Regional brokers have closed the gap on their wirehouse competitors when it comes to sales performance and practices, according to results of a recent mystery shopping study by Prophet Market Research in San Francisco.

But it wasn't so much improved performance on the part of regional brokers as much as deteriorating performance by wirehouse reps. This year, brokers from the nation's largest firms unanimously slid in their Prophet rankings from previous years, falling into a near tie with the average sales performance of regional and smaller broker/dealers.

Edward Jones of St. Louis vaulted into the No. 1 position after finishing last year in a tie for eighth place. Smith Barney and Merrill Lynch were the highest ranking wirehouses, finishing seventh and eighth overall.

The study ranks firms' effectiveness in uncovering prospects' needs. Between September and November 1997, Prophet sent out 128 mystery shoppers posing as unsophisticated investors with $35,000 to invest. The shoppers conducted 300 undercover audits of retail stockbrokers in 36 states, the largest such study ever conducted, Prophet claims.

Wirehouse reps were penalized in the study for pushing in-house products 43% of the time. Since fewer regional firms offer in-house products, only 15% of these brokers suggested them. Brokers at Dean Witter were the most likely to suggest in-house funds. Of the Dean Witter brokers who suggested mutual funds, 89% suggested at least one Dean Witter proprietary product.

Firms' overall performance slid in other categories:

* Fully 57% of the shoppers were not provided with relevant prospectuses, compared with only 50% last year.

* In 80% of the audits where prospectuses were not provided, other types of material were provided instead, including fund brochures, updates, annual reports, and fact sheets, compared with 75% last year. Much of the material was marked "must be accompanied with or preceded by a recent prospectus."

Prophet did detect some improvement, however. Perhaps in light of recent market volatility, brokers were more likely to discuss risks with prospects. Of the brokers who suggested individual equities, 93% discussed the risk, up from 82% in the previous year's study. Similarly, 70% offered realistic expectations of how invested assets would perform, up from 59% last year.

Slightly more than 75% of the brokers tested made specific product recommendations during their sales presentations, with domestic equity mutual funds the most recommended product, suggested 44% of the time. In 42% of the cases, brokers failed to ask about the tax situation of the investor; 32% didn't ask about financial status; 25% didn't ask about securities currently owned; and 21% failed to ask about the prospect's investment objectives. At regional firms, 9% of the brokers made recommendations without asking about any of these qualifiers, compared to 5% at national firms. The study showed brokers also tend to pitch products to female prospects more so than men without obtaining information on current investments. Prophet suggests that brokers may generally perceive female prospects to be less affluent.

Merrill Lynch brokers were the least likely to make specific product recommendations at the first meeting--24% of Merrill reps told prospects that investing should not take place before conducting a formal financial plan.

Prophet Market Research also has conducted its third annual study of bank brokerage which was scheduled to be released in January as RR went to press.