I am thankful for my years as a relationship manager. Besides getting myself on the right financial footing, I also learnt invaluable lessons which will stand me in good stead, ensuring that no banker or agent can ever pull a fast one on me with regards to investments, insurances, mortgages or treasury instruments. Its probably not easy to fool me on product features, important fine print that’s been left out or inflated costs for the rest of my life.
And I would like to share some of these experiences with you. Because money is hard-earned and trust should never be misplaced in the hands of bankers or agents out to make a quick buck at your expense.
Which products earn your banker the most in commissions?
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Soon after the requisite financial needs analysis, your bankers will likely recommend you some product solutions that match your financial needs.
The product category that earns your banker the most in commissions and with the least money required from you upfront is typically insurance products. Investment-linked insurances or endowment plans whereby you set aside a fixed amount monthly (say $500, $1,000 or $2,000) for the next 8, 10, 15 or 20 years. The commissions earned by your banker are likely in the 4-figure for $1,000 monthly premiums. Assuming you choose a decent term for e.g. 15 or 20 years. If you are buying your policy through an agent or independent financial planner, the commission earned is at least double that made by the banker. This is because bankers earn a basic salary while most insurance agents and independent financial planners don’t.
For the banker to earn the same amount of commissions on a unit trust investment as a $1,000 monthly premium plan, the customer would have to invest something to the tune of $300,000 in a lump sum.
Whilst the exact commissions differ from bank to bank under ever-changing incentive structures, the above comparison may be used as a ballpark and to bring home the point that selling insurance typically makes your banker the most in commissions.
Can you trust your banker?
With the above in mind, be wary of bankers who try to sign you up to an insurance policy from your very first meeting. Never mind you told him/her you prefer to keep your investments liquid, are not comfortable with a 10 or 20-year time horizon or that you do not have a regular income.
If you find your banker still tries to sign you up for an investment-linked or endowment policy, suggesting lower monthly premiums instead and trying to assure you that you can always take a policy loan if you need cash, run for the door! It is plain that this banker prioritises his/her commission payouts above your interests.
Costs of products & What’s Negotiable:
If your banker passes the trust test, keep in mind what product charges are negotiable. Of course, business should be win-win for both you and your banker. Your banker shouldn’t be reduced to servicing your account for free or close to nothing. But the idea is to be aware of the margins available for negotiation so that at least you are in the know if you are being charged an arm and a leg.
1. Unit Trusts
The typical upfront charge for unit trusts is a flat 3-4% of your investment amount. Typically, for larger amounts invested (e.g. $100k and above/this threshold varies from bank to bank, or in some cases, from banker to banker), there is leeway to reduce the upfront charges, even down to 1 or 1.5% for very large investments.
Do note that several banks have the option for you to buy unit trust investments on their internet banking platform. The sales charges are typically closer to 1.5% flat on the investment amount. For the specific charges, do refer to your bank’s ‘Investment’ section on your internet banking account. You may find that different unit trusts incur different charges, but you can be sure it will most definitely be lower buying online as there is no advisory involved.
If you do not need much servicing of your account or updates on the markets, most unit trusts are available on unit trust providers like Fundsupermart for no upfront charges or very low upfront charges like 0.5%.
Other non-negotiable charges would be the annual management fees. This is usually to the tune of 1.25-1.75% p.a. of your investment, and instead of being deducted directly from your investment value, it has been factored into the published prices of the unit trust. Do note that some unit trust providers charge quarterly platform fees of about 0.125% per quarter (or 0.5% p.a.) too.
2. Foreign Exchange
If you need to do a telegraphic transfer or buy a foreign currency to invest in property overseas or buy shares etc, please always check online (Bloomberg or Yahoo will suffice) for an indication of current interbank exchange rates. Yes, foreign exchange rates are very much negotiable. Especially for larger amounts (e.g. above $50k SGD equivalent).
To give an indication, the typical ‘spread’ (difference between bank’s rate to you and the interbank rate) taken on private banking foreign exchange transactions is 10bps whereas the typical spread charged by the bank’s board rates (when you walk to the counter at the bank branch) are 150 bps and above. For cross exchange rates (i.e. neither currency involves SGD), the spread is often more than double, i.e. 300 bps and above.
Days where customers walk in to do large foreign exchange transactions are akin to lottery days for the banker who services you. Giving you a very slight discount from the bank’s board rate, they are earning very handsome commissions from the spread. Yes, they earn commissions on your foreign exchange transactions! It is not in their interest to give you any sort of meaningful discounts unless you change money with them frequently.
3. Treasury Instruments
For customers with higher risk appetites, with regular income as a main financial objective, it is likely that your banker may recommend you dual currency investments, equity-linked investments or credit-linked notes. These are basically short tenor instruments ranging from 2 weeks to 1 month for dual currency investments or 3-6 months for equity-linked notes.
As these investments are OTC (over-the-counter, i.e. not published publicly), there is no way to confirm whether your banker is paying you a decent yield unless you check with a few banks. As a rule of thumb however, know that whatever yield is quoted to you, the bank is usually earning at least the same in fees. Which means that you may be able to negotiate for higher yields from your banker up to twice the yield initially quoted to you.
Unless of course, you are a very regular and savvy customer who trades large amounts and have a few banks managing your wealth. In such instances, it is more likely that you are earning richer yields than other regular clients. And your bank is contending with lower margins due to the volume of your trade and the fact that this is recurring income for them.
4. Insurance products
Alas, although the commissions earned by your banker is the highest for insurance products, the expenses paid these products cannot be negotiated. The expenses are inbuilt into the benefit illustrations and premium amounts. The only thing you can look out for are bank promotions in the form of iPads, vouchers etc for monthly premiums exceeding certain amounts. But of course, these freebies should not play any part in influencing whether you take up a policy or not. One must remember that an insurance policy is a long term commitment and only sign up for one if you forsee that you are able to comfortably afford the premiums for the entire life of the policy.
For simpler insurance products like term insurance and whole life insurance plans, take heart as MAS has announced that from 2015, there will be an online portal which allows consumers to buy basic insurance plans directly from insurance companies without having to pay commissions.
We hope that this article gives you some insights into your bankers’ motivations and empowers you on which product costs can potentially be negotiated.
DrWealth looks forward to bringing you more content that will help you to navigate the seemingly daunting financial landscape.