The company has been under a year-long investigation by the private-sector self-regulatory organization for allegedly misleading its smaller clients about investments.
Posted Oct 19, 2005
The National Association of Securities Dealers (NASD) has launched an investigation into Merrill Lynch's customer call centers to examine if it had intentionally given bad investment advice to some of its clientele. The investigation, which has been under way for more than a year and which was revealed this week, is nearly closed and the financial advisor says both sides are close to announcing a settlement of an undisclosed sum.
The investigation has focused on how investors were advised in 2000 and 2001 at Merrill's financial advisory centers customer service centers located in Florida and New Jersey. The service centers were set up in the late 1990s to handle the bulk of Merrill's "Main Street" clients--those with portfolios of fewer than $100,000, according to the company.
In a complaint filed by the NASD last November, regulators accused a Merrill broker at the company's Hopewell, N.J., call center of persuading investors to switch their investments from one mutual fund to another to boost the broker's compensation. The NASD complaint alleges that in each case, the investors ended up paying higher fees or penalties with no improvement in their investment returns, according to the complaint.
The broker was terminated in November 2002, according to Merrill.
The call centers experienced hardship after 2001, but the firm has since improved management and operations, according to Mark Herr, a spokesman for Merrill Lynch. "After 2001 Merrill Lynch's advisory center, known to Merrill Lynch clients as the Financial Advisory Center (FAC), experienced rapid growth, and in retrospect, suffered some growing pains," he says. "Over the last four years, we have made a series of changes to improve the operations and management of the FAC. Today, the FAC provides outstanding service, and a recent survey found that 86 percent of clients gave it a highly satisfied rating."
During the 1990s, major brokerage firms like Merrill Lynch realized that offering individual brokerage services to every investor, even the smallest ones, did not make financial sense. Merrill decided to consolidate its smallest clients at its call centers. The company maintains that such transfers were good for its clients, noting they could get around-the-clock service seven days a week, something a broker can't do.
Of course, unethical behavior in the call center is possible in the financial services sector as well as other industries. Sheila McGee-Smith, president and principal analyst of McGee-Smith Analytics, says "From a contact center technology perspective, this is an example that technology can be used for good and bad. You also see this sort of thing happen in the travel industry."
That said, McGee-Smith agrees that financial service contact centers lend themselves to such foul play because of the ability to "reach out and touch someone," she says. "Financial services [are] more targeted, because you don't even need to do anything illegal, all you need to do is churn the client. A call center lends itself to this by being able to reach out and call such clients."
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