As a kid, I loved playing sports. I wanted to be the next Wayne Gretzky of hockey or the next Tiger Woods of golf. Gretzky and Woods were experts of their respective sports – the best of the best.
In life, we look up to experts in all disciplines, not just in sports. If doctors tell us to take a type of medication, most people do it. If dentists tell us to brush our teeth twice per day, most people do it.
But what if certain experts do not always have the best interests of their clients as a top priority?
Banks. They serve a vital function in society. But it is important to note that banks are looking out for their own best interests. The number one goal of my bank is to make money. The more products the bank sells, the more money the bank makes.
I recently had an appointment with a financial advisor at the local branch of my bank to set up an account. Opening the account was the only thing I was looking to accomplish with the meeting. But the bank representative had additional intentions. She took this opportunity to try to sell me addition products or as she said, “help improve my financial situation.”
Here is how our conversation played out…
Topic 1: Investment Products
Bank Representative: “Now that we have set up your investment account, we have to decide which investment products to utilize. We have a wide variety of mutual funds that will help you reach your goals.”
Me: “I appreciate your offer. But I have actually been making my own investment decisions.”
Bank Representative: “Ok but you are going to be very busy with your new career. I believe you will truly benefit from our all-encompassing service.”
Me: “Thanks but I’m ok.”
Thoughts: Certain products might benefit me, but they are not always what is best for me. This is an important distinction. For example, investing in mutual funds for the long term is likely better than not investing at all. However, the yearly expense fee of 2-3% for most mutual funds can add up to significant amounts over time. There are alternatives to mutual funds which will be much better for me over the long term, but much worse for the banks.
Topic 2: Line of Credit
Bank Representative: “Based on your new income and savings, you are eligible for a line of credit. We can get you set up today.”
Me: “I’m ok thank you. I do not need a line of credit.”
Bank Representative: “Well we can just set it up today and if you ever need it the funds will be there.”
Me: “Thanks but I’m ok.”
Thoughts: There is no reason I should have a line of credit right now. Having access to a line of credit will just entice me to spend, and then have to pay the interest on what I spend. Great for the bank. Not so great for me. It’s nice to know that I could get a line of credit if I truly needed one, but I am not going to set one up just for the sake of having one.
In “The Wealthy Barber Returns”, Dave Chilton said a line of credit is like a giant credit card but with much lower interest rates and no rewards. If you have a lot of credit card debt, it can be useful to take out a line of credit to pay down the credit card debt because of the lower interest rate. But as a general rule, limit your access to money that is not yours.
Topic 3: Credit Cards
Bank Representative: “You are also eligible to upgrade your credit card based on your new income. This one right here is a real status symbol”.
Me: “Thanks but I’m ok. I am happy with my existing card.”
Thoughts: The credit card she was talking about had a $120 annual fee. Sure the rewards might have been a bit better than my existing credit card, but is this really the best option for me? Probably not.
These bank representatives are good sales people, and it really does seem like they are trying to help. And maybe they are helping. But helping you and doing what’s best for you are two different things. What is best for the bank is not necessarily best for you. It is a shame that there is not more alignment between the two.