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If we look back at our post time-stamps, it’s hard to believe the Millennial Revolution has only been around for like two months. Since then, the response has been beyond our wildest imaginations. Our inbox is filled with email after email thanking us for peeling back the layer of mystery surrounding their money, and people (including our real-life friends and family members) have sat down, figured out their balance sheets and turned things around. People who have spent years constantly living paycheck to paycheck, worried about their next rent payment and never getting ahead are now, for the first time, seeing their bank account actually go up every month. It’s been so rewarding to see that, and it’s why we get up every morning and write these articles.
Unfortunately, that’s where the good news ends.
Because as we know, savings is only half the equation. Once you have that part down pat, you have to then figure out how to invest it to grow your net worth, as well as turn it into an infinite stream of income. So eventually, our budding Revolutionaries have to talk to some bank person to open up an investment account.
And that’s when shit gets annoying real fast.
And don’t think I’m picking on any one bank. They all do this.
Why?
First, let’s back up a little. When you walk into a bank and ask to speak to someone about investments, the person you’re speaking to may have some fancy sounding title like “Investment Advisor,” but their internal classification is a PBO, or Personal Banking Officer. And PBO’s are not required to have any training or certification whatsoever when they’re hired. In fact, many are bank tellers that got promoted one level up.
Secondly, PBOs are paid a relatively low fixed salary and then compensated based on commissions. You may recognize this is similar to the compensation structure of a used car salesperson, and that’s because that’s pretty much what they are. They aren’t “Advisors,” they’re “Salespeople.” This is an important distinction.
True Investment Advisors are supposed to advise you on how to manage your money. Salespeople just sell you shit.
I’ve gone ahead and created a detailed mathematical model to describe how bank salespeople view you, the client.
On the vertical axis is your perceived level of knowledge (“how much they think you know about money”), and on the horizontal axis is how much money you have.
The Idiot
On the bottom-left quadrant is the person who walks into a bank with zero knowledge and very little money. The majority of people who these Salespeople meet are in this category. We will call these people “The Idiots.”
Banks love idiots, because they can tell them whatever the Hell they want and they’ll just believe them. Why not? They’re Idiots!
So step 1: Shove them into high-fee mutual funds. Favorites include bank-run “wrap” funds that just own their own high-fee mutual funds, and then charge an MER on top of that for shits and giggles. I’ve seen some of these have up to 3% in fees when you add them all up.
And step 2: Shove them into the biggest mortgage they qualify for. Because The Idiot doesn’t know anything about money, they’re easily susceptible to arguments like “rent is throwing money away” and “houses always go up!” Neither statement is true, but who cares? They’re Idiots! Once they’re locked into a jumbo mortgage, the bank has basically got them for life and will siphon cash off of them year after year until they wake up in their 50’s and wonder why they don’t have any money and where their lives went.
The Mark
For those scant few readers who aren’t familiar with 1960’s era grifter lingo, a “Mark” is what con-men call their intended victim, especially a fat juicy one with a lot of money. We experienced this first hand when we were interviewing financial advisors. This was back in 2012, and we had accumulated about $500,000. Back then, in order to find someone we could trust we would tell them how much money we had, act really stupid saying stuff like “I don’t know much about investing” and “what does GIC stand for again?” Then we would sit back and see if they tried to take advantage of us.
And Holy SHIT, did they try.
One person had a bunch of “hot IPOs he wanted us to get in on.” Another wanted to put it all into options (whatever the Hell that means). Another started selling us individual equities like Gap and Denny’s. And another wanted us to convert it all into Yen and buy gold with it on the Japanese commodities market.
It was fun to pretend to be The Mark (and we DID get a lot of free booze out of their sales sessions, so that was fun), but I feel for anyone who actually said yes to any of these bozos.
The Insider
The Insider knows their shit and, as a result, is intensely annoying to the PBOs. Because The Insider knows all about Index Investing using low-cost ETFs and knows anything else sucks as an investment, the PBO can’t trick the Insider into doing what they want.
See, there are two ways to make money off a client. Either shove them into a mutual fund that pays the PBO a commission, or become their portfolio manager and make a fee based on their total portfolio size. The Insider knows not to sign up for any shitty high-fee mutual funds, so they can’t make any money off them that way, and because they’re just starting out in their investment journey, they don’t have a big enough portfolio to manage. Basically, the PBOs have no way of making any money off The Insider, and once they realize that they treat you like shit.
