Three bites of the cherry
“The acquisition by dishonest means and cunning,' said Levin, feeling that he was incapable of clearly defining the borderline between honesty and dishonesty. 'Like the profits made by Banks,' he went on. 'This is evil, I mean, the acquisition of enormous fortunes without work, as it used to be with the spirit monopolists. Only the form has changed. Le roi est mort, vive le roi! (The king is dead. Long live the king.) Hardly were the monopolies abolished before railways and Banks appeared: just another way of making money without work.” - Leo Tolstoy, Anna Karenina
It should come as no surprise that the major Banks (quite apart from normal banking activities):-
- have large financial planning divisions;
- own many financial planning businesses (branded independently) that advise consumers to buy investment products;
- own many investment institutions (branded independently) that sell investment products;
- own insurance companies and sell their own branded insurance products.
Here is a random selection:-
- ANZ own One Path;
- CBA own Colonial First State;
- HSBC & JP Morgan Chase own AMP;
- NAB own MLC;
- AMP own AXA;
- Westpac own BT Financial;
- CBA own CommInsure;
- Suncorp own AAMI, Asteron Life and GIO.
Banks make billions of dollars annually in profits for their shareholders. They are raking it in. If they do not, those in charge (the Board of Directors) are removed by their shareholders. The Board are on mega salaries and have very nice share incentive schemes in their Banks to boot. They do not want to lose their jobs and comfy lifestyle.
Australian Banks are amongst the most profitable in the world. There is a reason for that. Everything is squeezed (until there is no juice left in the orange).
Naturally enough, their primary aim is to make money for their shareholders. They make this money from you, the consumer.
Believe me, this is not a Bank bashing rant. Without them our economy would not function very well at all. You just need to be aware of the environment you are being asked to enter by investing in a financial product.
In this profit-driven environment, pressure comes from the top right down to the bottom. If you need to be convinced of this you should watch the recent ABC Four Corners programme on CommInsure (a Commonwealth Bank company) here.
It’s not just the Commonwealth Bank (whose share price rose from $26.00 in 1999 to reach $96.00 in 2015 - Yes, the figures are correct).
Nearly all of the major Banks have in recent years been embroiled in controversy and have been accused of not servicing their customers honestly and fairly. The official responses from some of the Banks can be found at these links as recent as 15 March 2016:-
ANZ appoints PwC to conduct independent review of OnePath compliance systems
Statement regarding ABC 7.30's coverage of Macquarie, 4 December 2015
Statement regarding ABC TV's 7.30 segment on 23 November 2015
NAB Wealth's Customer Response Initiative update, 21 October 2015
Commonwealth bank welcomes ASIC'S accouncement regarding former planners
NAB Wealth's Customer Response Initiative update, 22 August 2015
ASIC Releases comparison report for CFPL and FWL varied licence conditions
Macquarie Bank Opening statement: Senate Economics References Committee inquiry into the Scrutiny of Financial Advice
All the Banks, in their own words, agree.
- take responsibility for their actions;
- acknowledge that they have made mistakes;
- are proactively dealing with situations and resolving them with clients who have been affected;
- are all committed to restoring the customer’s trust and confidence in their services.
So the moral of the story is, do your homework. If you are considering buying a financial product you should ask:-
- who ultimately owns the fantastic product you are being asked to invest your life savings in; and
- who (directly or indirectly) owns your advisor (in many cases one way or another a Bank will “own” your advisor).
Having established who the actual owners (of the product and the advisor) are check out the track record of both.
You may be lucky enough for a Bank-owned advisor to recommend that you buy a Bank-owned product and borrow money from the same Bank to buy the product. The borrowing bit is what is known as margin lending which I should record is a sensible strategy for some, but not, all. Ask any Storm customer.
So the Bank makes profit on the advice given, the product sold and the money lent.
This is what is known as getting three bites of the cherry.
It is also great business and nearly as ingenious as compound interest.
Just think you may be funding all of it.
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford