Banks and Your Money

STOP!!

🛑 Are you considering buying or investing in a mutual fund through your personal bank? Stop right there!

Sure, it may seem like a convenient option, but it comes with a hefty price tag and a host of risks. Here's why you should think twice before making that move:

1. High fees:

Banks often have deals in place with asset managers such as Blackrock and Vanguard, which allow them to offer mutual funds to their customers. However, the fees and minimum investment requirements can be exorbitant. For example, the Blackrock GF Global Allocation Fund has an initial charge of 2.5% and an annual expense ratio of 1.7%. That's a 4.2% loss in year one! And to top it off, your funds are locked in for five years, and usually, come with a high min investment of around $30,000 if not more.

2. Conflict of interest:

Banks and asset management firms like Blackrock have a business relationship, which means that banks may offer mutual funds and ETFs managed by Blackrock as part of their investment product offerings to their customers. Banks are compensated for each fund sold or each new customer onboarded, which raises questions about their fiduciary responsibility.

And while banks are required to disclose any compensation they receive, the question remains, who do they have a responsibility to - you or their shareholders? In the US, Banks are subject to oversight and enforcement by regulatory bodies such as the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau (CFPB) in the US, and are required to divulge compensation received from funds.

Outside the US the laws might not be as stringent when it comes to disclosing compensation from other fund or asset managers (please prove me wrong if there are other regions with similar or more oversight).

3. Lack of talent

While banks have a large pool of talent, it's important to recognize that the skills required to sell investment products are different from those required to handle traditional banking transactions. Investing involves a deep understanding of financial markets, risk management, and asset allocation, among other specialized knowledge.

Unfortunately, many banks tend to focus their resources on their core banking services, such as deposits and loans, rather than investing. As a result, their investment offerings may be limited in scope or not as sophisticated as those offered by dedicated investment firms. Additionally, banks often incentivize their employees to sell specific investment products, which can lead to a conflict of interest and result in biased advice.

Great - you gave us the problem, but what is the solution?

BUILD YOUR FINANCIAL LITERACY!

Building your financial literacy is one of the most underrated and overlooked skills there is. Banks and other financial institutions rely on your lack of knowledge and the presence of fear to sell you products that you don’t need.

Obviously do your research, but I always recommend beginners to start by investing in S&P500 index funds like -

FXAIX (Fidelity 500 index fund)
- expense ratio of 0.09% or 9 cents per 100 dollars
- min invest ~$2500
- can be traded like stocks

or VFIAX (Vanguard 500 index Fund)
- expense ratio 0.14% or 14 cents per 100 dollars
- min invest ~ $3000
- can be traded like stocks

Both funds have low expense ratios, flexible minimum investments, and can be traded like stocks. Don't let high fees, conflicts of interest, and lack of talent hold you back from making smart investment decisions.

Note: this is not investment advice, but intended to highlight how financial institutions take advantage of knowledge gaps in consumers’ financial literacy!

This newsletter concludes the 3 week series on doing an in-depth overview on the inner workings of a Bank, you can catch the previous 2 newsletters below

• How Banks make money?

• How Bank use, buy, sell and monetize your data?

Till Next Time

Adi 

You can catch me on Youtube and/or Linkedin (or my podcast)

PS - My new book on financial literacy for beginners titled “Financial Literacy Blueprint” will be launching in the next few weeks, and all you Growth Minded Ninjas will get first dibs! So stay tuned check out the images below for a sneak peak!