I keep my checking and savings accounts with a major corporate banking chain. For compliance reasons, we’re going to call it “bank X.” At least once a week I stroll inside my bank for some reason, whether a deposit, withdrawal, transfer of funds, etc. I’ve noticed that during approximately 20% of my visits, a smiling young “personal banker” (wearing a suit which matches the bank X logo) wishes to have a word with me. It happens so frequently that I’ve started saying yes just to see what it is they have to say. I figured the collection of conversations could lend itself to a good blog entry. Well, here it is. The irony, of course, is that these young and inexperienced bank employees are told precisely what to say when they pitch the bank’s clients. It’s very unlikely any of them could teach me, a research-obsessed financial planner with a published book about finding unbiased financial information, anything which I consider to be valuable or new. In fact, nearly every word they breathe has me cringing with disagreement and questioning their honesty and integrity. Bottom Line: Banks are good for checking and savings accounts. Be extra careful about letting them manage your investments
How do Bank Reps make money?
Commissions. If you read the Wall Street Journal or nearly any magazine about financial planning, you may have noticed that compensation questions regarding fees and commissions are quite the hot topic. Common sense should tell us that those who work strictly on sales quotas and transaction business (commissions) will tend to return the lowest level of service and success to their clients. Why? They’re chasing after the next piece of business rather than trying to understand the needs of their clients.
Bank brokers are a perfect example of this. When they see a person walk into the bank, it’s as though a dollar sign with legs just walked through the door. Rather than asking for a “word with you” they should just ask for $20. It would save time. These guys tend to have very little experience and make the same blanket recommendations to each client. They don’t pay much regard to crucial details such as investment experience and risk tolerance.
Here’s some proof: at my local branch I recently moved a chunk of money from my checking to my savings account so I could earn a higher level of interest. I explained to the “adviser” that it was for a short period of time–three months or less–and would be used for the down payment on a home which I purchased in April.
You don’t need a degree in rocket science or a CFA to know three months is a very short time frame for investing. If you have a closing coming up, you never, ever, want to be in a position to lose part of your principal investment. Brushing this basic knowledge aside, a not-so-good-at-advising “adviser” informed me that my best option would be purchasing a tax-free bond fund for the 90-days until my closing. He told me this would yield a greater overall return than bank X’s Platinum (4.41%) savings account.
Before I explain why this recommendation was so incredibly senseless, let me tell you what would happen if I made this recommendation at my own firm. Besides my guilty conscious (this person may lose their ability to purchase the home) a compliance officer would probably knock on my door and warn me about such a recommendation. They may discuss any of the following good points:
•Buying that fund would have cost me a commission, thereby reducing my total return. Depending on the share class, that commission may have pushed my return substantially below the 4.41% guarantee in the savings account.
•The fund would not have been liquid. I would have to put in a request to sell the fund (takes a day or two) to position the money back into checking and use it in time for my closing.
•Bonds, even when they are issued by tax-exempt and highly rated municipalities, contain some degree of volatility. The price of the bond will move, perhaps by a few pennies, each day. If I happen to purchase the fund at a time when interest rates are going up, the price of the fund may have gone down. In fact, it may go down so much so that my total return is 0%. Not likely, but certainly not impossible. It becomes increasingly likely depending on the size of that commission.
Not to worry, I did explain these realities to the fellow I was speaking with. I hope he learned a thing or two about financial planning.
On a different but equally dismal trip to bank X, I had a chance to sit down with a senior broker, one which explained to me how the bank’s operational structure works. For the record, I don’t think these practices are specific to my bank. My experience has been that most banks working in a large, corporate environment operate in a similar fashion. I learned that many of these young brokers aren’t even brokers yet. They simply get a “finder’s fee” if they can land a lead which their team manager can close. The junior brokers (or whatever jargon they print on the card) get base salaries plus finder’s fees which vary depending on how many leads they can fetch. Sounds like a fierce competition to me.
Where do these leads come from?
I also asked the senior broker how banks obtain so many leads. He explained that bank X engages in various forms of synergy and integration. Being the monster structure which it is, the bank has all types of advanced analytics which help it obtain and close new leads. One such program will indicate to the advisers when a direct deposit schedule has stopped or been altered. This signals to the bank that you may be leaving a job. Ding! Rollover opportunity. If they can snatch the 401k or other retirement plan, they might earn a commission. The bank will contact you in any number of ways to alert you as to how you (i.e. they) can benefit from this transition.
They do the same thing with credit cards. I went with my girlfriend recently to help her open up a new checking account. The bank offered her this interesting form of overdraft protection (going over your checking balance) which automatically opens up a line of credit if and when the customer bounces over. Sounds helpful right? If you think of it from the bank’s perspective, it’s really bringing you further into debt by saying “don’t worry about having little or no money. We’ll give you a high-interest credit card so you can fall faster into the horror of credit card debt.”
What’s even funnier is that she liked the idea and opted for the card. I have no idea what incentive is offered to the “adviser” who pushes the benefits of such a credit card arrangement, but I’m sure it’s nice. Credit card marketing is fiercely competitive, especially within corporate chains.
I had to get this stuff off my chest. As an independent financial planner, I risk losing clients if I’m not fair and honest. My job is made especially difficult by rules and regulations imposed by regulatory bodies which require me to disclose the entirety of my business, even to those who don’t ask. I’m held to the highest standard when it comes to making recommendations which are fair, accurate, and in the best interests of the client. Next time you walk into your bank, beware of any “little chats” which aren’t at the teller window.
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Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.