Fees on bank products

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Feb 20, 2006 4:06 pm

I had a customer trying to decide between placing some liquid cash in either a bank money market or a Money market mutual fund.   Even though the mutual fund MM rate was much higher he was skeptical because of management fees.


He was under the impression that a bank money market is "free".


How do most of you handle these types of situations?    For example..even a bank CD isn't really "free".     If a client directly asked you "How much does a bank CD cost?"   how would you answer this?


Thanks in advance.


Scrim

Feb 20, 2006 4:44 pm

Explain that the only thing the customer should be concerned with is returns, explain on equities higher management fees make it more difficult for the managers to "beat the market" index, however, that is the generic advice provided by the media, there are plenty of managers that consistently outperform their benchmark. 


If he is to stupid to grasp the concept you probably don't want him as a client.  Sell him a fixed annuity, no fees.

Feb 20, 2006 6:22 pm

I probably didn't word my inquiry to the best of my ability.


In my example I was comparing only money markets, not equity funds.


Also, is a fixed annuity actually free from any costs whatsoever?


scrim

Feb 20, 2006 7:15 pm
scrim67:

I probably didn't word my inquiry to the best of my ability.

In my example I was comparing only money markets, not equity funds.


Also, is a fixed annuity actually free from any costs whatsoever?


scrim


...oh Scrim...please tell me were kidding on that last question...


If you really want to waste your time on this "prospect", tell him/her that the cost of the bank's money market is the difference between what they charge for loans and what they pay for money market accounts...or roughly 4% of the principal balance annually.


My advice is to quit wasting yout time on "prospects" that are that stupid...in the long run, they are more of a headache than they are worth.


...and spend the time you are wasting on money market prospects to bone up on fixed annuities a bit...

Feb 20, 2006 7:17 pm

A bank money market isn't exactly free.  The price the customer pays is a lowered rate.  The bank keeps the difference between what he should have/could have been paid i.e. the real rate.  The bank keeps this difference to be able to pay the bank employees, cover overhead etc.  In addition a bank money market account restricts the number of checks that can be written in a month without being assessed additional charges. (3 I think).   So if you take into consideration the "haircut" on the rate and the additional charges. It isn't free.  


To compare it to a money market mutual fund.  Sure the fund charges expenses to pay its traders, cover overhead etc.  "So Mr. Client you see that there are expenses either way.  There is no free lunch.  The difference is that the fees and expenses are detailed in this prospectus from the Mutual Fund Company, while the Bank's charges are hidden."  Plus there are no restrictions on check writing (if that option is available) other than the size of the check.  After all a money market fund, bank or otherwise, is not meant for buying groceries and small purchases.


Fixed annuities, other than surrender charges, have no costs.  But the same "haircut" analogy applies.  The insurance company is investing and receiving X% on a portfolio, usually of fixed income instruments, and the then pay out to the customer something less than the actual return. 


As for how much a bank CD "costs".  Same thing.  The bank is taking your money and investing it or loaning it out. There isn't a pile of money in the vault with a little flag on top of it with your name on it.  The money you have in the bank is really in some one's car, house, or invested by the bank to make revenue.  The bank is making money on the spread by lending at the highest rate  it can and paying out in CDs, money markets etc. the lowest rate it can get away with.  


Sure a CD or Mmkt is safe but at what cost.  The rate you are getting is lower than you would get if you invested it even in something as safe as US Treasuries. The bank rates will not beat inflation and in the long run you will be losing purchasing power.  Naturally if the money has to be liquid and available at any time. Then you want to be as safe as you can.  "But, Mr. Client with your longer term money don't you want to beat inflation and have your money grow?"


I like this last bit, because if the client says no, he realizes that he sounds like an idiot.  You have boxed him in.

Feb 20, 2006 7:57 pm

I explain that banks don't have to report the fees involved in paying CD's or money market funds. The interest rates they advertise are "net" of fees.


Explanation (Short Version): The interest rate they pay out is after they pay for the bank building, salaries, bonuses, stock options, and atm machines.


Explanation (Long Version): Or I explain that banks make money one of three ways. With the money people deposit: they either lend it to other people at a higher rate than they pay depositors, they invest in investment grade securities that pay a higher rate than they pay depositors*, or as a last resort, they lend it to other banks at a slightly higher rate than what they pay depositors.


