Banks are a fiduciary and should place customers’ interest ahead of shareholders. Banks are for transaction, 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 then for a young but growing nation. The leaders planned for everything. Who you should marry, who your neighbour should be, how many children you should have, 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 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 said they will live beyond 85 years old and there is 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 it 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, spend within their means and were careful never to be in debts unnecessarily. They were after all, Asians. They were good savers and often go to the local banks to open a simple savings account to place a deposit or do some business transactions. Then one day, some smart people in the banks decided that this business model is too slow in bringing in profits. So they began selling investment products in the name of wealth management and financial planning, in line with what the government is encouraging: Take charge of your financial future. By selling investment products, they will receive lucrative front‑end sales commissions and recurring streams of trail 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 do their transaction at the counter, ask them whether they are happy with the low interest rate they are receiving from their deposits. Most will say no. We will then tell them that we have a better product for them that give great upside potential but limited downside risk. That will interest them. Once they show interest, we will get them to sit at our comfortable wealth management area and have our relationship managers sell to them. To entice them further, offer them a free gift. The more they buy, the more expensive gift they will get. Anyway, we are using part of the commissions we earn from them to buy the gift. We will still make a good profit. The entire sales process can be very fast. To cover ourselves legally, get them to answer some simple questions, add them up and tell them the product suit their risk appetite. If they sign, we are covered” The smart people were right. Tons of products (along with the free gifts) were sold.
But the 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 road shows all over Singapore to sell credit cards. They even entice students in campuses (who haven’t earn an income) to sign up for credit cards. To make even more money, they send cheques to their customers and encourage them to use it to buy what they like. Telemarketers called the people everyday and encouraged them to make use of the credit facilities to indulge in themselves. The idea is simple: Enjoy first, pay later. This went on for many years. Times were good during that period. Global economy was booming and the stock markets were sky rocketing. More and more complicated products (along with the free gifts) left the shelves of the banks. More and more people were spending beyond their means. The banks became richer, more powerful and the smart people received fat bonuses. Everyone was happy.
The year is 2008. Lehman Brothers has fallen. AIG went to the Fed for help and Merrill Lynch sold itself to Bank of America. A financial crisis second only to the great depression is in full force. Many have lost money buying products they never really understood. Many have over extended and are in serious debt. Fingers are pointing all over the place. People expressed shock that their leaders allowed such a thing to happen and blamed the bank for mis‑selling. Banks said customers went in with open eyes (remember they signed the questionnaire?). Leaders said the people should know that if they want higher returns, they should take more risks. The people are sad. They have lost their hard earned money. Many lamented: “How would we know? We thought if it is from the banks, governed by our leaders, it would be safe” Unfortunately, there is no “happy ever after” ending to this story.
The moral of the story:
- Although we have high trust in our government as they have taken care of our every need, don’t over rely on them. It is time we grow up and make our own judgement.
- 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 the principle of good financial planning. To give good advice, you must know your need for the product, your ability to bear the risk and determine your willingness to bear the risks. That required a thorough understanding of your assets & liabilities, your income and expenses and your goals in life. That requires at least 30 hours of discussion and analysis. You only have half an hour in the bank. How can you get good advice?
- Take care of your children; they are being influenced to spend future money, which is wrong. Otherwise, we will be building a generation of spenders.
Banks, you are so big and powerful that we can’t let you fail. But please know that with power come 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, Banks is for transaction not advice.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Retirement Financial Adviser. 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.
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