In an American Banker article on Sept. 21, Marietta Perkins wrote that mystery shopping for bank investment products is both an ineffective and overly expensive way to evaluate brokers' sales pitches.
In doing so, Ms. Perkins, a senior manager with KPMG Peat Marwick's financial services regulatory advisory practice, mischaracterized what is perhaps the most important new management tool of the decade.
Ms. Perkins asserted that mystery shoppers - individuals who masquerade as consumers to evaluate the way brokers do their jobs - are ineffective because these "shoppers" never close a sale.
However, leading banks do not want representatives quoting only positive features to customers even before the sales closes. Federal regulators do not want bank customers confused. In a branch lobby they might think mutual funds are insured by the Federal Deposit Insurance Corp., guaranteed by the bank, or insured in some other way.
Federal regulators want customers warned verbally that "mutual funds involve risk, including the potential loss of principal." And mystery shopping can determine whether brokers are making those warnings.
In 1993, an FDIC survey concluded that more than 60% of bank reps across the country were forgetting to tell customers about the lack of FDIC insurance.
Ms. Perkins is correct, mystery shoppers never close a sale. But our firm's shoppers often tell reps they want to study the brochure (and prospectus) and will mail them back a check.
They ask for all the forms necessary to open an account. If reps do not disclose what their banks and regulators want them to disclose before our shopper leaves, they are putting their bank at risk.
Banking and securities regulators agree that the best disclosures to a customer are the verbal disclosures that are made as part of the interview and sales process. There is simply no way other than mystery shopping to verify whether a bank broker is making the appropriate representations to customers.
Ms. Perkins also asserts that customer callback programs, in which real customers are quizzed about the sales experience, are just as effective as in-person mystery shopping, and much less expensive.
But investors rarely complain in the middle of a bull market. Telephone callback programs are a poor substitute for hearing what the reps are actually telling customers.
Several banks settle for sample shopping of a portion of their reps. However, leading banks insist on full coverage mystery shopping. Their risk management teams rely on the assurance of full coverage of the entire sales force. They refuse to overlook a single rep. Why?
In 1994, two major banks and a respected thrift were sued for more than $700 million. Retired investors allege in class actions that they lost money on their bond mutual fund investments. They claimed that the bank reps had not warned them of the risk of rising interest rates, among other allegations.
In related cases, former bank reps have filed National Association of Securities Dealers arbitration suits against some of these same banks. They allege they were ordered by management to commit similar misleading sales practices.
All three banks claim their reps were trained properly. But how can they prove training filtered down to the branch lobby?
Our firm and others attempted to interest all three respected banks in mystery shopping before they were sued. None of them saw a need. They had compliance officers. They had procedures manuals. They had training. What's the problem?
Their problem was they have no mystery shopping documentation of their reps' verbal presentations - no documentary proof of what their reps say everyday to their customers.
Legal experts agree that full coverage mystery shopping surveys by qualified firms can be powerful antidotes to class actions.
Mystery shopping provides banks with an objective, third-party record and assessment of every rep's verbal presentation. As a record of an entire sales force, mystery shopping surveys enjoy evidentiary value far in excess of their expense.
Ms. Perkins replies:
I believe Mr. Floyd missed the point of my article. Mystery shopping can be one tool in an overall quality assessment programs, but should not be the only tool to assess compliance.
Mr. Floyd implies that even if a bank has compliance officers, procedures manuals, and training, it cannot document what its sales reps say to customers.
I assert that bank management's philosophy must be embedded in its policies and procedures. Reps need to know policies and procedures, and they must be trained and retrained periodically. Moreover, compliance should be tested on a periodic basis.
