Banks are great places to store your short-term money but they are lousy places to get financial advice from or buy investments. That’s because they have a very strong incentive to sell you high-cost (which often means low-return) alternatives. Here’s why.
Most banks are publicly traded companies. That means they need to make higher profits every quarter in order to pump up their share price. And of course, pumping up the bank’s share value is their prime objective. As a result, the higher ups often put pressure on the sales people in the bank lobby to push annuities and heavily loaded mutual funds on unsuspecting bank customers.
We’ve spoken at length about why these investments are raw deals for you. But the banks do it anyway because they want to maximize their income – not your return.
In other words, the bank is interested in short-term results while selling you long-term investment solutions. Whenever a financial salesperson does that, it always spells trouble for clients.
Banks are not the place to go for investments but they are good for short-term holdings. If you are looking for a bank that offers very competitive rates on deposits check out Everbank. I love these guys. Great service. Great rates. And very professional. You won’t be sorry.
When I started my career I sold investments in a bank. My manager relentlessly “encouraged me” to sell these products as a means of increasing fee income for the bank. Ultimately, that’s why I left and became independent.
This doesn’t mean that every independent advisor is a saint. And it doesn’t mean that every bank financial advisor is a grease ball either. I’m sure there are many who are honest and caring. But when you walk into the bank lobby please be on guard.
When To Rely On Banks For Advice
I’m sure that most people who work in banks are nice people. The sad thing is their managers turn them into hungry sales vultures as quickly as possible. But you might be lucky and speak to someone who is actually interested in helping you before being turned to the dark side. How do you know?
1. Slow Down
The first thing to keep in mind is that if an investment is a good idea today – it will be a good idea tomorrow and next week too. In the overwhelming majority of cases, there is simply no reason to act quickly. Take your time. And if you feel like the person on the other side of the table is pressuring you, tell the sales shark you are not interested and leave. Simple as that. You don’t owe him or anyone else any explanations.
2. Verify
If you don’t fully understand the proposed investment, talk to a few people in your circle of trust who might have more experience. Get their take and make an informed decision. A reputable financial advisor is only too happy to have you speak to other informed people.
3. Ask The Downside Questions
Of all the tools at your disposal, this is probably the most important yet most often overlooked. Ask what happens if things go wrong. If everything goes well, everyone will be happy. But what if things turn south?
- Can you easily exit the investment?
- When?
- Under what conditions?
- What are the penalties?
- When do they expire?
- Are the returns guaranteed? How?
- How strong is the company standing behind the investment?
- What is their track record?
- Do you get paid a commission to sell me this? Can you provide other options that are comparable? What are the commissions on those competing alternatives?
You probably can (and should) think of a dozen more questions like these. Don’t be bashful. Take time to consider all the questions you need answers to. And once you complete your list, make sure you get all the answers you are looking for.
Bottom line? I’m biased because I’m an independent fee-based planner. None-the-less, I still think it’s a good idea to stay away from commission based financial planners and salespeople. And the banks are almost entirely comprised of commission-based salespeople.
When you go to the bank, do the people there try to foist investment products on you? Have you ever done investment business in a bank? What has your experience been like?
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