Held to a Higher Standard; How Some Banks Have Approached the Trickier Aspects of Meeting Mutual Fund Guidelines

How some banks have approached the trickier aspects of meeting mutual fund guidelines can recite legal disclosures to people and give them acknowledgement forms to sign. will they understand them? You and know we should read all the fine print on everything we do, says Jerry Church, CEO of Citizens State Bank, Petersburg, Ind. But as people move faster than they used to, they don't always do that. The older get, the more see that sometimes don't understand what's being disclosed to me, he says. Church points out that customers have always equated bank investments with getting all their principal back. We've done such a good job of getting across the concept of FDIC insurance that it carries over into the other products we go into, he says. Maybe we've sold it too well. if people fully understand their investments and the inherent risks at the time of sale, they won't necessarily remember later on. I don't care who you talk to, in time, some people are going to forget what they've bought, says James H. Litton, president of First National Bank, Mineola, Tex. you sell a customer hospitalization insurance and you talk to him six months from now, he won't remember he has that insurance. Litton says about 60% of the investors at his $42 million-assets bank are retired. And nobody reads prospectuses, in Litton's experience. When the investment rep who works at my bank gives somebody a prospectus, they come in to me the next day and say, 'Jim, t don't want to read you just tell me about it,' he says. Even lawyers and CPAs won't read them. Tell them again and again If disclosures and prospectuses put people to sleep, how do you make the necessary facts about uninsured investments abundantly clear? Litton says he heavily emphasizes the differences between insured and uninsured products during the interview with the investor. We lose people who are interested because we tell them so strongly that bank deposits are a dollar in, a dollar out, and there's nothing else like that except a money market fund, he says. He has customers sign two disclosure acknowledgement forms. Litton also sends investors a letter once a year that reminds them that the value of stocks, bonds, and mutual funds can go up and down, and that if they sell out when values are down they may lose principal. I repeat that and repeat that, Litton says. A callback program can jog investors' memory, suggests Sarah A. Miller, senior government relations counsel and manager, agency relations, trust, and securities at ABA. Shortly after a customer has invested in an uninsured investment at the bank, the bank can call him or her back and say something like, Now, you understand, Mr. Smith, that this is not an insured product. The bank can put a record of that call in a file along with the signed acknowledgement of the disclosures and newspaper articles and advertisements that discuss uninsured products, says Miller. Preventive medicine Jerry Church took an unusual step. though his $64 million-assets bank is not yet offering alternative investments, only considering doing so, he took out an ad in the local paper explaining the risks of mutual funds. The ad excerpted an article about the retail investment sales guidelines issued by ABA and five other banking associations. Church had seen a letter in the local paper from a woman who said she had invested in a mutual fund and lost $2,800 in principal, and that she hadn't understood that she could lose principal. When saw that letter, decided to run the ad, says Church. James Litton thinks some disclosures on advertisements can lead to customer confusion. It is crazy to say in the body of an ad for mutual funds, 'Mutual funds are not covered by FDIC insurance,' and then at the bottom of the ad or on the tag line of the radio spot say, 'Member FDIC,' he says. …