Dedicated to Deposits: Deals, Data, and Discussion

Should You Get Non-Deposit Products at Banks?


When you go into a bank, there is a good chance that you will notice a number of product brochures for financial services ranging from insurance to mutual funds. You might even find that bank employees try to sell you on an annuity when you go in to renew your CD. This is common. Banks and credit unions have been expanding their offerings to provide a more consumer feel to their branches. Additionally, offering other financial products and services can provide another source of revenue for banks and credit unions. Many of them get kickbacks and commissions when they get you to sign up for particular financial products and services.

Financial expert Clark Howard warned of this very issue:

Beware of "employees" inside banks trying to sell you variable annuities when you go to renew your CDs -- unless you want to pay humongous commissions, face massive expenses and have immense tax problems.

It can be tempting, nevertheless, to get these financial products and services through your bank. It brings to mind the idea of “one stop shopping.” Not only that, but if you have been doing business with a particular bank or credit union for a long time, you might want to get a few more products and services to show your loyalty. It seems to make sense – at least initially – to get an insurance policy where you do your banking. And having your investments all in one place, at the same place where you do your regular banking, seems convenient. Unfortunately, these products and services may not be in your best interest. They could cost you more than you should be paying, and they may not even be the investment account or insurance policy that you actually want.

Aside from loans, there is often a wide array of non-deposit products and services available at your financial institution. Remember, though, that these types of products and services are designed to provide a profit for someone, and that you need to be careful as you consider your options. Otherwise, you will be doing more for the bank or credit union than you will be doing for yourself.

Not FIDC or NCUA Insured

While some retirement accounts are FDIC or NCUA insured, most investment accounts that you open through your bank or credit union are not. Indeed, insurance for your accounts is meant to be on deposit accounts, so non-deposit products and services are not eligible for the protection that you get when you put your money in a CD or have it in a checking account. This can be a difficult distinction to make at times, since it seems as though opening an investment account at an insured bank or credit union should mean that it is protected. But it isn’t. Remember that this FDIC and NCUA insurance will not help you recoup losses related to an insurance policy signed up for through your financial institution, and that it does not apply to annuities, mutual funds and other investments made through the bank or credit union.

If do decide to get securities through your financial institution, make sure that the person handling your account has the proper certifications and memberships. (Likewise, if you get insurance via your financial institution, you want to make sure that all the proper licensures and procedures are observed.) You want anyone you use to have the proper securities certifications and adhere to SEC regulations. You also want to make sure that you are protected by the SIPC. The SIPC will not provide the same sort of protection for your money that the FDIC or NCUA does. However, the SIPC can help replace missing securities when possible.

Commissions

Whenever you purchase a financial product or service through someone else, you are going to have to pay a commission. There are always fees associated with any investment, but investments made with the help of some sort of intermediary can be even more expensive, since you often have to pay commissions. You also need to consider the tax implications of the financial products, services and investment that are considering getting through your bank.

Another issue related to mutual funds is that of fees related to actively managed funds. Actively managed mutual funds invested in with the help of someone at your financial institution can mean higher administrative fees, as well as load fees. There are a number of options, including creating your own mutual fund or investing in index funds, that can be more cost efficient than making use of any actively managed funds – no matter where you get them.

In some cases, though, the representatives at your bank or credit union may actually be offering something that makes sense and is competitively priced. However, it is vital that you shop around, since this is a rare occurrence. Consider your bank or credit union as just another option. Find out the details of the product, service or investment, and then compare what is offered at your financial institution with what is available elsewhere. While it is possible that your financial institution comes out ahead, chances are that you will be better off looking elsewhere for non-deposit financial products and services.

Things to Consider When Comparing Financial Products and Services

As you comparison shop for financial products and services, it is a good idea to carefully consider the following items:

  • Fees
  • Commissions
  • How the person recommending the product or service is paid
  • Limitations
  • Exclusions
  • Special requirements
  • Tax issues
  • Eligibility
  • Quality of service offered by the person making the recommendation
  • Potential real returns
  • Whether it fits in with your overall financial plan

It is rarely a good idea to agree to something on the spot. Instead, it is better to diligently research your options, and determine what is most likely to make sense in your individual situation. Consider various aspects of the product or service you are considering, and ask questions so that you can be sure that you are comparing apples to apples. You may feel some loyalty to your bank or credit union, but in the end you have to do what is best for you, and that might mean looking elsewhere for non-deposit products and services.


