Banks?
It's a relatively easy decision to choose a bank for its traditional services. But, turning your investment assets over to a bank representative is an entirely different proposition. Read this article and find out why banks are risky alternatives for investing assets that will determine your future standard of living and financial security.
Three Distribution Systems
Most larger banks have three distribution systems that are based on asset amounts. All three systems sell investment and insurance products, but there is a considerable range in the quality of their services.
- Trust departments serve investors who need the services of corporate trustees and have larger asset amounts.
- Private Client Services departments are for investors with larger asset amounts, often $3 million or more
- Bank representatives work in branches and they sell financial and insurance products to investors with smaller asset amounts.
- Some banks partner with third party representatives who sell products to bank customers and pay a portion of their revenue to banks.
Branch and third party representatives represent the greatest risk for investors. Their role is to sell you financial and insurance products that generate the maximum amount of revenue and profit for the bank. Very few reps have the necessary knowledge to help you achieve your financial goals.
Commitment
Most banks sell investment and insurance products (mutual funds, annuities), but very few make serious commitments to helping clients achieve financial goals. If they did, they would commit more resources to higher quality advisors and the technology they need to provide competitive services.
Existing Trust
Lack of commitment to provide high quality services isn't what makes banks so risky. It's the level of existing trust that banks develop when they provide traditional banking services. You've used their services for years. That's the good news. The bad news is most banks are willing to abuse that trust to maximize profits and share prices.
- Banks are a good source for traditional banking services.
- Banks are not a good source for high quality financial planning and investment services.
- You are hiring a financial advisor, not a banker.
Leveraging Customer Relationships
Your bank built a relationship with you when it sold you traditional bank products. Your bank leverages its relationship with you when it sells investment and insurance products.
- One of a bank's biggest assets is its customer base and the more revenue it can generate from that base the higher its profits.
- This strategy is good for the bank and bad for you.
Bank vs Financial Services
Banks would like you to believe bank and financial services are one product group because they both involve money. That marketing tactic is deceptive because money has different purposes. Your checking account has a different purpose than your retirement account.
It takes very little personal knowledge to provide automated checking account services. However, it takes substantial specialized knowledge and services to help you invest your retirement assets. Very few bank representatives have this level of knowledge.
Proprietary Products
A high percentage of banks produce and sell their own (proprietary) products to their customers. They sell the products because they generate more revenue than third party products that usually produce superior results. You should be very cautious when a bank representative tries to sell you the bank's own products. They are not selling the products because they produce superior results. They are selling them because they maximize profits.
Lower Quality Representatives
Banks sell annuities and mutual funds because they are easy products for lower quality representatives to sell. This bank strategy is bad for you, but it has worked for years because you already trust the bank because you purchased previous services from it.
Lower Quality Products
Most banks distribute mediocre products for several reasons:
- Banks like the upfront, commission revenue that they receive from third parties when their representatives sell annuities and mutual funds.
- Banks don't need high quality products because you already trust them.
- Many banks are late adopters when it comes to selling financial products to their existing customers and they are utilizing out-of-date business models.