One of our readers and fellow Revolutionaries experienced this just recently. She went into a bank trying to open up an investment account that would allow her to own the low-cost Index Funds she wanted, and got a barrage of bullshit spewed at her. At one point the Salesperson outright lied and told her these funds she speaks of don’t exist! But she stuck to her guns and, after insisting for the 20th time that she wanted a portfolio consisting of low-cost Index funds in a 75% equity/25% fixed income allocation, eventually the PBO relented, gave her what she wanted and, in an ironic twist, then proceeded to complain to her for the remainder of the meeting about how much he hated his job because he had to lie to people all day long.
The Shark
The Shark has a lot of money and knows what they’re doing. PBOs are terrified of The Shark. Obviously, they want their business, but when it quickly becomes obvious that The Shark knows more than them, they turn into spineless yes-men.
“Should I do this?”
“Great idea!”
“Or should I do that?”
“Great idea!”
And while it’s fun being called a genius every 3 seconds, it becomes scarily obvious how little these PBOs actually know. At one point I pointed out during their sales presentation that the trade commissions generated by keeping a portfolio of 35 equities outweighed even a bank-run mutual fund, and it sent them into a flop-sweaty panic. And these are the people we’re supposed to be trusting with our money?
So that’s how the big banks see you. Impressed? I wasn’t. And while I eventually did find a Financial Advisor that I could trust, it was by no means easy and we had to look outside the big banks to find someone who wasn’t compromised by their corporate overlords.
The lesson here, educate yourself. You need to work with bankers and PBOs sometimes, if for no other reason than to open the right accounts. Read books, read finance blogs (like this one) and never sit down with a PBO and ask for their advice. Treat them like you would a used car salesman: Research the Hell out of the thing you want, Insist on seeing it and only it, and Immediately get up and walk out if they try to bullshit you.
In their business, they have a saying “You eat what you kill.”
Don’t be the one that gets killed.
Photo by: RMajouji @ Wikipedia.
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Thank you for this article! This came just in time as I have a bank appointment coming up during which I want to convert my high fees mutual funds to the TD e-series. I’m really dreading it though as I remember how hard the PBOs were trying to sell me things like market-linked GICs and made me do online tests about my investing style. Also, they won’t stop asking me what I’m planning to do with my money (hint hint: you buying a car? A house??)
Determined to stand my ground this time but it’s probably not going to be easy.
We’ve personally been swindled by a bank before (look for our episode on the Stacking Benjamins podcast to hear more! /end plug). But like Mike McDermott warns us, caveat emptor, pal. Consumers are responsible for protecting themselves, and to quote Rounders again, maybe it’s immoral to let a sucker keep his money. 😉
Just kidding. People do need to be aware but, generally speaking, I don’t have a huge distrust of Wall Street (it’s where we do all our investing). I probably am more worried about people doing their investing at their local bank branch office on Main Street than in the trading actually happening on Wall Street.
As always, really intriguing stuff, and I like that you’re willing to take a strong position.
The banks do have the process down to an art. I remember the multiple choice, ‘get to know you & your risk tolerance’ survey that the financial sales person walks you through and then spits out the perfect match of a portfolio for you intended to give you a nice warm fuzzy feeling.
Fortunately it was within a year that we had reached enough funds to open all of our self directed accounts without fees. I still remember the day at the bank getting everything transferred over, and the anti-sales pitch. If you do this you are all on your own, no advice, no guidance etc. Once she realized that we were doing this no matter what she told us, the confession came “I only use these self directed accounts for my own investments too”.
So you’re a Shark then 🙂 Yeah, PBOs are terrified of us.
I don’t know why banks still use the same outdated tactics. It just wastes everyone’s time.
It simply works on idiots and there are more idiots than insiders. However, I’m only an insider. I know things but I don’t have much money lol…
Firecracker,
I recently discovered your site from your comments on the Financial Samurai site. Although, my wife and I are not Millennials, I enjoy your posts, tone, kick ass attitude, and writing style! I watched your video and it is spot on! My Millennial cousins can’t afford a house in the US. In fact, I always tell them to never buy and just rent. Like you said, once you buy that expensive house you are locked in until your mortgage ends. 15 or 30 years is a long time to be paying and needing a job unless you make a ton of money.
