If your bank offers investment products and advice, it seems natural to want to avail yourself of them. After all, it’s where you have your checking and savings account and your mortgage, so why not keep everything under one roof? However, before you open that brokerage account or IRA, there are some things you should know about investing with banks.
The Evolution of “Financial Planning” and “Wealth Management” Offerings at Major Retail Banks
Until 1999, when President Clinton invalidated the Glass-Steagall Act, banks were prohibited from engaging in the investment business. Since then, most major banks have created or acquired investment arms, offering a full array of brokerage services in most cases. These banks, including Bank of America, Wells Fargo, and UBS, aggressively marketed their services to existing bank customers to create cross-selling opportunities for increasing profits.
What does this mean exactly?
Today, banks compete on the same playing field with stock brokerage firms, independent broker-dealers, and Registered Investment Advisors by offering in some cases what they call “Private Wealth Management” or “Financial Planning” services.
When you understand how and why these “relationships” are now being offered, you’ll better understand why they may not be your best option. And while it may be convenient to open an investment account where you do the rest of your banking, the disadvantages of doing so might far outweigh the advantages.
Conflicts of Interest
Banks warehouse their own proprietary products, manufactured in-house or through affiliated partners, which can be cross-sold and up-sold. Essentially, some investment divisions of banks are retail distribution channels. Bank investment reps work for and are compensated by the bank to sell these investment products. If that is the case, are you being offered the products that are beneficial to you? Many bank employed reps are not Investment Advisor Representatives and may not hold themselves to a fiduciary standard to their advisory clients, putting the clients’ interests first.
A Lack of Transparency
When banks sell investment products, there are layers of revenue and remuneration from within the organization and from third-party providers as such that it can be difficult to know about all of them, and banks are not required to disclose all of them. You may not know the true extent to what you pay in fees and commissions, and you may not know if you’re receiving “best-in-class” investment products. Oftentimes, your money could be dragged and dropped into a cookie-cutter model portfolio with everyone else’s, regardless of your goals or circumstances.
Higher Investment Costs
If you have limited investment options, potential conflicts of interest, and a lack of transparency, you might pay more in investment costs. Banks might charge higher management fees on their proprietary products, and the cost of revenue-sharing with third-party providers is typically passed on to customers.
Banks at times can charge higher trading costs. These days, you can open an online brokerage account and pay $0 per trade, while some banks might charge between $3 and $7 per trade. These hidden fees can put a huge drag on how much money you can keep invested and growing.
Like any good business, banks steer their investment capital to where they generate their highest profit margins, such as their deposit and lending services—not their investment services. As a result, the technology they make available to investors, while serviceable, may not be top tier. Investment firms like Charles Schwab and Fidelity generate profits exclusively from their investment services, so they invest heavily in the latest technology and promote it as a competitive edge.
Several decades ago, brokerage firm Dean Witter was acquired by retailer Sears Roebuck, who thought it was a good idea to house some branches in their stores. Do you think many thought it was a good idea to buy their stocks where they buy their socks? Eventually, Sears sold Dean Witter.
Many banks have one interest, which is to increase profits through cross-selling investment products. Ask yourself would you be better served by an independent financial advisor dedicated to putting your interests first.