The Apparent Conflict of Goals With Investment Advice From Banks
Some people are pretty naïve though and think that the bank’s interests don’t matter, and get upset when they perceive that the bank has looked out for number one too much, selling them products to achieve sales targets for instance.
The very fact that people working at a bank have sales targets disturbs some people, and in some cases there is even some political pressure for change, holding all bank employees or more of them at least to the same standards as registered financial advisers or other accredited professionals.
What people need to realize is that everyone is in a sales role really, it just comes down to how much those providing the sales value the long term relationship, and the more they do, the more they will act in your interest to build and preserve these relationships, rather than to shoot for higher sales targets at the expense of these relationships.
So there really isn’t a need for legislation here, and some people are even bothered with bank tellers looking to upsell them, even though when this is not done, people miss out on opportunities a lot. The idea here is to serve clients by having them in the right banking products, and to do this properly you are going to be looking to assess the current situation and make recommendations when warranted.
Like anything else though, people do bear the responsibility to assess the quality of the advice that they are getting and select those who they perceive as best fitting their needs. Unlike highly regulated professions like doctors and lawyers, the nature of the transactions are not such that they are well beyond the client’s ability to understand, where one must place a lot of trust in the quality of the professional’s advice, although there does need to be a certain level of trust between the advisor and the client with financial advice.
Banking relationships aren’t a whole lot unlike going to a car dealership and buying a car, the bank does benefit by selling, and one may reasonably expect that the bank is going to look to sell you, just like a car salesman would, although a good car dealership will value their relationships with their customers and look to get them into the right car, provide the right service, and so on, to keep them happy, coming back, and referring others.
This is what a good bank will do as well, and this is even more important with banks, as relationships are even more important. Losing clients due to dissatisfaction is something banks work hard to look to avoid, some more than others, and the perception is the reality here, so if people feel that they have been taken advantage of, it doesn’t matter whether they have been or not.
It should be expected though that generally speaking, advisors at banks do have more expertise and knowledge about proper investing than clients do, and therefore will be relied upon to some degree in the decision process, but one must also realize that clients are the ones that ultimately decide here and they must also bear some responsibility in the process.
The Nature of Investment Advice Banks Provide
Investment advice given out by banks can range from anything from having the right savings account, to wealth management, which involves more than just investments, but managing one’s wealth overall, including things like estate planning and insurance. There are even financial services that cater to a wide range of needs of wealthy families, including helping them manage their non banking day to day affairs.
Given that the bank has a financial interest in selling them investment products, whether it be their own investments or commissions they make in selling third party ones, there is a considerable amount of regulation that is present already, to protect the well being of clients in this atmosphere of potential conflicts of interest.
Banks aren’t independent advisors in any sense, they are working for the bank, and they will advise you in that framework, although the bank’s interests and your interests are often the same. The bank’s role isn’t just to gain your business, it is to make you happy and see you succeed, so in this sense investment advice from a bank is at least in part a service, and if the advice given is sound, it is in large part a service.
This is to a large degree what sets financial advice from banks apart from most other retail business relationships, although there are other retail sectors which provide primarily a service role but also benefit from the business this generates, insurance agents for instance.
In a way, prescribing financial advice is not unlike what a physician does, they diagnose the situation and then prescribe a course of action based upon what they know and their knowledge of the subject matter, in this case, investment knowledge.
Like a physician though, the prescriptions given may not be the best, and with investment advice, advisors already get blamed for more than they deserve, for instance with investments that have simply been a matter of bad luck but which may have been sound anyway, or if one does not follow the advice and does not hold the investments for the prescribed time, takes a loss, and it’s somehow the advisor’s fault.
For this reason, investment advisors need to be particularly careful with the advise they give, as they are often held accountable for the results, not the quality of the advice. Given the way the market operates, even the soundest advice may not go the way that clients hope, and this can sour or even end relationships. So an advisor does not want to add to this by making less than sound advice and increasing the chances that the client may end up unhappy.
This is part of the reason that banks tend to be on the conservative side with investment advice, they are hedging their bets here a lot of the time, and in some cases may be more risk averse than the clients are. This isn’t ideal of course, but this is why educating clients is so important, to have them appreciate the relationship between risk and reward more, and know that when you increase the potential rewards you also increase the risks, but you often want to do this to give yourself the best opportunity to achieve your goals.
It really does come down to what the client’s goals are though, and it is true that in a lot of cases, those working for a bank may not properly assess the particular needs and wants of clients prior to making recommendations. Without doing this properly, we run the risk of not aligning the objectives of the investment plan with the needs of the clients, which increases the potential for dissatisfaction.
In the banking business, it does come down to client satisfaction, and this is what drives things in the long run, so it is important for both banks and clients to pay enough attention to getting this right.