Many people have had a long history dealing with their bank. They trust the bank to handle their checking and savings accounts as well as their home mortgage. Many people don’t feel comfortable with the traditional Wall Street Broker-Dealer, so it is natural to go to their bank for advice on their Individual Retirement Account (IRA).
In a recent article one writer stated, “some of my friends in the business that actually work within these local bank branches say that ‘it's like shooting fish in a barrel’ because the customers are so loyal and trust the bank implicitly.”
This is unfortunate for the millions that have received advice on their IRA in a bank for the following five reasons:
1. Investment advice at a bank is usually not from a “bank employee”, but rather from a sales person from an affiliated company.
Banks are not directly in the investing business. Banks have subsidiary companies or related firms to deal in the investing area. For example, for investment advice in a Bank of America branch, you are dealing with a Merrill Lynch employee. At Chase, you are working with JP Morgan Securities.
Employees of a bank are usually on a salary. Investment company employees in the banks are often incented with commissions based on what they sell to you. Thus, you are subject to conflicts of interest between what is best for you and what is best for the salesperson and their firm.
2.Overselling of products
We all know that banks are in business to make money or they would not stay in business, but some banks have gone way too far. Take Wells Fargo as an example:
As reported in the Guardian, “Wells Fargo’s mantra, in pushing its rank and file employees to cross-sell products, was ‘eight is great’. These workers faced pressure – up to and including threats of losing their job – to get every bank customer to sign up for eight products and services, regardless of whether they actually needed them.
The abuse was so bad The Federal Reserve restricted Wells Fargo's growth, citing the embattled bank's "widespread consumer abuses and compliance breakdowns."
3. Using the Bank’s own product at your expense
Many banks have their own line of products. City National Bank (CNB), as an example, offers a limited number of their own mutual funds, but they have some of the highest fees compared to similar products or investments.
Take the example of a CNB Taxable Money Market investment account. Nationally, there are 520 options that are available and the City National offering (CNFXX) is the 6th most costly. That means there are 513 lower cost options available.
Worse yet is the City National Short-Term Government Bond fund (CGBAX), that has an annual fee of 1.08 % (one of the most expensive offerings in the class). The fees are so high that the average 1-year return was -0.8% and the 3-year average was -0.8% according to Morningstar.
Then there is Chase. In a recent Bloomberg article, “Private Banking Meets Cross-Selling for JPMorgan’s Wealthy Clients” , Neil Weinberg indicated that Chase prefers their in-house products from other lower cost options, since it earns additional fees using the in-house products.
4. Annuity sales
Banks sell tens of billions of dollars of annuities each year. Variable annuities and Index Annuities have some of the highest commissions of any financial services product. As a result, the sales person may be motivated to make a bigger commission and sell an annuity.
FINRA stated, “investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea.” However, it has recently revealed that 60% of all such annuity sales were in IRA accounts. The main reason is that the high commissions motivates the salesperson to sell the annuity rather than something that would be less costly and more appropriate. If you go to the bank for IRA advice, you may well get sold an annuity.
5. Investment management fee limits for RIA services in bank branches, are far above the national average.
The financial services firms that operate in the bank branches have multiple programs or offerings and not everyone will be offered the same option. Below are some Registered Investment Adviser options that may be offered, based on the ADV forms filed with the SEC as of 3/9/18.
Chase- JP Morgan
Bank of America
Avg. Non-Bank RIA
In conclusion, if you obtained an IRA in a bank, it could be worthwhile to get a second opinion.
To avoid getting "shot like a fish in a barrel", do not go to a bank for recommendations on your IRA, or any investment. Many in the media and universities recommend that you go to a fee-only firm where your best interest is foremost at all times. Fee-only firms do not sell insurance, annuities or investments.
To find a fee-only Certified Financial Planner (CFP)® advisor near you, go to the National Association of Personal Financial Advisors website (NAPFA). Another option would be do a web search for the following topics with quotes on each, “fee-only” “CFP” “your city”.