In a deregulated market, not all accounts are guaranteed

12:00 AM CDT on Monday, July 17, 2006

By WILL DEENER / The Dallas Morning News

The money's in the bank.

RICHARD DOWNS/Special Contributor

That used to mean that your money was 100 percent secure. But with deregulation allowing banks to offer many more investing vehicles than just a savings account, money you give to a bank isn't necessarily safe from loss.

Bank-sponsored investments like stocks, bonds and mutual funds aren't protected by federal insurance, as traditional bank accounts are. These securities, which most large banks offer to clients, carry the same risks as any other brokerage account.

Alice Foster says she found that out the hard way. Mrs. Foster, a 69-year-old widow from Greenville, lost half of her life savings in a bank brokerage account when tech stocks collapsed after the turn of the century. She says she thought her money was safely in the bank.

"A bank cashier referred me to the bank's investment counselor, who told me I really needed to invest my money and not leave it in a checking account," Mrs. Foster said. "I told her I didn't know anything about investing, but I said as long as it's in the bank, I know I've got it."

Mrs. Foster handed over about $200,000 in 1999 to a broker at Bank One's securities arm, which is now part of J.P. Morgan Chase & Co. She later transferred the account to Banc of America Securities when her broker changed firms.

The broker invested Mrs. Foster's money in highly volatile and risky technology mutual funds, according to an NASD arbitration claim against Banc of America Securities.

Not only that, the broker also bought stocks for Mrs. Foster with borrowed money – on margin – which increased the risk even more.

"This was done without notifying Mrs. Foster or telling her of the risks," according to the arbitration claim. "Mrs. Foster doesn't even know what margin is."

The Greenville widow, who has only a junior high school education, lost about half of her savings over the next three years.

"When representatives from the bank tell you to go speak to someone within the bank, it's not like they are telling you to go speak to someone in another building. It's someone usually right down the hall," said Richard Lewins, a Dallas securities lawyer.

"An unsophisticated person takes this to mean this person is someone I can trust because the bank is who is sending me to them," he said.

Mr. Lewins, who represented Mrs. Foster before an NASD arbitration panel in October 2003, said banks disclose only "in the fine print" that stock and bond investments aren't insured by the Federal Deposit Insurance Corp.

"Many people don't look at the fine print. All they know is that one day they walk into the bank and someone says go talk to Joe or Mary down the hall," Mr. Lewins said. "They trust that this is someone affiliated with the bank, and they don't think of their bank as a risky place to do business."

A spokesman for Columbia funds, Bank of America's mutual fund company, said he could not comment about Mrs. Foster's case.

However, in general the company "tries to make this as clear as can be that these products are not FDIC-insured," said Tom Gariepy of Boston-based Columbia.

"The marketing material that comes out of Columbia has on it right there – no FDIC guarantee," Mr. Gariepy said.

The line between banks and brokerage firms has been blurring for the last two decades or so. Currently, 2,122 commercial banks in the United States offer mutual funds, or almost one-third of all federally insured banks, according to the Federal Reserve Bank of Dallas.

Some banks simply buy mutual fund companies. Other banks contract with mutual fund companies such as Fidelity Investments to manage funds. Most banks set up subsidiaries to manage their mutual funds.

Tracy Stoneman, a Dallas securities lawyer and co-author of the book Brokerage Fraud, said banks aren't being deceptive but rather investors mistakenly believe banks are "somehow shrouded with a safety net."

"That's not the case," she said.

Ms. Stoneman said some excellent brokers are affiliated with banks, and she has found that bank brokers are actually more conservative than their counterparts at the large, traditional brokerage firms.

Bank brokers typically aren't offered as many incentives to push certain products as traditional brokers are, for example.

"I would even say there is less misconduct at bank brokerages than other brokerages," Ms. Stoneman said. "These incentives like trips to Hawaii and all that seem to go on dramatically less at banks."

Mark McClanahan, a financial planner at Baker Financial Services in Arlington, said he believes many investors are simply confused by all this. There seems to be an unstated, implied endorsement by the bank of these other products.

"I don't know that the banks are at fault for this, but people sometimes just associate it this way," Mr. McClanahan said. "But in any case, the broker has the responsibility to make sure it is an appropriate investment."

Mr. Lewins said Mrs. Foster's money should have been invested in the most conservative funds available, because it was all she had. Her husband, Frank Foster, who died in June 1996, left her little money, and he had no life insurance.

But in April 1999, Mrs. Foster said, she received more than $200,000 in the settlement of a lawsuit brought when her mother died in "horrible conditions" in a Wylie nursing home.

This was the money that she entrusted first to her bank – in a typical federally insured checking account – and then later to the bank's brokerage arm.

"I didn't know what was good stocks or what was bad stocks, but I knew this was money that had to last me the rest of my life," Mrs. Foster said. "She [the broker] told me within five years I would have $1 million, and I wouldn't have to worry."

Mrs. Foster said the broker "was supposed to be a Christian woman."

"She and I even prayed together in her office," she said. "I was leaving it all in her hands. She said I should watch the Nastec, because that was the closest to what I was invested in."

At the time, tech stocks had been soaring for years, and despite warnings from many experts, many others were just as persuasively arguing that stocks would keep rising indefinitely.

But the Nasdaq Stock Market began dropping in early 2000, eventually bottoming out at a 78 percent loss in October 2002. By that time, Mrs. Foster's nest egg had lost about half its value.

This loss, coupled with withdrawals to buy a car and give some money to her children, left only $40,000 in the account. It was at this point that she finally closed the account and spent the remaining $40,000 as a down payment on a house.

The broker and the bank argued that Mrs. Foster had been made fully aware of the risks, knew what she was doing, and was no different from any investor who lost money in the stock market.

The arbitration panel ruled against Mrs. Foster. Mr. Lewins said this was one of only a handful of times he has failed to get a client at least some restitution.

Arbitration panels consist of three members – two from outside the brokerage industry and one affiliated with the industry.

"I really felt bad for Mrs. Foster. I just feel like we had a terrible panel," Mr. Lewins said.

Arbitration panels never give reasons for their rulings.

Today, Mrs. Foster lives off a monthly Social Security check, rents out a room in her home to make ends meet and receives food stamps.

"I trusted my bank, and I was led to believe that the money was secure and would last the rest of my life," she said. "But now all the money is gone."

E-mail bdeener@dallasnews.com