I’ve been meaning to write this blog post for a long time.
Most people hate banks, for good reason – mortgage fraud, excessive fees, etc. The list goes on and on. There is another reason to hate banks which goes virtually unnoticed – but it should be noticed, and it should be illegal.
The scam goes like this:
1. You are a conservative saver, and you have a large amount of money in the bank. As a high net worth customer, the bank puts you in their premier program and gives you your own personal financial representative. Little do you know that by putting you in the premier program, the bank is really marking you as prey. Your financial representative, while pretending to act in your best interest, is really trying to get you to move money over to the bank’s investment arm, so the bank can make more money, and he can reap a big bonus.
2. If you do move your money over to the bank’s investment arm, they will charge you big fees (typically upwards of 1% of assets per year) and big commissions on top of that. But these won’t be called commissions – they will be various incentives paid to your financial advisor that are “built into the price”. And in return, you will get bad – really bad – advice. The bank will dump investments into your portfolio that may include: funds of funds (which charge layers and layers of fees), IPO fund offerings that the bank can’t manage to sell off, structured products consisting of packaged-up collections of sketchy assets, variable annuities, and the like.
3. The result will be that you will almost certainly do worse than the market overall – at the very least, by the fees and commission you pay, and at worst, by scorching losses obtained via inappropriate investments.
4. If – big if – you figure out what has happened (and most people don’t, they will think that the market just did badly), you will have little recourse. The system is rigged against you. The bank will have forced you to sign a mandatory binding arbitration agreement that shuts you out of the court system. Even if there’s fraud, forgery, etc. – it doesn’t matter. The courts are closed to you.
5. If you manage to obtain a settlement or get a judgment from the arbitration forum, the results will almost certainly be kept confidential. Therefore, the goings-on are kept hush hush, and the banks can continue their practices.
So there you have it. How do I know this? All of the above happened to my family. Yes, we got a settlement. But no, I cannot talk about the bank, the specific events, the fraud, or the forgery. But I can talk in general – and this IS very general. These practices are rampant. ALL of the big banks do it. It is their strategy, their bread and butter that they talk about proudly to their shareholders – referrals of high net worth customers (i.e., our parents and grandparents) to their investment banking arm, so they can sell them all variety of investment products. Ever since the repeal of Glass-Steagall, you cannot put your money in the bank and be left alone; you will be harassed at every turn.
I’ve been trying to think of a good analogy for these practices. Here is what I’ve come up with: It’s like paying a crook to rob your home. You pay your financial advisor extraordinary fees and trust him with your life savings, only to have him sell you investments that earn him big kickbacks (that come out of your pocket) and that almost certainly perform worse than the overall market.
This should be illegal. It is illegal in some fields. For example, in healthcare, the Federal Anti-Kickback law makes it a felony for anyone to receive a kickback for the referral of a Medicare or Medicaid patient. It is a felony when it comes to Medicare. But in the financial industry, these types of kickbacks are accepted practice, with no end in sight.
We could put a stop to this.
We could ban banks from soliciting banking customers to move their money over to the investment bank. You should be able to put your money in the bank and not be harassed.
We could ban mandatory binding arbitration agreement in consumer contracts. Consumers are not agreeing to these willingly. These agreements are being imposed by businesses, and consumers have no choice but to sign away their rights.
Finally, we could ban fiduciaries from having conflicts of interest. All the behavioral economics studies show the same thing – if you have a conflict of interest, it will influence your recommendations (and of course it would - those offering these incentives know what they’re doing). You cannot be a true fiduciary if you have a conflict of interest. Let’s call a spade a spade.
I have visited my senators and congressperson about these issues. But I didn’t get very far. They listened, they were polite – but they said that they aren’t hearing about these issues from other constituents (likely because the people being scammed don’t know what’s happening) and therefore it’s not a priority for them.
It should be.
Thoughts out there?