Archive for Tuesday, March 28, 2006

Don’t get ‘punk’d’ by mutual fund firms

March 28, 2006


Imagine your brokerage firm sends you a letter saying your account now will be handled by a centralized call center. So one day you call to ask a question about one of your mutual fund holdings.

Next thing you know you're persuaded to switch your money into another fund, costing you extra fees and charges. What does the salesperson get for the unsuitable switch? Tickets to a rock concert.

What just happened?

To borrow from the MTV show of the same name, you got "punk'd."

However, unlike in the show in which getting punk'd means you are the victim of a prank, this is for real. This allegedly happened to some Merrill Lynch customers, according to NASD, the private-sector regulator for the securities industry.

NASD announced recently that it fined Merrill Lynch $5 million for failing to supervise advisers, holding impermissible sales contests and other violations in connection with the operation of a financial call center.

Learn from this story. It's a lesson on how not to get punk'd.

In 2001, NASD said Merrill Lynch began handling thousands of customer accounts throughout the country in what the firm called its Financial Advisory Center, or FAC.

Generally, smaller accounts with assets of $100,000 or less, or those with minimal transactional activity, were moved to this centralized financial center, in part so that Merrill Lynch's full service financial advisers in branch offices could devote more attention to larger accounts, according to NASD. The firm failed to disclose that the brokers staffing the centers often had five years or less brokerage experience, and that they were limited to recommending mutual funds.

"These brokers weren't as experienced as the brokers in the regular branch offices," said James Shorris, NASD's head of enforcement.

From 2001 to 2004, NASD said the brokers were found to have "engaged in a pattern of mutual-fund switch recommendations that were accompanied by misrepresentations and omissions of facts to customers."

In settling this matter, Merrill Lynch neither admitted nor denied the charges.

The company, in a statement, said it was going through "growing pains" as it expanded the financial center.

But it sure looks like a profitable pain.

Between March 2001 and August 2002, more than 1 million customers were transferred to the financial center. At its peak size in 2002, this part of the firm had about 1.3 million accounts holding about $20 billion in assets. That year, the center had gross revenues of about $210 million. Shorris said a significant amount of that revenue was obtained through mutual-fund switching activity.


Use the comment form below to begin a discussion about this content.

Commenting has been disabled for this item.