Smart Banking Guide

The financial services industry

Written on December 11, 2009 – 3:08 PM | by dodo

Investments can take many forms. Within the banking/financial services industry, they tend to be cold, uninteresting things, notable only for whether they earn you a profit or a loss. Investments can however, be anything from rare books to old cars to houses for rent, and if you acquire the necessary specialised knowledge in a particular field they can be fun. Whatever else you do though, you will also invest via one or more financial institutions.

Some bad experiences have caused a credibility gap to arise between a section of the public and the representatives of the financial services industry. These people have grown to see a collection of palatial buildings populated by predatory fat cats of varying degrees of competence and integrity and are wary of financial advice, even when it is good. Sometimes with good reason they fear the ’sell’ and perhaps, the ‘oversell’ that comes with the advice. It is unfortunate that this situation has been allowed to arise because most people have a dire need for honest advice and guidance – particularly on the matters of investment and retirement.

What’s it all about?

Many different services are provided by specialists – stockbrokers, tax consultants, venture capitalists and so on. If you are already a knowledgeable investor you will know your way around or at least know where to ask. This is just a primer so we shall view only the basics.

Nowadays, banks, insurance and investment companies all tend to overlap in the services provided. It is as though each races the others in the frantic scramble to try to become the sole company that controls everybody’s money everywhere. For our purposes however we will consider banks as something separate from the others.

Your bank

Everyone with any money has to bank somewhere in this day and age so no doubt, you already deal with a bank. Your cash ‘nest egg’ or emergency fund if it exists, is probably in an easily accessible interest earning bank account. If it doesn’t exist start building one tomorrow.

Over the years you have probably developed a relationship with your bank. If not then change your attitude or your bank, whichever is appropriate. They should be willing to lend you money (within limits) when you want it and provide you with a credit card and an overdraft facility. Do not think even for one moment though, that if you ever desperately need money they will help you. Nobody helps desperate people. The nice guy with whom you deal will explain sympathetically that he understands the situation and is doing his best to help but ‘those people at head office’ have vetoed it.

You always have to stay on top of your finances.

Banks have branched out into all areas of financial services to get the most mileage out of their customer base. They know a lot about each customer and his finances and so can assess what to try to sell him. If what they offer makes sense and appears to fill a real need at a competitive price then do business with them. It probably helps to cement some sort of relationship. But never feel any obligation to accept an offer of a service or a product just because you are a customer in other areas. If you feel you need it then always shop around to find the best deal you can.

Alternatives

This is the world of insurance and investment brokers, financial intermediaries, advisors, consultants, policies, shares and unit trusts. This is where you make longer-term investments after your ‘ready cash’ nest egg has been established.

Almost everyone in these sectors of the financial services industry is well trained and well informed in his particular field. The front line consists of specialists who gain your confidence and persuade you to hand over your money, for the most part to purchase

Insurance cover or for investment. The front-liners are supported by financial planners or advisors. Their job is to see that the advice given to you and the investments or insurance policies sold to you are reasonably appropriate. They know a lot about the law and taxes and estates and such and assist with specialist advice in various areas.

Once handed over, your investment money is passed on to others who are tasked with investing it or using it in an attempt to make a profit on it. If a profit is made, you receive a share thereof. If a loss is made you generally receive a share of that too. A few organisations aim to teach you to invest your own money profitably.

Many tens of thousands of these trained specialists populate the financial services world and they all have two things in common. The first is that they are not charitable, despite the kindly images that the companies attempt to project. Most of them take a slice of your money one way or another, irrespective of whether you gain or lose. The second is that they are all paid and supported by you – the client.

Your broker

Once upon a time the world crawled with insurance salesmen.

If you kicked a bush or shook a tree a few would fall out, pounce on you and try to sell you something. Eventually the term ‘insurance salesman’ began to carry something of a stigma so it was relegated to the dustbin of the marketing world. Now you might deal with a financial intermediary, a financial consultant, a financial advisor^- a broker and even perhaps (heaven forbid) a salesman. There are often subtle differences between their various functions and abilities but the overriding purpose of almost every one of them is to sell you something.

In order to save unnecessary ink I shall refer to them as brokers except where I wish to single one out for special attention.

To interface with the financial services world you will need a broker. I once tried to invest in unit trusts with one of the major insurance/investment companies. Because nobody had talked me into anything or sold me anything and I was doing this entirely on my own initiative I felt that it was totally unreasonable to charge a 1,5 % broker’s commission on my fairly substantial investment. In effect they said that if no broker is involved then they pocket the commission destined for him. I told them to go and boil their heads and invested my money elsewhere.

Your broker will probably be a very nice person; the successful ones have to be. It is more important however, that you believe in him than like him. He will after all, have a major influence on your financial future. Always bear in mind that to the broker you represent a source of income because the industry runs on selling things to people. If he cannot sell you what he believes you really need then he will quite possibly sett you something else less suitable, rather than sell you nothing at all. The amount of real attention that you receive from him has to be in direct proportion to the amount of money he can make from you.

The sooner you face up to the fact that you and your money are the merchandise of the industry, the better you will be able to look after yourself.

In general the broker delivers the best service he can while trying to make a good living. He brings to you investments, policies and services of which you would probably be entirely ignorant were it not for him. In your own interest however, you have something of an obligation to educate yourself and to assist the broker in seeing to your needs. In that way you can each draw the maximum benefit from your association.

Feeling intimidated? I hope so!

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