Banks often leave much unsaid when selling mutual funds

STAYING AHEAD

November 07, 1994|By JANE BRYANT QUINN

NEW YORK -- Banks tend to see women as poor prospects for mutual-fund investments, and treat them accordingly. And on the matter of giving suitable advice, many banks aren't doing much better for men.

Those are some general conclusions reached by Prophet Market Research & Consulting in San Francisco, after sending 81 "mystery shoppers" to the nation's 50 largest banks. Around half of all banks now sell mutual funds -- generally to people who don't know a lot about investing and who don't expect to lose money in any bank-sold product. Several banks run excellent sales operations that fully explain the investment risks, Prophet's undercover shoppers found, while others are just reaching for a quick buck.

A number of complaints have been brought against banks and their stockbrokerage subsidiaries by investors who say they were misled. Last month, for example, Mark Fenning, 45, of Culver City, Calif., filed a class-action lawsuit against Glendale Federal Bank. He had taken roughly $132,000 in credit-union savings to GlenFed last December, after learning that he would lose his job as an offset printer.

Fenning was attracted by an investment advertised at 7.5 percent interest but, according to the complaint, told the sales representative that he had to keep his money safe. The rep sold him a high-yielding bond mutual fund and a stock fund. In just six months, he lost $16,000 in principal.

Fenning knows nothing about investments, he says in his complaint. He thought he was buying something insured. GlenFed's Jeff Misakian replies that Fenning was fully informed of the risks and signed a form stating, in large print, that the mutual funds aren't backed by the bank.

Based on the experience of Prophet's mystery shoppers, Fenning's story could be right. The shoppers pretended to know very little about investing, and said that they wanted a safe alternative to low-yielding bank CDs. Each bank was visited eight times, between June and August of this year. The shoppers heard 400 sales pitches.

On average, the sales repsbehaved better than during a similar survey that Prophet pursued last March for Money magazine. "So the publicity is helping banks to improve," says Prophet principal Scott Galloway. "But many banks still have gone from mediocre to merely marginal." Here are some things the shoppers found:

* Around 1 mutual-fund sales rep in 5 violated federal guidelines by failing to tell customers, orally, that mutual funds aren't backed by federal deposit insurance. "Many brokers simply feel that it would be easier to make the sale without mentioning this," Prophet concludes.

* 1 rep in 5 also failed to mention that mutual funds aren't backed by the bank -- another violation of federal guidelines.

* Of the shoppers who were urged to buy bond mutual funds, around 1 in 5 weren't told about the interest-rate risk. So they wouldn't have known that, when interest rates rise, the value of their bond funds fall. When customers complain, however, sales reps usually claim that all the risks were fully explained.

* Women get less attention than men. Bank tellers were less likely to refer them to mutual-fund sales reps; the reps were less prompt in scheduling appointments; and they spent less time discussing the women's investment goals. Prophet thinks that the reps incorrectly assume that women don't have significant funds to invest or don't make the household's investment decisions.

* Sales reps often pitched investments without first discussing the customer's finances and investment goals. Nearly half of the shoppers were not asked how large their incomes were, which is crucial to determining a suitable investment. Forty percent weren't asked what tax bracket they were in, yet 40 percent of that group was pitched on tax-advantaged investments for high-bracket people.

* Younger people got poorer advice than older investors, Prophet found, because sales reps paid less attention to their financial needs. Many times, reps suggested stock-owning funds just because the person was young. But if that saver needed the money, say, to buy a house or tide himself over a spell of unemployment, stock funds would be a dangerous bet.

* Around 1 rep in 10 didn't mention sales charges at all. Many of the others brushed over the charges, without helping the customer understand how much the mutual fund would cost.

* Some reps didn't know a lot about the products they sold. Prophet described them as "little more than screens," placed in the bank's doorway to try to capture some of the money flowing out.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.

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