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Comments
8 comments.
Comment #1 by Anonymous posted on
Anonymous
Banks are not the only place you have to be aware of the conflicts of interest.

Here's what Charles Schwab states in its disclosure:


Schwab makes money from client fees, trading commissions, interest income and also from third-party or affiliate compensation. While we seek to minimize conflict of interest and act in our clients' interests, our sources of compensation may influence both how Schwab representatives give investment advice and how those representatives are paid.

5
Comment #2 by Anonymous posted on
Anonymous
Bank employees are paid so little that their thoughts are on the sale and bonus and not on the customer. I would never go to anyone but a financial advisor that is paid by the hour. They are transferred so often and do very little follow up with the customer as a rule.

5
Comment #4 by cactus posted on
cactus
Good summary of a commonly-misunderstood topic.

Find a fee-only financial advisor (a person you pay who doesn't get commissions).

Directory of Certified Financial Planners -- many of whom are fee-only http://www.cfp.net/search/

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Comment #5 by Rosedala (anonymous) posted on
Rosedala
Ms. Marquit gives great advice since things might've changed since I most successfully bought annuities at much higher rates in the past than the going bank CDs at that time.. she's also very right in suggesting to exercise caution before opening an annuity, just as we do with bank instruments.   I stay away from stocks, bonds and mutual's, but feel secure with CD-type fixed annuities, for instance:   In June 2001 my excellent M&T Bank CD (at around 4 or 5%) matured and I was shocked to see that the going bank CD rates were around...1%!!!  An employee suggested I get a 5-year fixed (CD type) annuity from Jefferson Pilot at 5.9%!!!  I called them directly and verified that there were no fees or other charges - at whatever rate and conditions you buy it that's what you get on maturity, and the security of the annuity is dependent on the ratings of the insurance company (plus the state guarantees retrieving any loss).  On maturity I had this entire account transferred without any problems to another institution.  Why should I worry if the employee makes money on my transaction???   Why not???      Later I bought other CD type annuities from Ing and Jackson Natl. Life Ins. in 2008 when bank CDs were still in the lower one digits, at 5.05%, 5.46% and 5.66% no fee, no charges, etc.  I even tried another one for 4 years at 5.8% (as a special offer) from Presidential Life Ins. Co., an unnown company with questionable rates...and it was great.  Yes, I gambled and won!  But not advisable nonetheless.  LOL!   Also, Teachers Ins. & Annuity Assn. (TIAA) specialize in annuities although I believe lately added other stock & bond-type of instruments.   Among other things to check, I'd suggest to buy ONLY CD types and FIXED.  With Variable annuities one may lose the principal.  The only drawback is if you need money before maturity in which case you pay a surrender charge, but bank CDs also have its equivalent...   But when I was young and stupid and also had NO knowledge of annuities or the sense to check them out first....on maturing my good bank CD, I let the bank manager convince me to buy an annuity for 16 years at the fabulous starting rate of over 8%!  which soon got much lower (it wasn't a CD-type) with a minimum down limit of 4% (I still have it and actually it has been good since at 4% I'm still above the going rate from around the beginning of this century, even with this bad annuity!  And...I don't have to run around looking for good bank rates that don't exist anymore...   Not to forget also that tax is deferred until you withdraw but continues deferred when you transfer to another annuity within same or to another institution.  By not even considering annuities, the RIGHT ones of course, one is doing a disservice to oneself!     Rosedala

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Comment #6 by Rosedala (anonymous) posted on
Rosedala
Hi...I'm sorry that paragraphs disappeared when I clicked "submit".    :)

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Comment #7 by lou posted on
lou
Rosedala, do you know the prevailing rates today for comparable annuities. Also, did you do your own research or did you rely upon an advisor. How do go about finding these no fee CD annuities?

1
Comment #8 by Curt (anonymous) posted on
Curt
I sooooo liked Rosedalla's comment about her saying to buy only CD and fixed annuities.    I've been losing sleep about getting mine as I am about to retire and am planning on getting both a CD and fixed annuity to supplement my SS income.   I don't want to gamble with the money I have to live on so varible and fixed indexed annuities are out of the question.   Thank you Rosedala for your comment.

1