Financial advice from a bank is never “ free ”
With deposit rates falling and the markets continuing to soar – the S&P 500 has risen 13% so far this year – it’s no surprise that disgruntled savers are wondering how they can earn more.
Given this potential appetite for risk, as well as the wealth of savings accumulated during the pandemic, it may not be surprising that banks are considering increasing their sales of investment products.
More than 16 billion euros have been saved on their own over the past year, while overall Irish deposit levels have reached record levels, at some 128 billion euros, according to the latest figures from the Bank Central Ireland.
And a lot of it doesn’t even earn paltry sums on deposit – it languishes in checking accounts. Figures from the AIB show that current account balances jumped 24% in 2020 to reach 32 billion euros.
Not only that, but billions on deposit could be forced to find a new home in the months and years to come, given the uncertainty around Ulster Bank and KBC Bank.
Entering into this breach, retail banks, eager to increase their income by targeting savers who have become investors.
Banks target investors
KBC Bank (it remains to be seen whether or not it manages to reap the rewards of this venture) launched a mobile app last month, allowing you to invest from € 10 per month in a range of six funds.
The Bank of Ireland, meanwhile, is hosting a series of webinars aimed at helping experienced and new investors get the most out of their money, while AIB is reportedly in advanced talks on a possible joint venture with Irish Life, in an effort to fill the “product gaps” in the bank’s arsenal – a gap that includes investment.
While an offer from a bank might be exactly what your personal investment strategy calls for, it’s worth understanding how the service works before you get started.
Most banks act as intermediaries or brokers for investment products – in other words, they do not “manufacture” the funds themselves, but sell them on behalf of other investment managers.
Typically, they only offer a limited range of products, often supplied by a single supplier.
Bank of Ireland, for example, is a tied agent for New Ireland, which means that the “vast majority” of the investment products it offers, according to the bank, comes from its subsidiary.
Likewise, AIB offers Irish Life products, such as its range of MAPS funds, as well as Permanent TSB, Ulster Bank and EBS.
KBC Bank is a tied agent of Irish Life for its insurance products, but distributes investment products of KBC Asset Management, a subsidiary of the Belgian financial services group.
If you go with a bank for your investment advice, you’ll be limited to a small group of asset managers – just three across the market and one from your bank.
You might think that arranging a financial review with your local bank to consider such investments won’t cost you a lot.
In a way, this is true. You won’t have to pull out your checkbook (if you still have one) or swipe your card for your session with a banking advisor, but that doesn’t mean it’s free, either.
There is one reason AIB sells Irish Life products: to increase revenue. And one of the ways he does this is by earning a commission on any product sold by one of his financial advisers.
It’s a similar case with Bank of Ireland. As a distributor of New Ireland products, he receives a commission. And these numbers can be heavy.
Fortunately, at least now it’s easy to find out how much.
Under the rules of the Central Bank, intermediaries are required to post all fees, commissions, rewards and remuneration that they receive from product suppliers in exchange for selling products or providing services to consumers.
So, before handing over your money, you can check out these commission summaries online. Many numbers represent the maximum commission paid, but they can be a useful guide.
Bank of Ireland, for example, receives an initial commission from New Ireland of up to 22% of the first year premiums on each regular pension or PRSA product it sells, while for a single investment product at premium, she receives 3.5%. in the front.
It’s a similar story with other banks. Irish Life pays Ulster Bank an upfront commission of 14% on its savings products or 3.2% on investment bonds. And EBS gets 5.2% on investments, or up to 25% on pensions, while AIB gets up to 20% on pensions and up to 3.25% on Irish Life investments. Not only that, but “trail” or annual commissions may also apply.
This means that a lump sum of € 100,000 could earn a bank up to around € 5,000 in commission up front, while other incentives could apply in subsequent years. This money has to come from somewhere and it’s probably you.
How you pay
Clients will typically pay for the commission-based distribution and advisory structure through higher fees and charges on their investments, or allocation fees, through which a certain percentage of your money is actually invested.
For example, EBS Choice investors will pay an annual commission of 1.65% on the Irish Life Indexed Global Equity Fund.
That’s a heavy load for a passive fund, given that it tracks the FTSE World Index – and there’s a Vanguard exchange-traded fund that does just that for an annual charge of just 0.22%. So annual fees of € 1,650 against € 220 on an investment of € 100,000.
Early withdrawal fees are also common. If you withdraw your funds early from an investment policy purchased from AIB, you will be charged an early withdrawal fee of up to 5% of your investment. Or € 500 on an investment of € 10,000.
As with most things in life, when it comes to receiving financial advice, there is no such thing as a free meal. Even if it takes place on Zoom.
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