Why Should I Avoid Financial Advice At A Bank?
In the good old days a bank was a bank. It was where you deposited your paycheck, had a savings account and got a car loan. Laws were changed (due to heavy lobbying by the banks) to allow them to sell investment and insurance.
Most banks now have a subsidiary company/partner that is a Broker Dealer (BD) and the financial advisors at the branches are employees of the BD.
Here are some reasons why it may not be in your best interest to buy investments from a bank.
1. All financial advisors in the banks have a legal loyalty to their employer not the client. They do not have a responsibility to disclose conflicts of interest, or to do what is in the client’s best interest. The only two requirements are to “know your customer” and provide products that “are suitable”. Suitable does not mean what is “best” long for the client but could be what is best for the bank.
2. Banks are publicly traded companies who answer to Wall Street. The Board of directors and CEO’s are charged with increasing stock value for the shareholders. The Board sets policy, which affects the products that can be offered for sale and what not to sell. Would it surprise you that they are more likely to approve high commission products and encourage sales?
3. Banks are under tremendous pressure to fatten up the bottom line. Increasing profits from the sale of investments and insurance is a quick way to do that in this low interest rate environment and that many banks must begin the repayment of the federal bailout money with interest. There is a lot of pressure to increase income. This can lead to the sale of products with higher commissions as well as inappropriate sales which is may not to be beneficial to the customer
4. Allowing investments to be sold in a bank has resulted in confusion for many clients. One client reported going to her bank to acquire a CD. When she expressed disappointment at the low rate she was directed to a financial adviser who sold her an Equity Index Annuity, which provided the bank and a representative with the commission of up to 7%. The client was not aware that she could not get all her money back without penalty for 10 years. The lady was 83 at the time.
5. There is a higher average turnover of financial advisers in banks then elsewhere. This can result in dealing with less experienced salespeople or those that have not been successful elsewhere.
6. The integrity and ethics of some banks can be questioned.
a. Wells Fargo was recently sued by the State of California for selling investments to clients as being safe when there was risk and failing to disclose the inherent risk. Other banks did the same thing but at least provided some form of restitution.
b. Bank of America was sued for involvement in a Ponzi scheme.
c. Bank of America sued for not disclosing the true facts related to the purchase of Merrill Lynch that resulted in the Government granting BoA 20 Billion and later to guarantee another 90+ billion.
d. Several banks recently went bankrupt due to poor management with the changes in the economy.
e. U.S. government’s stress tests results revealed that nine out of the 19 banks tested do not need additional capital including; B of A. wells Fargo and Citicorp
In reality, many of the same situations exist when dealing with for-profit corporations such as Morgan Stanley, Edward Jones, Smith Barney and other of broker-dealers.
A better option would be to use the services of a Registered Investment Advisor (RIA) who does not sell product. RIA’s have a legal fiduciary duty to disclose potential conflict of interest and to keep the clients interest foremost at all times. When there are no sales of product and no commission, there is no worry.