You walk into your bank to deposit a check, drink a free cup of coffee, and talk to an employee you have known for years. You have done this hundreds of times. It is a safe, benign process until the teller or manager introduces you to the branch’s investment specialist.
You have entered shark-infested waters, but you don’t know it. You think you are in a safe environment, having a cup of coffee, talking to friends. But, it is a set-up. Your bank wants you to feel comfortable so you do not question what comes next.
Investment & Insurance Products
The person you know at the bank introduces you to the branch’s investment specialist. He invites you to bring your “free” cup of coffee into his office so he can explain how the bank, you know and trust, can help you retire with more money. The surface of the water looks fine. It is what is under the water that should concern you.
Why Do Banks Sell Investment Products?
I know from personal experience that banks began selling investment and insurance products for one reason. It was not because they thought they could do a better job than Merrill Lynch, Raymond James, or Linsco Private Ledger. On the contrary, that had nothing to do with it. They had millions of customers and they wanted to generate more revenue streams from these customers.
The Trust Angle
Banks who entered the investment business had a major advantage. They had existing relationships with millions of people who trusted them when they provided traditional bank products. They could use the trust they built up over the years to sell investment and insurance products. Unfortunately, people did not separate bank products from investment products.
License to Steal
The banks had a license to steal from existing customers. The question was do they do what is best for their customers or do they do what is best for the bank (profits, executive bonuses, rising stock prices)? Virtually every bank in America chose the latter approach, which created an enormous risk for people who trusted their banks, as financial advisors, to do what was right for them.
Cheap, Cheap, Cheap
One way the banks maximized profits was to pay the investment specialists as little as possible. In fact, when these programs first rolled out banks were concerned the specialists would make more money than branch managers. Some even went to the extreme of licensing tellers to sell investment products.
You have gone to the wrong place if you expect high quality investment advice that puts your financial interests ahead of the banks.
Your local bank serves the most expensive “free” coffee in America. The coffee was free, but you paid thousands of dollars for bad investment advice. Not a bad deal, if you are the bank.