How effectively are bank-based retail securities brokers selling investment products compared to their competitors in the traditional stock brokerage industry? Two recently completed mystery shopping studies by my company highlight the differences between the two distribution channels and provide insight into the strengths and weaknesses of each.
Traditional brokerage firms have some significant competitive advantages over bank brokerage firms: their brands are more synonymous with investing, they do not face the same regulatory scrutiny, and their industry is more mature.
Some bank programs have been successful establishing their own proprietary funds, though it is still difficult for any channel to compete on product differentiation. Key areas where bank programs can establish a competitive advantage are in service they provide and interface with consumers.
Over the past year, my company conducted two studies that benchmark services provided by bank brokers and traditional full-service stockbrokers. Nearly 1,000 in-person audits were conducted at 71 financial institutions in 37 states. Both studies examined customer service and sales skills, how well salespeople qualified prospects before making product suggestions, and the disclosure of fees and risks in securities.
In each audit, a mystery shopper presented himself or herself as an investor looking for investment guidance from a securities salesperson. The average shopper was 53 years old and portrayed an unsophisticated prospect seeking to invest a maturing certificate of deposit of about $35,000 in an investment vehicle that would provide a higher rate of return.
Several differences between the service provided by brokers in each channel are highlighted in the results.
Traditional stockbrokers were most likely to give "aggressive" advice. Stockbrokers recommended products that offered the greatest potential for return, but also exposed the investor to the highest level of market risk. Almost a quarter of stockbrokers surveyed suggested prospects invest at least a portion of their assets in individual equities, whereas no bank broker in the sample made this suggestion.
The most frequently recommended investment in the bank brokerage channel was a "growth and income" mutual fund, which was suggested to 41% of the sample. In addition, bank brokers were much more likely to suggest conservative income funds and fixed annuity products.
Bank brokers did not offer as wide an array of investment products as traditional brokerage firms. In fact, bank brokers primarily recommended either mutual funds or annuities. The investments suggested by stockbrokers ranged from conservative certificates of deposit to very aggressive initial public offerings and small company stocks.
With a more conservative product line, bank brokers were more likely to dispense investment advice during an initial meeting with a prospect. While 17% of stockbrokers surveyed suggested scheduling follow-up meetings when specific investments could be recommended, only 6% of bank brokers ended the meeting without recommending a specific mutual fund or annuity. This indicates that bank brokers are faster to sum up a prospect's financial needs and provide specific investment recommendations.
In mystery shopping studies conducted by my company in 1994 using like methodologies, bank brokers scored lower than stockbrokers in all areas of sales effectiveness. For example, bank brokers were more likely to sell product features rather than benefits and less likely to establish a course of action at the end of a sales presentation. Results from the recent studies indicate that the differences between the channels in these areas has narrowed over the past 18 months.
The sales presentation skills demonstrated by bank brokers are now comparable to those of wire-house brokers. The bank brokers surveyed were as adept at uncovering a prospect's needs, establishing an awareness of the investment advantages in securities, and demonstrating effective closing skills. The improvement is especially apparent in "dedicated" bank brokers - those who discuss investment products exclusively. The sales effectiveness skills demonstrated by most "platform" employees in the study are still significantly below industry benchmarks.
One key sales area in which traditional wire-house brokers continue to demonstrate stronger sales skills than their bank brokerage counterparts is the follow-up after the initial meeting. Bank brokers generally either do not follow up the meeting with a telephone call or call only once. Stockbrokers, on the other hand, generally call the shoppers until they are able to speak with them personally and rarely stop calling until they get a firm 'no, I'm no longer interested.'
There is no discernible difference in the level of disclosure of market risk and fees between the two channels in most compliance areas tested. Brokers in both channels are more likely to discuss principal fluctuation and market risk than sales charges and fees associated with investing. Bank brokers, however, are still much more likely to provide prospects with prospectuses after suggesting mutual funds (75% to 50%) and to disclose the lack of federal insurance on investment products (69% to 30%).
The results from both channels indicate that bank brokerages are not reaping full benefits from their biggest competitive advantage - their interface with consumers - to establish a prospect's needs.
While many brokers in both channels did an outstanding job, a large percentage of brokers made investment recommendations with little or no knowledge of the prospect's financial situation.
Over half the shoppers in both channels were given specific investment advice without being asked basic questions about their tax bracket or income level. Just over 25% of both bank brokers and stockbrokers surveyed recommended investments without inquiring about the prospect's investment history or risk tolerance.
Until brokers apply these fundamental practices to every consultation, investors may perceive brokers in both channels as commission-driven salespeople rather than full-service investment planning professionals.
Bank brokers' ability to leverage interface with their core consumers will be important to their continued success. Even the briefest dialogue that results in a more appropriate recommendation immediately erects barriers to switching to another brokerage firm, financial planners, or to no-load fund complexes.
Mr. Lodes is a senior associate with Prophet Market Research and Consulting in San Francisco.