Tuesday, May 21, 2019
5 Examples of How The Bank Doesn’t Care About You
It’s time to dish folks. I have had about enough and now the beans shall be spilled. The cat will come out of the bag. It’s time to talk about banks and how terrible they are. None of us really like the bank. They are a necessary evil at best. One of my idols, Gail Vaz-Oxlade, coined the term, “The Bank is Not Your Friend.” If you follow finance, which I do, you would be amazed that they can turn a record profit every single quarter. How does a company do that? It’s fairly simple to do when raising fees or laying off workers is in their toolbelt at any given moment. What about you? Or me? Or our families? Why does this matter? It matters because it affects our everyday life. Today I am going to display to you real-life cases, names omitted, of situations where the bank showed how much they do not care about their clients. Let’s get down and dirty.
Widow Mortgage Madness
When someone dies, especially a spouse, your whole world is turned upside down. This is especially true if that spouse was the “head of the household” and handled all the family finances. I have seen this firsthand many, many times. The survivor is often ill-equipped to handle the onslaught of bills, paperwork, and other estate issues when this occurs. This poor old lady was left holding the bag when her husband died. Their property still had a mortgage on it when he passed, too soon at the age of 63. Luckily for her, the amount was not too much, only $70,000. Also, luckily for her, her property had 2 rental units attached to it which allowed her to comfortably make any mortgage payment as well as have a little money for living expenses. Where it went sideways is when the bank, or in this case credit union, got involved. Due to the fact that her husband was out of the picture and his income was gone, they renegotiated her mortgage. Instead of the normal interest rate at the time, between 3 and 4%, she was shoved into an interest rate of over 8%! For her, this means her monthly mortgage payments will be mostly interest for the first few years, and by the time all is said and done, she will pay an extra $20,000 in interest after 10 years. They know her situation, they know about the rental income, they know she can comfortably make the monthly payment, it didn’t matter. I personally do not think that is how you should treat a widow.
My next story is another sad one concerning elderly neglect. This amazing couple has been together for over 50 years and worked hard their whole lives. They do not live extravagantly whatsoever but managed to build a little nest egg that over time became enough to retire on, coupled with their small workplace pensions and government benefits. During their working years, they had a representative that they dealt with specifically at their bank who would help then when they made an appointment. In these meetings, they discussed their retirement investments and made any changes or adjustments that needed to be made. While we all have our areas of expertise, this hard-working couple relied heavily on their bank representative to guide them on investing as they would be the first to admit they are novices. Early into retirement, a rude awakening came when all of a sudden, they were not allowed to meet with their representative at the bank anymore. You see because they were now withdrawing from their retirement account on a regular basis, their balance fell below the threshold of what it needed to be to have a regular representative. They were now relegated to meeting with someone at the branch level to discuss their account. While this may not seem like a big deal, it was to them as they had been dealing with the same person for several years and now had whoever may be in that day to help them out. Even worse, they did not receive specific tax advice that ended up costing them money come tax time. I find it troubling that service levels depend on bank balances and not fostered relationships.
Another amazing retired couple I encountered had the unfortunate luck of having an advisor with the bank that was on vacation 4 months randomly during the year. While this wasn’t the case early in the relationship, over the past 5 years it has been. Sadly, during the past 5 years is when they needed the most help with their accounts as they were getting ready to retire. What I saw were accounts that were way above their risk tolerance, meaning invested in far riskier funds than they were comfortable with. I also saw income taken from their RRSP’s too early which could and should have been delayed as it was not needed to meet monthly needs. This unneeded extra income put them in a higher tax bracket and left alone could have grown quite well over the next 5 plus years. It also helped claw back their government retirement benefits which meant less money they were entitled to from Old Age Security on a monthly basis. The advisor was also not around when they wanted to make their annual TFSA deposit and then when it was finally made, they put it in the wrong account, causing headaches and more paperwork. What troubles me most is the fact that this couple has the sole objective of providing for their children when they pass on, one of which is special needs and would require lifelong assistance. This unique situation should be handled with the utmost care and concern and it appears that is not and has not been the case.
When I first decided that saving money was to be a priority, I did not know where to turn. Of course, the first thought would be the bank as a place of refuge. Sadly, for most youth, this is their first thought as well. A friend of mine happened to walk into the bank during one of their many promotional events. Oddly enough it wasn’t for the various debt they try to push on you, it was for savings this time, specifically Registered Retirement Savings Plans, or RRSP’s. She happened to be in the bank during February, which here in Canada is RRSP season. Her $500 deposit into her bank account was met with, “Well, you should be saving for retirement with that money.” While this bank teller is not technically wrong, they failed to understand the situation. Firstly, this young lady didn’t have much money to her name, so building savings was definitely a priority, but not necessarily for retirement. Secondly, this young lady didn’t make much money annually so the benefits of the RRSP tax deduction would be irrelevant to her. Thirdly, this young lady would have a high likelihood of needing this money in the near future, as do most young people. Things come up and savings are often needed. An RRSP is the last place she should put this money as it provides very little benefit to her and penalizes her (with taxes) if and when she needs to withdraw the money. Her best bet should have been to open a Tax-Free Savings Account which would allow her to be more liquid and yet still get her in the habit of saving and investing. As her savings grew, and her income too hopefully, she could then transition into an RRSP account and use it to its full advantage. While altruistic, the teller that proposed this to the young lady was strictly looking to gain notches for a company bonus program, that month being RRSP’s. The client was just a number, nothing more.
My last example is a bit more complex. Estate planning takes extreme care and commitment. There are many who go into this phase of life without a strategic plan to leave their money behind to loved ones. If that is your goal, I would recommend you speak with a professional because the consequences can be dramatic. Our next person was fortunate enough to inherit a large portion of money from her parents when they passed away. Her parents were savvy investors, having built up a substantial portfolio over many years with the goal of one day leaving it to their daughter. Their representative at the bank prided the fact that with their help they were able to build a 7-figure estate to leave behind. What our bank representative didn’t account for was the tax implications of leaving such an estate to their child. While the blow of taxes cannot be avoided, the impact of it can be lessened. This requires careful planning and a hands-on approach during the accumulation phase of investing. Over the years, a strategy of yearly tax efficiency would have resulted in much less of a burden upon death. This resulted in almost half of this 7-figure estate being lost to the taxman. While it is not the job of the advisor to handle the taxes of their clients, it is their job to advise them on the possible tax implications and then direct them to the right source for their solutions. If the goals of the client were known, which they were, this type of problem should have never happened. The only logical conclusion is that is required to much work on an annual basis or it was beyond the scope of what the advisor knew. Either way, the wishes of the client were not met, and the daughter was left with a fraction of what she thought she would inherit. This is why the “soft” fact find of a client’s wishes and dreams is just as important as the “hard” fact find of the raw numbers. It literally can cost you hundreds of thousands of dollars.
Every industry has its weak links. The financial industry is no different. While it seems that I am singling out the banks specifically it is only because of what I have seen. When dealing with your finances it is important to have a competent, trustworthy and available advisor. Don’t be afraid to ask questions and don’t be afraid to demand the service that you require. We all deserve that kind of attention.
“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” – Robert Frost
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