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NASD Alert: Call Center Abuse

The NASD alerts investors about potential problems with sales-orientated call centers.
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Editor's Note: The following is an investor alert from NASD originally posted on March 16. It is being republished here with their permission as a service to's readers.

Some securities firms use call centers to provide support for a variety of administrative and customer service issues. Some firms, especially discount brokers, utilize call centers to accommodate self-directed investors. Generally, such call centers respond to incoming calls initiated by the investor. In most cases, the individuals who staff these call centers don't call you, don't recommend specific investments and in many cases don't receive commissions or other transaction-based compensation for selling investment products.

This Investor Alert focuses on a different, and relatively new, type of call center -- the customer advisory center. It is a center that is staffed by securities professionals who may provide financial planning services, sell securities products and receive commissions or other financial incentives for doing so. These new, sales-orientated centers are becoming more prevalent, and you may not be familiar with how they work. Before you deal with this new type of call center, be sure you understand its operations.

Some of these sales-oriented centers are characterized by:

A client base that may be determined by account transaction activity, portfolio size or household assets (for example, household assets of $100,000 or less).

Accounts that are transferred to the center without prior customer consent. Customers may learn of their transfer through a letter from a customer's broker or brokerage firm stating that the customer's account has been transferred to or "enrolled" in the firm's investment or call center.

Customers who no longer have a single broker assigned to their account.

A compensation structure that creates incentives for center brokers to sell certain investment products or to bring in new money to existing accounts.

Potential Problems

In a recent

Enforcement Action against

Merrill Lynch


, NASD identified a number of problems and rule violations associated with one of these new customer advisory centers:

Aggressive sales tactics that were not only in violation of NASD's rules, but different from the type of relationship the customer had experienced before being moved to the new call center environment.

Failure to gather customer suitability information.

Mutual fund switches (the transfer of money from one mutual fund owned by the investor to a new fund) that were not suitable for a variety of reasons. For example, switches were made without first considering whether comparable funds that met the customers' investment objectives and performance requirements were available within their existing mutual fund families without paying additional loads.

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Misrepresentations and omissions of key information. These included failing to disclose the name of the fund being recommended and relevant information such as a fund's investment objectives, portfolio makeup, historical income and yield information, expense ratios and sales charges. Performance differences between funds were misrepresented, and customers were also told that recommended switches would be at "no cost" or words to that effect, without advising them that their new mutual fund shares would require them to pay higher annual fees, and could subject them to CDSCs if sold within a certain period. (A Contingent Deferred Sales Charge, or CDSC, is a fee that is charged when you sell your mutual fund shares. Class B mutual fund shares often impose a CDSC.)

Failure to disclose the availability of different classes of mutual fund shares and the different costs and expenses associated with each option.

Inadequate supervision of call center representatives.

Sales contests designed to promote the sale of a brokerage firm's own mutual funds, in violation of NASD noncash compensation rules.

Seven Tips for a Successful Call Center Experience

If your existing account has been transferred to a sales-oriented call center, or if you open a new account that is serviced in this type of environment, the following tips will help promote a successful experience:


: If you receive a "welcome" letter or other notice that your account has been, or will be, transferred to a call center or investment center, contact your representative or brokerage firm to ask questions about this change to your account. For example, you may want to ask:

Will I have an individual representative assigned to me that I can contact? Will he or she know me, my account and investment experience and objectives?

Will my new representative be permitted to provide recommendations on all types of investments?

What services will I receive from the investment or call center? How will these differ from the services I previously received?

Will I pay the same commissions and fees for the services I receive?


: Be wary of calls from call center representatives that lead to recommendations to move money out of existing investments and into new ones, particularly into a firm's own mutual funds or other investment products.


: If a particular investment product is being recommended, don't be afraid to ask how the representative is compensated if you purchase the product.


: Ask whether you are able to establish a relationship with a single call center representative. You may be allowed to do so. Take down the full name of any representative that provides investment recommendations or tries to sell you a product. Use

NASD BrokerCheck to make sure the brokerage firm and call center representative are properly registered and to research the disciplinary history of a firm or registered individual.


: Help ensure suitable investment recommendations by making sure each representative you speak with understands your risk tolerance, financial circumstances, investment objectives and any other information pertinent to recommendations that he or she might make. Accurately portray your financial situation and level of financial expertise, and be sure to update this information as circumstances change.


: Understand mutual fund share classes and the different costs and expenses associated with each. This will help you determine whether a switch from one mutual fund share class to another is in your best interest. To learn about mutual fund share classes, read NASD's Investor Alert,

Understanding Mutual Fund Share Classes.


: If a mutual fund switch is recommended, make sure you know the fund's name, investment objectives and fees and expenses. Be suspicious if the recommended fund is outside of your existing fund family: Ask if there is a similar fund within your existing fund family and the cost -- if any -- associated with such an exchange. Ask for a side-by-side comparison of fees and expenses between your existing fund and the recommended fund. Use NASD's

Mutual Fund Expense Analyzer to compare investment objectives, fees and expenses, including a CDSC schedule, and other fund information.

Where to Turn for Help

If you have a problem with a call center representative that the firm cannot resolve to your satisfaction, you may file a complaint online at

NASD's Investor Complaint Center.

Remember, you can also transfer your account if you feel that you are not receiving the quality of service that is best for you. For more information, see NASD's

Understanding the Account Transfer Process.