In recent years, mutual fund and annuity sales programs have emerged as a powerful new source of fee income for banks.
These programs are making an important contribution to the rebuilding of industry capital that was depleted by the loan problems of the 1980s. They are a natural extension of consumer banking, and serve to strengthen customer relationships.
But just as this new opportunity is being realized, regulatory challenges are arising that could stifle it.
Imagined or exaggerated perils are being used by regulators and by nonbank competitors to advocate laws and practices that would suppress sales and render banks uncompetitive.
Clearly, bank involvement with these products spawns the potential for unsound sales practices and for the creation of bank liability. There is a need for the application of appropriate standards and regulation. Customers should be made aware especially that such investments are not deposits and lack federal deposit insurance.
Unfortunately, proposed regulations and the advice of regulators go way beyond these sensible standards.
One reason for this overreaction is that the media has bombarded us with a barrage of articles with alarming accounts of bank customer misunderstanding and confusion.
In January, the Los Angeles Times warned, "Do you know how safe your bank investments are? According to a newly released national survey, the answer is probably not."
And in April, Business Week opined that "this lack of [bank customer] comprehension is chilling."
The flames have been fanned by surveys such as one sponsored by Money magazine. The article is highly critical of some leading banks for failing to disclose to prospective mutual fund buyers that the funds were not bank obligations and were not FDIC insured.
The fact is that often these disclosures are made well along in the sales presentation after customer suitability information has been developed. The surveyors, reportedly posing as buyers, ended the discussions before the sales representatives reached that point.
Repeatedly, alarmist stories cite a survey performed by Princeton Survey Research Associates in January. Among the findings were that only 18% of bank customers know mutual funds bought at banks are not FDIC insured. For annuities, the figure was 14%.
Reportedly, a substantial majority of buyers of these products claimed that no one talked to them about the suitability of their investments. Widespread ignorance was also reported as to customer knowledge of the terms, fees, and features of their investments.
As the head of a company that has sold over $1 billion of annuities and mutual funds through banks, these findings stuck me as unbelievable. A careful reading of the Princeton survey raises serious questions about its validity:
* Of 1,000 telephone interviews, only 60 respondents said they had actually bought mutual funds through their banks. Only 30 said they had bought annuities. Valid statistical conclusions cannot be drawn from such a tiny sample.
* There is no information as to how long ago these alleged buyers may have made their purchases.
* Can any meaningful conclusions be drawn from the responses of the vast majority of those surveyed who said they had not purchased mutual funds or annuities through banks?
* Perhaps most suspect is the survey's independence. One of its sponsors was the American Association of Retired Persons, which has sold $12 billion in mutual funds to its members.
Even if we can agree on what level of information disclosure is appropriate for the sale of these products, we are left with the question of the extent of a seller's fiduciary responsibility to buyers. One can infer from some regulators' suggestions that product suitability must be near perfect.
What if sellers of all products were to be held totally accountable for the suitability of their sales? One answer, as expressed by Rep. Stephen L. Neal, D-N.C., is: "I don't see why the mutual fund salesman has to know what's suitable for me, and a car salesman does not." The price of setting suitability standards high is that it can stifle sales and productivity.
