Why You Should Never Trust People At Banks...
I love commission sales but everything has its limits.
If you like numbers, the financial industry is awesome. Everything about it from the operations you get to be involved in, to the money you can make (we’ll talk about why I didn’t say “earn”), to the size of the deals you get involved in.
I worked in it for a time… it’s easy to get addicted.
But in every financial certification from Life Insurance to CSC Canadian Securities there is a large component dedicated to ethics - specifically how to treat the consumers that are the core of your business so each party benefits from the other.
In my program it was the part that said stuff like “don’t sell Tim a $500,000 policy when he only has $200,000 in assets and $50,000 of debt!” even though in the course of selling insurance there is plenty of opportunity to do just that.
But Surely I Can Trust Bank Tellers?
They have incentive to push products you don’t need. Permanently under pressure to meet up-selling targets for things like credit cards, higher fee accounts, and over draft protection. In this article written by CBC Go Public dozens of Tellers admitted to breaking the law in order to meet sales quota and keep their jobs.
So Who Do I Really Need to Watch For?
As the article will also tell you, it’s the Wealth Advisors that are the real issue. They are licensed to sell investment accounts, Mutual Funds, HELOCs, and mortgage products.
They are exposed to multiple conflicts of interest that make acting within the bounds of ethics, and even the Canadian Banking Act very challenging.
I’ll start with my own minor experience.
Before I opened my first trading account I had been referred several times to my Wealth Advisor to get an investing account set up with TD EasyWeb. I was reminded how important it was to GET STARTED RIGHT AWAY and how beneficial it would be for my future - eventually I allowed myself to be persuaded.
TD EasyWeb is an okay platform (the bad user interface and slowness notwithstanding) but you are capped on 50 free buy/sell orders per year - after which they cost $10 each. The selection of investments you can buy is also not the best. This is fine for some but students often have variable levels of income that mean you often need more than 50 small orders ($5 here, $10 there) a year to invest consistently.
They knew perfectly well that WealthSimple had unlimited commission free trades and a better product selection. Thus giving me a greater chance to succeed in the market under the circumstances. That’s bad financial advice and a breach of the Fiduciary Oath (the financial “First do no harm”).
This is a fairly minor example but they do the same type of thing with their Mutual Fund and ETF products.
Then There Comes Debt…
Sadly dear readers, our fellow Canadians (who should really read this newsletter if they don't!) are not very financially clever. As a country we have reached over 108% of GDP in personal debt. Much of that comes down to the sales of debt products consumers can’t afford.
A family member once told me the story of their Wealth Advisor calling them and saying: “Congratulations… Dale.. your home has gone way up in value which makes you eligible for a Home Equity Line of Credit!”.
You can think of this as a massive low interest long term credit card/second mortgage monster they offer you when your house goes up in value.
“Why would I want more debt?”, he asks suspiciously.
“Oh it’s just so the money is there when you need it! Come by tomorrow and we can get the contract signed.” Sadly he did.
The money was not supposed to be touched, the advisor said it was an emergency fund. But times got tough - there was a Great Recession, and now a mortgage that was 300,000 to start is now 700,000… for a couple wanting to retire in 10-15 years. lol.
The job of a Wealth Advisor is to make sure this doesn’t happen to clients! There are legitimate uses for HELOC money but they are very specific and never an ideal first choice!
And My Goodness… Mortgage Insurance
There are a few perfectly legal, sometimes legally required things that are complete scams. No-fault car insurance? Scam. $100 seat selection on airplanes? Scam. Any insurance sold by a bank? Absolute scam. Banks are not insurance companies, are not regulated like insurance companies, and usually don’t hire anyone certified to sell insurance!
YET they offer something called Mortgage Insurance. The way it’s sold makes it sound like Life Insurance - it isn’t, not even close.
Two Huge Differences:
First: Life Insurance pays out a pre-agreed benefit that is determined at the time the contract is signed. Mortgage Insurance covers only the remaining debt on the house, which hopefully declines over time.
Second: With Life Insurance, the medical checks are done at the time the contract is signed as this determines the monthly cost. Mortgage Insurance rates are charged arbitrarily every month and may go up as the home owner ages (again, this is not a real insurance product). Also, medical checks are only done when a claim is made. That allows the bank to deny a payout if there are any future medical issues you failed to mention before the time of the claim or you were engaged in “risky behaviour” (which is whatever it needs to be to avoid the bank paying).
As a licensed financial advisor, I begged and pleaded with my clients to end these contracts and buy real life insurance. Yes I sold policies but I wasn’t under pressure to sell products that would HARM my clients financially.
Final Thoughts
Unfortunately dealing with these people is a necessary evil. True, it’s good to have credit card, and you will likely need a mortgage to get a house, and you will need to open registered accounts.
You can however avoid many of the landmines we’ve talked about in this post by paying a licensed financial advisor (preferably a Certified Financial Planner) and talking to them regularly about your needs. They can help build a plan that you take to the bank and use as a shield against their deceptive sales tactics. Yes it’s at least $100 an hour, and yes that is cheaper than the extra interest you will pay every month.
So the cliche goes: If you aren’t paying for the product, you are the product - so it is with everything.
That’s all for this week!
Sincerely,
James R. Davies