NEW YORK -- Investors and bankers should keep an eye on the radical experiment under way at the Bank of America, headquartered in San Francisco. It is changing the way it pays the staff that sells mutual funds, tax-deferred annuities, bonds and other securities. If it's successful, competitors would be wise to copy.
The bank's objectives are two: (1) to motivate its sales representatives to pay more attention to what the customer really needs; (2) to establish strict quality controls, so a rogue broker can't do a customer wrong.
Most financial salespeople work on commission, earning a percentage of every dollar you invest. Stripped to its essence, this form of compensation can drive sales reps to sell anything they can to every warm body that shows up. Management may aggravate this attitude by setting high sales quotas, offering extra pay for selling house-brand mutual funds or honoring a "sales achiever of the month." If a sales rep makes his numbers, he keeps his job and maybe wins a week in Hawaii. How well-served his customers were has nothing to do with the size of his reward.
The Bank of America thinks that attitude has to change. Instead of being paid just to sell products, a portion of each rep's compensation now depends on how well the products sold fit each customer's real needs.
The new compensation system began in June, says Bob Flowers, head of BA Investment Services, the bank's investment arm. The rep compiles a customer profile -- age, assets, income, risk tolerance, goals. The bank predetermines the range of investments that serve each type of customer best. The rep bases his suggestions on that limited list.
If a rep sells an unsuitable product -- say, an international stock fund to a woman who has never owned anything but certificates of deposit -- the anomaly should be spotted that day (or at the end of that month) by a manager for quality control. Someone will telephone the investor, to chat about her stock fund's risks. If she didn't understand the dangers, the bank will undo the transaction, Flowers says. The rep who sold the fund will be docked up to 20 percent of the commission. Reps can also be docked for not providing customers with a suitable diversification of investments.
Those are just the first steps. Flowers also is experimenting with ways to tie sales compensation to such things as the amount of money a client decides to invest through his bank and how well the portfolio performs. "It's not going to take long to change [salespeople's] behavior," Flowers says. He thinks they're already thinking more about client needs and less about pitching products.
Many bank presidents talk, talk, talk about training sales staffers better, so they won't sell risky investments to clients who want to keep their money safe. But the training will not take, as long as reps' earnings are tied to the quantity, not the quality, of sales. If those same bank presidents linked commissions to continuing customer satisfaction, they'd train their salespeople overnight.
The sales climate at some banks is not unlike that of the auto industry in the 1970s, says Scott Galloway of Prophet Market Research & Consulting in San Francisco. "The automakers didn't respond to customer needs," he says. "Once you bought the car, they didn't know you if you called them with a problem."
Last August, Prophet sent 81 undercover shoppers into the nation's 50 largest banks, posing as inexperienced investors seeking safe alternatives to their low-yielding certificates of deposits. The shoppers found that sales reps often pitched investments without discussing the customer's finances and investment goals.
I've heard from many angry readers who feel that their bank took them for a ride. My saddest letter so far came from the caretaker of a blind 91-year-old man in Pompano Beach, Fla. When the man's only nest egg -- a $40,000 CD -- came due, his bank put him into a government bond fund, which he believed to be insured. When the bond market crashed this year, the value of his fund dropped sharply.
When asked whether a seven-year investment made sense for a man that age, the senior counsel for the bank's brokerage firm, the Invest Financial Corp., replied tartly, "My father is 91 and in better health than I am." If it were me, I'd dock not only the salesperson's pay but the senior counsel's, too.
Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.