Should You Get Non-Deposit Products at Banks?
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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.
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:
- How the person recommending the product or service is paid
- Special requirements
- Tax issues
- 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.