In either of the three cases, the difference between what the bank receives and what it pays out, constitute "fees". A bank could earn 10% on deposited money, only pay out 4%, and never have to tell the depositor they charged 6% in fees. Compare that to a Money Market Fund manager who (for example) earned 10% and only paid out 4%. They would have to report 6% in fees.


* (I highlighted this portion because it's particularly effective if you have a bank CD prospect who is reluctant to invest in a bond. For example, find out where the prospect banks, get a copy of the bank's annual report, turn to the "investments" page of the report and show the prospect all the bonds the bank is currently invested in. Then tell the prospect they can let the bank keep the difference between what the bank earns on their CD and what it pays them or just eliminate the bank and keep it all for themselves.)


Also, as a side note: if you have small, independent banks in your area, they could be valuable muni clients of yours. In Georgia, at least, banks will buy muni's for their investment portfolios. The muni's have to be a particular grade and type, so check with your small bank prospects to see what they're looking for. (This is white elephant prospecting, but don't pass on this without calling on them. Could be worth your while.)

Feb 20, 2006 8:01 pm

For the newbies:


CD = Certificate of Depreciation


Feb 20, 2006 8:24 pm

I knew a fixed annuity has "costs".


I just wanted to see a garden variety of explanations as some perceive these aforementioned products as "free".


scrim

Feb 20, 2006 9:04 pm

Nice job team...

Feb 20, 2006 11:51 pm

Remember that the returns shown on a Mutual Fund MMF are net of fees.  As others have mentioned, we just disclose fees.  Tell the client that we go to jail if we don't show net numbers.


It doesn't matter what the fee is if the net return beats the bank's net return, with a similar level of risk.

Feb 21, 2006 6:41 am

Bypass all of it and by VRDO's and R Floats, thats what the banks and
the funds like to buy anyway.  This way you give your clients 4.2%
taxable or 3.1% tax free respectively.  If your prospects don't
like that than they are not prospects.

Feb 21, 2006 10:54 am

I have actually had decent success by calling on VRDO's. They are a unique instrument that offers compelling yields/liquidity versus regular money markets or CD's right now...


Clients are intriqued that they can get those types of yields while maintaining greater liquidity than typical cash mangement vehicles.


Granted, we dont get paid for VRDO's, VRP's or R Floats, but its a great way to get prospects in, acquire assets, and work with them for the other assets that will eventually pay nicely.

Feb 21, 2006 3:15 pm

Babbling Looney gave quite a good response.


I never want to compete on fees.  My service is what I sell.

Feb 21, 2006 4:48 pm

"I never want to compete on fees.  My service is what I sell"


exactly.......

Feb 21, 2006 10:54 pm
blarmston:

"I never want to compete on fees.  My service is what I sell"


exactly.......



I sell my body.....

Feb 22, 2006 6:52 am
joedabrkr:
blarmston:

"I never want to compete on fees.  My service is what I sell"


exactly.......



I sell my body.....





Thats why Joe works out of his house...now it all makes sense!

Feb 22, 2006 7:58 pm

Joe probably has the theme song from "American Gigalo" playing in the background of his office. His filing cabinet is stocked with scented oils and body lotions. His hot tub has a built-in flat screen tv tuned to CNBC. His office attire is a satin bathrobe and silk pajamas (think Playboy mansion attire). A typical business day for Joe starts at around 7-ish PM and ends when he "completes the transaction".



Feb 22, 2006 8:45 pm
scrim67:

I knew a fixed annuity has "costs".


I just wanted to see a garden variety of explanations as some perceive these aforementioned products as "free".


scrim



Scrim fixed annuitties have no costs, it says it right in their brochure.  There is oportunity costs, but no fees and the rates are starting to become attractive on mYG rates

Feb 22, 2006 11:25 pm
bankrep1:
scrim67:

I knew a fixed annuity has "costs".


I just wanted to see a garden variety of explanations as some perceive these aforementioned products as "free".


scrim



Scrim fixed annuitties have no costs, it says it right in their brochure.  There is oportunity costs, but no fees and the rates are starting to become attractive on mYG rates


No costs?!!


hmmmmm...what happens if I want out early?

Feb 22, 2006 11:32 pm

that's why I put costs in quotes.


CD's are similar.


They aren't really free