WE FIND THAT BANKS OFTEN GIVE BAD INVESTMENT ADVICE
By Mark Bautz

(MONEY Magazine) – People who buy mutual funds, annuities and other investments from banks had better be savvy -- or beware. An exclusive study for MONEY found that banks do a generally poor job on such basic tasks as learning the financial needs of clients and disclosing fees and the lack of FDIC insurance on the investment products they offer. Overall, the 33 leading banks and thrifts we examined averaged a mediocre score of 68.62 on a scale of 0 to 100. Even the three banks that did best -- NBD of Detroit (86.96), Wachovia of Winston-Salem, N.C. (80.51) and NationsBank of Charlotte, N.C. (79.18) -- made minor slips. At NBD, for example, one adviser failed to provide prospectuses for funds she was pitching; another touted a fund as never having had a losing year but didn't mention that you can't predict future results from past performance. At the other end of the spectrum, advisers at Boatmen's National Bank of St. Louis, dead last with a score of 55.99, used misleading words like "guaranteed" to describe investments that are entirely exposed to market risk. And they failed to disclose full details on mutual fund sales charges and fees. (The tables at left highlight the overall results.) MONEY has called attention to banks' shortcomings as investment advisers twice before, in our August and December 1993 issues. But our latest survey, by Prophet Market Research & Consulting of San Francisco, which helps banks evaluate their own customer service programs, provides the most detailed evidence yet of sloppy sales practices at many of the nation's largest and most prestigious financial institutions. This news is particularly troubling because more banks are plunging into the business of peddling investment products. Today, 3,300 of the nation's 13,000- plus banks and thrifts sell mutual funds, and analysts expect that number to double in five years. More important, bank clients accustomed to stashing their money in federally insured bank accounts and certificates of deposit can be especially vulnerable to misleading sales pitches. "People who buy investments in banks tend to be less sophisticated than those who walk into stockbrokers' offices," says James McLaughlin, director of securities for the American Bankers Association. Therefore, he adds, bankers must be ultracareful: "To maintain our customers' trust when selling them investments, we have to make sure our hair is always combed and our buttons are always buttoned." To see how well banks are living up to that standard, we turned to Prophet. The firm dispatched 29 trained, professional testers to 33 institutions in 15 states, posing as first-time investors looking for better returns than those available on CDs. One group was made up of 25- to 40-year-old men and women who said they had $20,000 to invest. The second group, age 45 and older, claimed they had $50,000 to invest. The testers visited three branches of each bank, in separate states wherever possible, grading each branch's performance in 26 specific areas. The results were dismaying. Time and again, salespeople failed to ask for such basic information as the customer's investment objectives, risk tolerance or income. Several reps recommended tax-free bond funds without first asking about the testers' tax brackets. Many proposed tax-deferred annuities without finding out whether the tester had other tax-deferred accounts such as IRAs or 401(k)s that they should be funding first. Moreover, many salespeople neglected to volunteer critically important information. For instance, 31% didn't point out that mutual funds and annuities are not protected by federal deposit insurance. And a staggering 67% were silent about the annual operating expenses of funds and annuities, which can run to 2% or more of your investment. Worse, a few investment counselors made statements that were highly misleading or flat-out wrong. An adviser at a Firstar Bank branch in Illinois, for example, said that a particular mutual fund was "insured" by Morningstar, which is a rating service and doesn't insure funds. Fortunately, since most advisers stuck with fairly conservative investments, few recommended investments that were totally wrong for the safety-conscious customers; none, for example, suggested a single-country foreign mutual fund. In interviews with MONEY, spokesmen for a few banks conceded -- to their credit -- that their own undercover testing had revealed similar deficiencies. "We didn't find any conscious efforts to mislead customers," said Richard Davies, president of First Chicago Investment Services, the brokerage subsidiary of First Chicago Bank (No. 31 on our list). "But we realize that we need to move disclosure to the front of the sales discussion." Davies and officials of several other banks said they are beefing up their training of salespeople to improve service. Other bankers, however, took issue with our study. "Your results are very surprising," said Rainey Gray, president of bottom-ranked Boatmen's Investment Services division. "We've done our own tests and had results that indicate we're doing a great job." And a number of bank executives noted that fees and other detailed information about investments are spelled out in forms that customers must sign before handing over their money; since our testers didn't , complete any transactions, they didn't receive these forms. But a few pages of fine print delivered just before a sale are no substitute for accurate guidance from an investment adviser. What are banking regulators doing about this sorry situation? In mid- February, the four federal bank and thrift regulatory agencies finally got around to issuing uniform standards for banks' investment sales practices. But the guidelines are not mandatory. So it's up to you to fend off faulty advice. Make sure to volunteer your own investment goals, financial history and tolerance for risk. Even then, don't assume the salesperson's recommendations are appropriate. Ask plenty of questions about the investments the bank rep suggests. If you don't get complete answers in plain language, take your business elsewhere. Ask for prospectuses and other relevant documents on the investments you're offered, along with the latest reports from independent rating firms. Finally, remember that no one can guarantee an investment's future performance, no matter how spectacular it's been in the past; that's a bit of advice you can bank on.

CHART: NOT AVAILABLE CREDIT: Source: Prophet Market Research & Consulting CAPTION: HOW 33 LEADING BANKS AND THRIFTS STACKED UP IN OUR SURVEY The scores below show our testers' assessments of banks' sales practices and are based on how well the institutions met 26 separate standards.

CHART: NOT AVAILABLE CREDIT: Source: Prophet Market Research & Consulting CAPTION: AND HOW THEY FARED IN KEY AREAS Bank investment counselors were better at describing the long-term nature of investments than they were at disclosing sales loads and operating expenses.