Banks such as Wells Fargo & Co, JP Morgan Chase & Co and Goldman Sachs, under pressure from a host of national and international laws meant to stop a repeat of the events of 2008, have now found themselves a new moneymaking opportunity:
According to an article published today by Bloomberg.com, these global financial behemoths “have rediscovered the appeal of the mundane business of managing money for clients” and are looking to grab “market share” from such mutual fund superstores as Fidelity Investments, and Charles Schwab.
Unfortunately, what’s good for the consumer is unlikely to be good for the banks.
The vast majority of investors, from individuals trading at home to high profile mutual fund managers, will not beat the markets on a consistent basis. As a result, almost all of us are best off with a group of diversified indexed mutual or exchange traded funds and ones that come with low expense ratios.
But that ain’t what the bank is likely to be selling you on. That’s not where the money is unless your company’s name begins with the word Vanguard. No, the money is in getting naive customers to buy into actively managed funds where they pay as much in fess as possible. Performance is not the name of the game. As Bloomberg pointed out, more than half of Goldman Sachs’s actively managed mutual funds performed worse than their peers over both a five and three year period, with those of JPMorgan Chase and Wells Fargo only doing a little bit better.
So how exactly does a bank make a buck with such a host of sad sack offerings? Well, hello hard sell. For all-too-many customers, visiting the bank has become as fraught as stepping into an automobile sales room, with salesmen pitching them on this year’s hot model investment.
That’s how we’ve gotten such events as the New York Times’ summer reveal that JPMorgan Chase was putting pressure on their brokers to sell customers on sub-par but high fee funds to fellow Forbes blogger John Wasik’s excellent work detailing how the financial services industry is selling elderly security seeking men and women on so-called structured products. As Wasik wrote:
From a seller’s standpoint, bank lobbies are an ideal place for brokers to pitch these products. “Elderly people are often more comfortable with brokers who work in their banks,” says Geoff Evers, a Sacramento, California-based lawyer.
Before you say “call in the authorities” know it is unlikely they can or will do much about this. That’s because just about everyone selling you on an investment at a bank is, despite calling themselves by the high falutin’ term financial advisor, is nothing more than glorified broker, not bound by the fiduciary standard to place their client customers in the most appropriate investment but instead one that they simply deem suitable, a rule that gives brokers lots of latitude.