Buying Funds At The Bank: Franker Is Fairer

In the race to turn America into a nation of mutual-fund investors, banks and thrifts are running hard. Today, bank-sponsored funds account for more than 10% of mutual-fund assets, and that percentage is sure to climb as banks lure more of their customers into funds.

But there are serious questions about whether the banks are doing all they should to explain mutual funds to their customers. A study of 1,000 bank customers by the American Association of Retired Persons and two other groups shows that less than 20% of them understand that mutual funds purchased from banks, like all mutual funds, are not federally insured--and half of the customers who actually bought the funds believed they were. A Securities & Exchange Commission survey indicated similar confusion. Some bankers take issue with the survey results, but the fact remains that a problem exists.

The lack of comprehension is chilling. Many bank customers who shifted from certificates of deposit to bond funds last year to boost their income may already have suffered losses of principal. Even worse, some neophyte investors may not even realize that they have lost money.

NOVICE INVESTORS. There are also problems with mutual-fund fees. A recent probe by Consumer Reports, which sent a staffer posing as a potential fund buyer to see 40 salespeople at banks in five states, found that only eight provided clear information on mutual-fund fees. The AARP study found that as many as one-third of the customers buying funds at banks do not know if there are commissions, fees, or other costs involved.

Some lack of understanding is to be expected. Many bank customers are first-time investors who may be unfamiliar with products that carry fees and that can fluctuate in value. They need more explanation of investment basics than do many customers of securities brokers. "Most people dealing with those kinds of institutions [brokers] don't expect to be insured," says Federal Reserve Governor John P. LaWare. "The reverse is true with a bank." That puts the onus on banks to explain more.

True, there are already plenty of rules covering bank mutual-fund sales. The banks' sales efforts are generally under the same regulatory supervision as sales by brokers. Both bank and brokerage employees should have special training, and they should determine a customer's investment priorities and tolerance for risk. A bank may also come under the scrutiny of up to four federal agencies.

But the survey results indicate that many banks follow the letter--but not the spirit--of regulators' guidelines. "A vast majority of banks are just doing a perfunctory job on disclosure," says AARP legislative representative Kent Brunette.

Take bank-managed funds. While many banks rake in fat fees selling other companies' funds, some make even more running their own. A few even give their funds names that are close to those on insured bank products. That's not illegal, but it may prove misleading to inexperienced investors. Few bank funds have lengthy track records, and they may not be as suitable for certain investors as other, more established funds.

Some changes are under way. The FDIC and other regulators are studying consumers' awareness of mutual-fund risk and mulling over the use of "testers" to pose as customers to check on how well banks explain the risks of mutual funds. Banks such as Shawmut National are using testers of their own. The American Bankers Assn. and other trade groups have issued guidelines on mutual-fund sales. Two powerful House committee chairmen have introduced legislation to tighten rules for banks' mutual-fund operations.

Clearly, the rules have to be tougher. Bankers will doubtless object--but it could actually work in their favor. They already have the advantage of being viewed as trustworthy. If they must meet higher standards than brokers, they can point to that when marketing their funds. For example, brokers are under no obligation to show investors funds managed by other companies. A bank that is required to be more evenhanded could win big points with its customers.

Some bankers have already seized on the silver lining. "We have a higher standard to meet, and we try to use that to our advantage," says David W. Dunning, managing director of National City Investments Corp., the brokerage subsidiary of Cleveland's National City Corp. National City branches separate investment sales from regular banking areas. Salespeople have desk signs saying their wares are not insured, and their business cards say they are employees of the investment firm. Tampa's Invest Financial Corp., a fund distributor, is selling signs and stickers that banks can use to warn customers about the differences between mutual funds and deposits.

Banks may find that in the short run, tough rules cost them sales. But better to lose a few customers now if high standards help banks gain many more over the long haul.

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