July 1994 A whistle-blower tells how banks abuse investors By: Mark Bautz In our May issue we unveiled a new survey pointing up the shoddy sales practices that are all too common among banks pushing mutual funds and other investment products. This month we go undercover to give you an exclusive insider's account of the shocking dirty tricks some banks play. Our source: a broker who generated more than $1 million a year in commissions while working for a major regional bank from 1990 to late 1993. Now with a top Wall Street firm, he insisted on anonymity for himself and his ex-employer in exchange for his cooperation. MONEY has confirmed his version with other former employees of the bank. According to our whistle-blower, the bank pressured customers to make high- fee, often unsuitable investments, and generally misled them. While this is just one bank's story, it underscores problems that our earlier study revealed to be widespread. (For ways you can protect yourself, see the box opposite.) Here, in his own words, is what the whistle-blower told MONEY's Mark Bautz: ON BAMBOOZLING CD CUSTOMERS We'd have CD nights, where tellers and customer service people would stay late with lists of all the CDs that were about to mature. In search of customers for high-commission products, they would cold-call everyone on those lists. They'd say: "Mr. Jones, I see you have a CD coming due. I've made an appointment for you to come in and talk to our tax-advantaged department about making 5% instead of the 3% you're getting now." To the client, this was a trusted banker calling, so he came in. He'd have no idea that the person he sat down with was really an annuity salesperson from an outside company, not a banker. And even after buying that tax-deferred product, the customer would often not be aware he had bought an annuity. The word annuity was never mentioned. ON VIOLATING CUSTOMER CONFIDENTIALITY After a customer made a deposit, the teller would call a broker, and say, "Hey, client X has $100,000 in savings. I thought you'd want to know." Or he'd make a copy of the deposit slip and pass it along with the customer's account information. This confidential data got passed around to anyone who might get a piece of the action -- and all without the customer's awareness or permission. The incentives for tellers and other service personnel? Greed and fear. They got paid $5 for the first referral, $6 for the next, up to $10 per referral. ( The person with the most referrals would be pointed out at the quarterly officers' meeting and given a check. "Here's $500. You referred 52 people. Great job!" Every employee had a monthly referral quota. The threat was that if you didn't make it, you wouldn't get a good raise or promotion. ON DIALING FOR DOLLARS My telephone technique was to make people feel unique. "Hello, I'm Joe Blank, calling from a special division of Blank Bank that deals only with selected clientele. You've been specifically recommended by the branch manager." About half the time, I'd sell funds over the phone without showing a prospectus. Often I wouldn't even ask about a customer's background. I sold tax-free funds without checking that the customer was in a high bracket. We were at the bank to close as many deals as we could. Because it's easier to sell a fund that doesn't have a front-end sales load, we usually put people in funds with back-end loads that gave the bank a nice 4% commission. Now that the markets have gone down, some of these people want to get out of their funds, and they're complaining they didn't know there was a charge for withdrawing their money. ON BROKERS PRETENDING TO BE BANKERS In the 13 branches I worked in, there was no physical separation between the bank part of the office and the securities part. When I sat at a desk, everything around me said FDIC insured -- even though most investments aren't. People who in a million years would never go into a traditional brokerage office were meeting with me, not understanding who I was. Sometimes I'd be sitting inside the branch manager's office, with the bank manager right there beside me. I'd be meeting that client because the manager had told me: "Mrs. Smith has $250,000 in her savings account, let's see what we can do. This sounds like a good proprietary funds sale." ((Such bank-sponsored funds generate higher fees than outside funds sold by the bank.)) ON FLOGGING LACKLUSTER HOUSE FUNDS The bank paid us full commissions on proprietary funds but kept 10% of the fee we made selling competing outside funds. In addition to giving us this haircut, as we called it, the bank set a minimum quota of $2 million in proprietary fund sales per broker per year. If we didn't make it, it affected next year's raise. Now, it wasn't easy to sell $2 million in house funds because they weren't good for clients. There were only three funds to choose from, they had no $ track records, and the stock fund, which had terrible management, was a piece of junk. So we based everything on being part of the bank. "You know us, we're rock solid, we've been around for generations." It didn't matter that bank mutual funds aren't the same as a bank account. We'd say: "Why leave your money in a CD when you can put it in the bank's equity fund? That will qualify you for a premier checking and investing account." If people bought house funds, they got a fancy combined statement and a free gold Visa card. A lot of brokers had success this way. ON THE POWER OF PERKS It was like golf balls were falling out of the sky. We'd sell Company Y's funds because when we did $500,000 in business, they'd send us to St. Thomas or St. Croix. For $1 million, we'd go to London. Another fund company sent us American Express gift checks in $25 denominations. We'd get a dozen of these and pass them out to tellers who gave us referrals or use them to buy golf clubs, dinner or drinks for ourselves. If a fund was on the bank's approved list, we were going to sell it, regardless of what we thought of it. Truth was, we didn't have time to pick each one apart. On a typical day I might have 10 appointments with prospective customers in seven different branches. At one point I had 1,400 active accounts. There was no way I could keep track of them. The bank kept us too busy selling new ones. ON PUMPING UP COMMISSIONS It worked like this: A broker would sell someone a front-loaded mutual fund -- say, an emerging growth fund -- and collect the 3% sales commission. Then after six months passed, he'd call the client and say: "It's time to get out of emerging growth. I want to put you in growth and income." And he'd slam the customer into back-end loaded shares of a G&I fund. There's no resistance since the customer doesn't have to pony up a sales charge to move into these, just to move out. But the bank collects its 4% commission immediately. So with just one client and one lump of money, we'd make 7% in commissions in six months by churning investments. ON HIS REGRETS I'm guilty of selling mutual funds to people I knew shouldn't own them. Often they were elderly people, pulling their life savings out of CDs without understanding the risks. I feel bad about that. But the bank's attitude was, if customers will buy it, you sell it. Photo(s): NO CREDIT Bankers' dirty secrets Color: The anonymous author - contents page. NO CREDIT Our inside source is an ex-broker at a major regional bank. Color: The anonymous author.