policy specialist for the Office of the Comptroller of the Currency.

"We don't do any mystery shopping," said Ms. Romyn. "Apart from sitting in on a sales presentation, there is no way for us to know exactly. Our approach has been to see what policies and procedures the bank has in place."

Bank brokerage executives say they are vigilant about keeping tabs on brokers.

Joel Calvo, president of PNC Brokerage Services, said his brokerage has a "well-publicized zero-tolerance policy, and we will terminate brokers that don't comply."

The brokerage, which currently employs 228 brokers, has fired three in the past two years, Mr. Calvo said. The company has also been willing to compensate customers for losses "if we think that they have not been served well by our brokers," he added.

Though most bankers dismissed the Prophet survey, they are eagerly awaiting another, much broader mystery shopping study - one commissioned by the Federal Deposit Insurance Corp. and conducted by Market Trends, Bellevue, Wash.

The survey was completed in the fall, but has yet to see the light of day.

"It's a matter of getting results organized in a way that makes sense," said Robert F. Mialovich, associate director for the FDIC's Office of Supervision. He said the report - based on 4,000 visits and 4,000 phone calls to bank brokers at every U.S. bank that sells investments - could be out this month.

"Without question, a study that is done with the imprimatur of the FDIC is going to be very important," said Robert M. Kurucza, a partner with the law firm Morrison & Foerster in Washington.

This article was reported by Scott Hensley, William Plasencia, Howard Kapiloff, and Katharine Fraser. It was written by William Plasencia and Debra Cope.


Long-running Saga

Key events in the battle over bank mutual fund activities

October 1992

Exemplifying banks' growing interest in retail investments, NationsBank and Dean Witter unveil plans to sell mutual funds, stocks, and bonds in bank lobbies nationwide.

May 1993

Citing risks of customer confusion, two influential members of Congress commission studies of banks' approach to mutual funds.

June 1993

The Federal Reserve issues detailed guidelines for banks that sell mutual funds. Other banking regulators soon follow suit.

November 1993

In a jolt to banks, the Securities and Exchange Commission finds that most people who buy money market funds at banks mistake them for insured deposits.

December 1993

Scrutiny of bank mutual fund activities intensifies further when Mellon announces plans to acquire fund giant Dreyfus Corp.

February 1994

In a bid to bring some uniformity to bank fund regulation, the four principal federal banking regulators issue joint guidelines on retail investment sales.

June 1994

A lawsuit against NationsBank marks the start of a flurry of cases against bank brokerages by customers and former brokers claiming inappropriate sales tactics and inadequate disclosures.

August 1994

Mellon's deal for Dreyfus closes, but the company must hew to strict limits laid down by the Office of the Comptroller of the Currency

November 1994

Raising the stakes in the debate over bank investment practices, the National Association of Securities Dealers proposes rules - not guidelines - for bank broker-dealers.

August 1995

South Carolina ends a probe of NationsBank's brokerage business, concluding the company had not intentionally misled customers.

September 1995

Quieting protests from banks, the NASD eases its proposal rules on bank brokerage activities. The final rules now await SEC action.

The FDIC commissions a "mystery shopping" survey of every U.S. bank that sells mutual funds and annuities, conducted by Market Trends, Bellevue, Wash. Results, however, have yet to be released.

November 1995

Florida regulators announce they are broadening an inquiry into complaints of misleading sales practices.

December 1995

In a move expected to trigger a new round of litigation against banks that sell investments, NationsBank settles a lawsuit involving closed-end mutual funds.

January 1996

Prophet Market Research says its mystery shopping survey shows banks are "backsliding" in their mutual fund disclosure and compliance efforts.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.