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.
Photo by Images of Money via Flickr
Deposit your money with a bank, but don’t rely on it for retirement investing.
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.
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.
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.
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.
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.
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.