Be wary of personal bankers
Did your last visit to the bank end up in a forced faceoff with a personal banker whose real purpose was to sell you stocks?
The technique is called cross-selling, and it's happening everywhere as banks of all sizes attempt to dig deeper into your pockets to recover the fines and fees recently outlawed under financial reform legislation.
Banks can't charge many of those lucrative fees anymore, but their brokerage firms can.
"Cross-selling is definitely widespread," says Isabella Fonseca, research director for wealth management at Celent, a financial services consulting firm. "On the brokerage side, there are transaction fees, commissions and perhaps the need for an adviser -- so multiple revenue schemes."
Here's how the bait-and-switch typically works: You approach the teller window with your standard bank deposit or other transaction. The teller informs you that before they can assist you, the pleasure of your company has been requested by the personal banker in yonder cubicle.
You figure, OK, maybe there's a problem with one of my accounts. Instead, your personal banker turns out to be a high-pressure stockbroker looking to sell you mutual funds, annuities and portfolio-management services you don't want or need.
"That's not effective cross-selling, that's harassment," says Tony Plath, finance professor at the University of North Carolina at Charlotte.
There's nothing new about cross-selling. Bankers have done it since the invention of the safe deposit box. In recent years, perhaps the most visible example of bank cross-selling was the "free" bank credit card, which in turn made them money in penalties and fees.
But the financial reforms of the Dodd-Frank Act, its Durbin amendment and the Credit CARD Act prompted both Bank of America and Wells Fargo to redouble their cross-selling efforts. Barclay's Capital estimates the reforms will cost the nation's 26 largest banks a combined $21 billion this year.
The standard sales pitch involves comparing today's meager return rates on CDs and money market accounts to the relative riches you could be making in the stock market.
What they typically omit, but is buried in small print in the indecipherable brokerage agreements, is that unlike a CD or MMA, securities are not FDIC-insured, may lose value and will generate substantial fees that could eat up any profit you stand to make.
What's more, your personal banker is likely only looking out for him or herself as you are steered toward investments that pay the highest commission.
Banks make no pretense about who they target: If they can see money sitting idle in your savings or MMA, or if you hold a sizable CD that is about to mature, you may be flagged for a sit-down in the near future.
Plath says that although banks talk a good game, most have yet to figure out how to cross-sell much of anything.
"They have the software, the information services and the employee training in place. All the building blocks are there. But what isn't there is the substance," he says. "You have to have something that your customer wants to buy. Then the question is to identify how to approach them and do an effective job of selling the product."
The old bait-and-switch, holding the customer's daily banking hostage while forcing them to endure an ear-beating about the glories of the stock market, seems a dubious tactic at best.
Accenture estimates that cross-selling could return 3% to 5% to the industry's bottom line, which could hardly be considered a sound rescue strategy.
Still, not all cross-selling is bad for consumers. Plath cites the success that Winston-Salem, N.C.-based BB&T Co. has had with its line of insurance products.
"They're the largest agency business inside a commercial bank in the country, and as far as agency business goes, they're like second or third in terms of market share among all insurance providers," he says. "They make it work, even though there are all kinds of impediments to making it work. The typical insurance person thinks differently than the typical banker."
U.S. banking is going to need more creative synergies like BB&T's to make cross-selling pay off, Plath predicts.
"It should be more than just checking and savings and credit cards. It's got to be stuff like insurance, wealth management to the mass affluent, convenience products and services like tax preparation or accounting advice or some sort of family office consulting for small business customers," he says.
One thing seems certain: Banks are likely to be approaching us with more product offers in the months ahead. The best course is to weigh these programs against your own financial needs and avoid betting what you can't afford to lose, especially if there are fees involved.
Follow Interest.com on Twitter.