I also enjoyed reading your 4 part journey to FI! What a ride to be FI in your 30’s so CONGRATS! We become FI in our late 40’s so we are late to the party. We are 51 and 52 now and still working to 55 to beef up our pension and to get medical coverage when we retire. My wife will get a pension and severance package late this year which is great for her. Our company is also outsourcing our IT jobs to India but that is another posting.
We do not invest in the stock market at all but I enjoy reading your investment strategeries to protect your principle. We live in the US and we only invest in Municiple bonds which are Federal and State tax free.
This post hits home because there are financial advisors that will take advantage of you. When we first wanted to buy our first muni bond they make you take a financial risk assessment test. Hello! I know We are the most conservative investors. Then they try to sell you a fund to make their commision. Yeah, we were naive the first time and he talked us into getting a bond fund 2% load. He tried to sell annuities but we said NO. Then he proceeded to help us buy the munis. Less than a year later our “save” bond fund lost 7K. I don’t have the stomach for the stock market and I sold it at a loss. Stupid me because the following week it recovered. So, no more funds for us.
I learned that the bonds from a financial advisor is 1-2% more than a self service brokerage like Fidelity. We no longer use an advisor and we pick and buy the muni bonds ourself. Now, I tell my family and co-workers to only use a self service brokerage to save money.
Adam
“What a ride to be FI in your 30’s so CONGRATS! We become FI in our late 40’s”
Thanks! Congrats to you too!
“We no longer use an advisor and we pick and buy the muni bonds ourself.”
What’s the yield on your muni bonds? I’m curious.
in 2009-2014 we brought a lot 5% muni bonds from $99 – $108
In 2015, we brought a lot of 4-4.25% bonds close to PAR(face value of $100).
In 2016, 4-5% bonds are too expensive and 3% bonds are at PAR.
We avg 4% for all of our bonds and in our tax bracket, it is like a 6% CD.
It pays interest every 6 months and we know exactly our income every year. We love it. It is low risk because our State is financially stable and they are tax free.
For example, 100k of 5% bonds at $108 will cost $108,000. $8 over PAR. Each year, I would get $2,500 twice a year ($5K). It would take 2 years to break even.
These days, I prefer to only buy bonds that are close to $100-$101 and only pay a small premium. When the bond is called or matures, I only get back the face of $100. So, in this example, I would get back $100K instead of 108K.
This is still better than savings interest of .10% from a bank and then we have to paid 33% tax on the interest.
Adam
Damn, tax-free bonds yielding 5%? Wish we had that. Yummo!
Generally I try to avoid banks at all costs now. They are nothing more than salespeople trying to con you out of your money any way they can. They have their uses, but those uses are generally limited to a chequing account a credit card and perhaps a mortgage.
All your other money should not be anywhere near a bank IMO. I’ve had nothing but relentless issues when dealing with them, even for relatively simple things.
Yeesh, tell me about it. Buncha crooks. 80% of the industry is based on keeping the consumer ignorant and confused so they can be stolen from. If everyone understood how easy investing is, they’d all be out of a job. Good riddance.
As always, great article. I got stuck with a mutual fund with a 2% MER back when i was more of an idiot, which I have now pulled out and am itching to invest. I would like to time this well and I am a little concerned that the S&P500 is approaching an all time high, and would thus hate to buy at the height of a bull market that may be ready for a correction. Any thoughts of whether holding oout for a few months is adviseable to see if prices lower at this particular point in time, or whether there is a strong rationale for jumping in now and ride the bull market.
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This happened to me with a life insurance agent (salesman) I met at a party! We really hit it off, started talking about 401ks, IRAs, ETFs, allocations and he invited me to dinner to get to know each other better – as a friend of course!
Later, he asked if I’d mind if another “good friend” joined us. Sure! The more friends, the merrier, right?
They showed up to dinner in suits, information pamphlets, and notebooks to take note of all the super important stuff I said. One guy didn’t even eat anything. At that moment I knew their true identities, but I was happy to play along until the end. We danced all the way to my friend calling me one night to ask for my bank account number so he could “get the process started.” That’s when I had to put my foot down and not play dumb anymore.
The whole thing was quite an interesting life experience, and I got to learn a lot about the world of life insurance and life insurance salespeople.
Great post btw, and I love the model.
Thanks, Don and welcome to the blog!