Fees on bank products

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.

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

[quote=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[/quote]

...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...

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.

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.)

For the newbies:

CD = Certificate of Depreciation

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

Nice job team…

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.

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.

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.

Babbling Looney gave quite a good response.

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

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

exactly.......

[quote=blarmston]

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

exactly.......

[quote=joedabrkr]

[quote=blarmston]

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

exactly.......

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".

[quote=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

[/quote]

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

[quote=bankrep1][quote=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

[/quote]

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[/quote]

No costs?!!

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

that's why I put costs in quotes.

CD's are similar.

They aren't really free

Amen, Brother Scrim!  If there are no costs, how are we paid commissions?!!

[quote=doberman]

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”.

I see you have been talking about me while I’ve been away making $$…

Indy

You are paid a commission, there are no internal fees.  Read that again.  The insurance company makes a substantial profit on the spread between their investments and what your client gets and pays you a commission.  I would hardly call that a fee.  The common person can't invest in 20 year corporates, it's not in their best interests 99% of the time.

Fixed annuitties with MYG rates are becoming more and more attractive. I imagine in 6 -12 months they will be a great place to place money.  I like the liquidty, the mass mutual annuity offers 20% liquidity per year.  5 year surrender, guarntees no loss of principal, bonds cannot do that.

BR, I’m not defending bonds, and especially 20-year bonds.  We’re splitting hairs here on the fee question, but I’ll maintain that there is a cost for every product we sell…some are just more transparent than others.

"Mr. Customer.  You say you want to buy a bank CD?  Let me ask you this.  When you give the bank your money what to you think they do with it? 

They invest it or loan it out. 

When they do this do you think they loan it out at the higher rate or a lower rate than what they pay you?  A higher rate, of course. 

So, if you could invest in the loans that the bank makes that would be a good think...right?  Exactly. 

I have just the thing for you.  They are called senior loan notes or floating rate funds.  You can invest in the loans that large financial institutions make. 

However, these aren't loans to guys like me and you.  These are short term commercial loans to large companies.  As such, these are variable rate loans that reset their interest rates every couple of months when the fed changes interest rates.  That way they keep pace with inflation.  You are not investing in a specific company per se.  You are investing in the loans made to these companies.  Sign here."

[quote=Indyone]BR, I'm not defending bonds, and especially 20-year bonds.  We're splitting hairs here on the fee question, but I'll maintain that there is a cost for every product we sell...some are just more transparent than others.[/quote]

I'm not defending any particular investment either, but bonds are hardly transparent when it comes to fees.  You quote a yield thats been marked up or has sales credit, which the client never sees.  Not really different than a fixed annuity at all. 

Yeah

Floating rate funds are a safe bet....Keep watching

I'm not defending any particular investment either, but bonds are hardly transparent when it comes to fees.  You quote a yield thats been marked up or has sales credit, which the client never sees.  Not really different than a fixed annuity at all.

Actually quite different. You can't sell an annuity to make a profit or take a loss on a fixed annuity unless you surrender early. 

I don't know about you, but when I sell a bond the client clearly understands the mark up, yield to maturity, yield to calla and the difference between par, premium and discounted bonds.

However, it is true that there are internal "costs", if you want to call them that, in an annuity in that you could have purchased the bonds separately from the annuity to get a better yield. The guarantees in exchange for the lowered yield are what the client is "paying" for. No loss of principal, no market fluxuation, and guaranteed income with tax deferred growth.

[quote=babbling looney]

I'm not defending any particular investment either, but bonds are hardly transparent when it comes to fees.  You quote a yield thats been marked up or has sales credit, which the client never sees.  Not really different than a fixed annuity at all.

Actually quite different. You can't sell an annuity to make a profit or take a loss on a fixed annuity unless you surrender early. 

I don't know about you, but when I sell a bond the client clearly understands the mark up, yield to maturity, yield to calla and the difference between par, premium and discounted bonds.

However, it is true that there are internal "costs", if you want to call them that, in an annuity in that you could have purchased the bonds separately from the annuity to get a better yield. The guarantees in exchange for the lowered yield are what the client is "paying" for. No loss of principal, no market fluxuation, and guaranteed income with tax deferred growth.

[/quote]

BL,

I do the same thing.  The point is, you can beat to death any investment on fees....you could make a checking account look like a bad deal.

I'm more of a bottom line guy, and I guess I attract customers who are the same.

It only takes a few minutes to cover Bonds 101 with the client.  Believe me, they will be much easier to deal with when the bond fluctuates on the statement if you took a few minutes in the beginning.

I agree we don't need to beat the investor to death with minor details otherwise their eyes glaze over and they won't make any decisions. But they do need to have the basics at least explained in the beginning.  Document yourself and CYA.

Yeah I am sure they are real happy they bought the GM bond for the extra 1% right now.  That fixed annuity is looking mighty good!