Banks are now urging their customers to buy mutual funds, tax-deferred annuities and car title loan. They note when your CDs are coming due and call you with a sales pitch. You might visit with someone you think is a banker and never learn that he or she is actually a broker angling to sell you a product and earn a commission. Your friendly teller may have to refer you to these brokers in order to keep his or her job. At some banks, you will get a full and fair explanation of annuities and mutual funds. But don’t count on it. All too often, the operation reeks of deceptive sales. How bad is it? The American Banker, an industry trade paper, once sent reporters posing as mutual fund customers into ten banks. Reps at eight of those banks “forgot” to mention that mutual funds aren’t federally insured; only a few of them disclosed fees; most downplayed the investment risk; some illegally forecast specific (and double digit) gains; one even suggested that mutual funds were like CDs but with higher yields.
Similar surveys using “mystery shoppers” keep turning up similar results. Some customers don’t realize they’ve bought mutual funds or annuities, don’t understand the risks, and find out too late that there is a stiff penalty for withdrawing money before several years have passed. In one case I am familiar with, a 92 year old man was sold an annuity with withdrawal fees lasting until he was 99. He thought he was buying a high rate CD.
According to federal guidelines, banks are supposed to:
Tell you that mutual funds and annuities are not backed by the bank or by the federal deposit insurance.
Tell you that the performance of mutual funds and annuities is not guaranteed.
Tell you that your interest and principal may be at risk.
Sell in an area clearly separate from the rest of the bank, with no FDIC signs anywhere near.
Sell you investments appropriate to your age and financial circumstances.
Industry guidelines add that all sales commissions, surrender charges, and other fees should be fully disclosed.
Your banker’s IQ
How often does interest compound? “Compounding” means that the bank adds the interest you earn to your account and then pays interest on the combined interest and principal. The more often your interest is compounded, the more money you make at car title loan.