Why Investing Through Your Bank is a Bad Idea

When considering your options to invest either for retirement or just with the extra money you have, your bank should be one of the last places you consider. Banks are places you keep money in savings, certificates of deposit, and checking accounts; NOT places you want to invest funds for the future. If you never dealt with financial institutions other than banks, it may not be obvious why you should not — and here are the reasons.

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Why Using Your Bank to Invest is a Poor Choice

Deposit your money with a bank, but don’t rely on it for retirement investing.

Limited Investment Options

The first problem with investing at your bank is you will have limited investment options. The bank will have either their own mutual funds or those of a specific partner for you to pick from. You won’t have nearly as many options as you would if you had elected to go with a discount brokerage firm.

Expensive Investment Options

When your investment choices are limited you are much more likely to run into expensive investment options. When your bank steers you towards their own investment options or those of their partners, you are not going to get the most competitively priced options. You can expect higher expense ratios and additional fees.

Higher Trading Costs

The most competitive discount brokerage firms offer equity trades at $4.95 to $9 per trade. They offer some no-transaction fee mutual funds or charge you a similar trade fee. While there isn’t a set standard of bank trade pricing, you can be assured it won’t be as competitive as $5 to $10 per trade.

Less Impressive Trading Platform

Banks are in the business of taking in deposits and loaning out that money while paying nominal interest to the deposit holders. They are not in the business of helping you invest money for the long term. They are not in the business of putting together an impressive trading platform for you. Banks will either minimize the technological investment in this area or end up buying a secondary firm to shore up this area. Discount brokerage firms are built specifically to help you invest money and trade stocks, bonds, and mutual funds. They will be inherently better in this area than your bank.

Biased Advice

Finally, whenever you walk into your bank branch to meet with your bank’s investment advisor, you must know you are not getting unbiased advice. The advisor will have some sort of certification behind his or her name, but it doesn’t mean their advice is unbiased. The only way to get unbiased investment advice is to use a fee-only financial advisor that has a fiduciary duty to you. Otherwise the advice undoubtedly will be made with a hint toward making the bank money. The advisor you are speaking to wants to keep his job and will have targets given to him by management for assets under management or revenue generated through commissions. That means churning your investments or pointing you toward expensive options.

A Better Option: A Discount Brokerage

When compared to investing with your bank, a discount brokerage comes out ahead. You will have more investment options, cheaper trading costs, and a better trading platform. The only thing you might miss out on, depending on the firm, is the unbiased advice. But you shouldn’t be getting advice from anyone that you are handing money to be invested over to. You should seek out an independent and unbiased advisor for advice, then find a brokerage firm that you can execute the advisor’s strategy with. Keep your deposits at the bank and your investments with an investment firm.

About the Author

By , on Dec 15, 2011
Kevin Mulligan
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.

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Leave Your Comment (5 Comments)

  1. The only good investment at the bank is a CD just large enough to get free checking priviledges. I maintain a $5,000 CD which earns interest and saves me about $300 a year in bank fees (a 6% return).

  2. technopeasant says:

    Its ironic we’re still supposed to think of banks as deposit holders and loan makers when in reality they take customers money and gamble it away.

    I really wish the firewall still existed between “banking” and “investing” but its soo hard to legislate greed.

    WellsFargo does have a decent & free trading platform for the qualified individual but I expect them to charge for it any day now.

  3. Larry Y says:

    Kevin – If you bank at Wells Fargo and meet certain deposit requirements you qualify for a PMA account. Through WellsTrade you then receive 100 free trades per acount per year.

  4. Petunia 100 says:

    I used to agree whole-heartedly with what you have written here. However, I have since learned it isn’t always necessarily so.

    Last year, I moved my traditional IRA from Vanguard’s brokerage to Wells Fargo. I also opened their all-the-bells-and-whistles checking account, which they call “PMA”.

    Because I have a brokerage account, I get the PMA account for free (normally $30 per month). Because I have a PMA account, I get 100 commission free trades per year. How do you like that circular logic? I love it!

    At Vanguard, I had to pay a commission for any non-Vanguard ETF. I don’t have to pay a cent at Wells Fargo (I trade far less than 100 times per year). I only hold one non-Vanguard ETF, but still it was a $7 haircut each time I needed to buy or sell.

    A bank can be just as good as or even better than a discount broker. 🙂

  5. Kris says:

    Too bad a local bank is such a poor way to invest. you think of a bank as a trusted place to learn about and keep your money. But these days walking into a bank is not much different than walking into most retails stores…need I say more?!

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