Banks are using some tried-and-true spying techniques to make sure their mutual salespeople don't step out of line.
A growing number of banks are dispatching decoy customers to sales offices to make sure that representatives are disclosing that mutual funds lack deposit insurance and carry special risks.
As the number of banks selling investment products through branches has proliferated, proper disclosure of fund risks has become one of the hottest issues in banking. Consequently, bank mutual fund activities are attracting more scrutiny from lawmakers and regulators. By policing themselves, banks may head off harsh regulatory action.
Monitoring compliance is a "prudent course" for banks to take, said Fritz Elmendorf, communications director for the Consumer Bankers Association.
Because selling mutual funds is a new area for banks. "they are very concerned about doing it right," Mr. Elmendorf said. "They know that the eyes of Congress are watching."
Mystery shoppers aren|t new to banking. Many banks hire these spies to help weed out bias in their mortgage lending operations.
But only recently have mystery shoppers begun to show up in the bank mutual fund arena. San Francisco-based Bank-America Corp., one of the largest banks using the technique, instituted its program two years ago to ensure that "we're upholding the highest standards possible" and complying with securities regulations, said Kelsey Ashford, vice president and national marketing manager at the bank.
The bank uses both an outside market-research firm, which Ms. Kelsey declined to name, and internal auditors.
The bank has 450 investment counselors, and all of them are "shopped" regularly. Ms. Kelsey said. Often, she added, the counselors are tested several times.
Hiring spies needn't be entirely unpalatable for banks. In addition to evaluating disclosure and sales practices, mystery shoppers can measure how effective brokers at selling.
To that end, shoppers evaluate the broker's sales pitch, ability to overcome objections and close sales, and even whether brokers arrive on time for meetings.
Indeed, Mr. Elmendorf said, mystery-shopping programs may have a special value for banks that hire marketing companies to set up mutual fund sales programs in branches.
"When you are exposing customers to outside sales agents, you want to have a monitor on them."
A cottage industry is springing up to help bank managements assess whether employees who sell securities in their branches are doing the right thing for customers.
Among the market research firms that offer such services are Prophet Market Research, San Francisco, and Market Trends, Seattle.
Shoppers with Licenses
Prophet bills itself as the only market research company to offer a program specifically geared toward auditing brokers. In fact, its mystery shoppers hold brokers' licenses from the National Association of Securities Dealers.
Prophet's mystery shoppers go into bank branches posing as customers with money to invest. Working from a list of questions, they quiz brokers about product offerings.
Banks participating in the Prophet program tell their brokers that shoppers will be monitoring them.
Bank investment salespeople are "less likely to pull a fast one if they know a shop is going on," said Lee Lodes, a senior associate with Prophet who oversees the firm's banking-brokerage division.
"We hope they are always on their best behavior because every customer is a potential |shopper,'" he said.
By identifying behavior that does not serve customers' best interests or subjects the parent bank to liability, Prophet helps management rectify problems.
"If there is a loose canon in one of their branches, we let the bank's management know so they can deal with them," Mr. Lodes said.
It is better to find out confidentially from an independent monitor than from a customer or the NASD that there may be a compliance problem, he added.
Training Effectiveness Tested
Seattle-based Market Trends, performs "shops" designed to measure service quality, according to William Young, the company's president.
As part of the service, shoppers ask brokers about interest rates and if principal is guaranteed, Mr. Young said.
Banks often use the program to determine whether their training programs are working, he said.
What kind of problems have mystery shoppers uncovered? Mr. Lodes of Prophet says that his band of spies haven't found any "blatantly irresponsible" bank brokers since they started looking at them last fall.
But that's not to say that there haven't been problems. Prophet has encountered salespeople who inaccurately describe loads, or sales charges, as management or operating fees.
Brokers have also been caught telling customers that U.S. government securities funds are guaranteed by the government, which they are not, Mr. Lodes said. And some brokers have failed to mention the risks that rising interest rates would pose to investors in government funds.
Banks need to keep an especially close eye on fund sales practices because their customers tend to be older and more conservative than the typical fund investor, Mr. Lodes said.
"They walk into branches and see |FDIC insured' stickers on the door and assume that everything is insured."
Often, he maintained, customers who buy investment products through banks are simply looking for better returns than their certificates of deposit are yielding.
"They hear what the rates are [on mutual funds], and everything else goes over their heads," Mr. Lodes said.
Banks that spy on their brokers are still the exception rather than the rule. And those that are testing salespeople tend to be secretive about the practice.
Most banks are not monitoring salespeople. Detroit-based Comerica Inc. does not have a mystery shopper program, a spokeswoman for the bank said.
Still, change may be in the wind.
"We are not far enough along al Nations Securities" to use a mystery shopper program, said Ellison Cleary, a spokesman for Nationsbank Corp., Charlotte, N.C. "But we may consider it next year."