Banks are fiduciaries and should place customers’ interests ahead of shareholders’.
Banks are for transacting, not advice.
Once upon a time, on a sunny island in Southeast Asia, lived more than 4 million people. The government took care of the people and the people trusted their leaders. Although outsiders were often jealous and scoffed at it being a nanny state, it was the best model for a young but growing nation.
The leaders planned for everything. Whom you should marry, who your neighbour should be, how many children you should have, and even what language you should speak. Whatever the leadership did, the people believe in them and followed. When chewing gum was banned, the people only ate it when they went overseas. When bird flu hit the country, people continued to eat poultry because the leaders said it was safe to eat them. When the leaders told the people that they would live beyond 85 years old and that there was a need to plan for their financial life, the people followed. Such was the trust between the leaders and their followers. The people depended on their leaders and submitted to them. So, despite being just a little red dot on the map, the country grew to become one of the richest nations in the world.
The earlier generation lived a simple life. They earned a salary, spent within their means and were careful never to take on unnecessary debt. They were, after all, Asian. They were good savers and often went to the local banks to open simple savings accounts for their deposits or perform business transactions.
One day, some smart people at the banks decided that the business model was too slow in bringing in profits. So, they began selling investment products and called it wealth management and financial planning. The Government had told people to “take charge of their financial future” and the bankers were glad to help. By selling investment products, they received cash incentives, lucrative front‑end sales commissions, and streams of recurring commissions, year after year.
But how do you get busy people who come into the banks for a simple transaction to buy investment products? The smart people came up with a bright idea: “When our customers transact at the counter, we can ask them whether they are happy with the low-interest rate they are receiving from their deposits. Most will say no. Then, we can tell them that we have a better product for them that has great upside potential but limited downside risk. That will interest them. Once they show interest, we can get them to sit at our comfortable wealth management area and have our relationship managers sell to them. To entice them further, we can offer them free gifts. The more they buy, the more expensive the gifts. We can pay for the gifts with our commissions and still make a good profit. The entire sales process can be very fast. To remain legally compliant, we will get them to answer some simple questions, and tell them the product suits their risk appetite. Once they sign, we will be safe.
The smart people were right. Tonnes of products were sold.
But smart people were not satisfied. “How can we make more money?” they thought. They came up with another bright idea. “We have now made money by getting them to save and invest. Let’s make more money by getting them to spend their future money!” So, they started organising roadshows all over Singapore to sell credit cards. They even enticed students on campuses (who hadn’t yet earned an income) to sign up for credit cards. To make even more money, they sent cheques to their customers and encouraged them to use them to buy what they liked. Telemarketers called the people every day and encouraged them to make use of the credit facilities to indulge themselves. The idea was simple: Enjoy first, pay later. This went on for many years. Times were good during that period. The global economy was booming, and the stock market was skyrocketing. More and more complicated financial instruments and derivatives were packaged as products and continued flying off the shelves. More and more people were spending beyond their means. The banks became richer and more powerful, and smart people received fat bonuses. Everyone was happy.
The year is 2008. Lehman Brothers have fallen. AIG has gone to the Fed for help and Merrill Lynch has sold itself to Bank of America. A financial crisis second only to the great depression is in full force. Many have lost money buying financial assets they never really understood. Many have overextended themselves and are in serious debt. Fingers are pointing all over the place. People express shock that their leaders allowed such a thing to happen and blame the bank for mis‑selling. Banks say customers went in with open eyes (remember they signed the questionnaire?). The leaders say the people should know that if they demand higher returns, they are required to take more risks. The people are sad. They have lost their hard-earned money. Many lamented: “How would we know? We thought if it was from the banks, governed by our leaders, it would be safe”. Unfortunately, there is no “happily ever after” ending to this story.
The moral of the story:
- Although we trust in our government as they have taken care of our every need, we should not be too over-reliant on them. It is time we grow up and make our own judgements.
- Banks are not the place to get financial advice. Their platform is a flawed one. One department is getting you to spend your future money; another is getting you to save. That is not in the spirit of good financial planning. To give good advice, you must determine your needs, your ability to bear risks and your willingness to bear risks. That requires a thorough understanding of your assets, liabilities, income and expenses and how they relate to your goals in life. It requires at least 30 hours of discussion and analysis. You only have half an hour at the bank. How can you get good advice?
- Take care of your children; they are being influenced to spend future money, which is imprudent.
Banks, you are so big and powerful that we can’t let you fail. But please know that with great power comes great responsibility. You are playing with the lives of many people. You are a fiduciary. You should take care of your customers’ interest first and shareholders second. Please do not inculcate the wrong values of spending, especially to our younger generation. We are Asians, and we thrive on thrift not credit. There are some monies that you should not earn. No matter how you overhaul your sales tactics, you are for making transactions, not for giving advice.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Wealth Advisory Firm. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation. The edited version has been published in The Business Times on 20-21 December 2008.
For more related resources, check out:
1. Making A Name Through Ethical Practices
2. Don’t Be A Victim To Wealth Management
3. Here Are The Top 3 Attributes Of A Good Financial Advisor
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.