Isn't It Funny How Your Bank Always Thinks Their Investments Are The Best?
- Steadfast Equity
- Jun 17
- 13 min read
Banks often push their own investment products, not because they’re the best for you, but because they benefit the bank the most. Here’s why you should approach their recommendations with caution:
- High Fees: Bank mutual funds often come with high management fees (e.g., 2%), compared to low-cost ETFs (as little as 0.10%).
- Conflicts of Interest: Advisors are incentivized to sell in-house products due to commission structures and internal sales quotas.
- Limited Options: Banks prioritize their own products, reducing your access to potentially better-performing, lower-cost alternatives.
- Marketing Bias: Most bank ads push specific products rather than offering unbiased financial advice.
What you can do:
- Question your advisor’s compensation structure.
- Compare fees, performance, and risk independently using tools like portfolio analyzers and comparison platforms.
- Consider fee-only advisors for unbiased advice.
Quick Comparison: Bank Products vs. Alternatives
Feature | Bank Mutual Funds | ETFs (Alternatives) |
Fees | ~2% annually | ~0.10% annually |
Conflict of Interest | High (sales-driven) | Low |
Performance | Often underwhelming | Market-aligned |
Transparency | Limited | High |
Take control of your investments by staying informed, asking the right questions, and exploring independent options.
Investment Biases: The Hidden Enemy of Your Portfolio
Why Banks Recommend Their Own Investment Products
Banks prioritize their profit margins, often placing their financial goals ahead of your wealth-building objectives. To understand why they push their own investment products, it's essential to unpack their business model and the incentives that drive these recommendations. Let’s explore how their revenue streams, compensation structures, and conflicting priorities shape this bias.
How Banks Make Money from Their Own Products
Banks rake in revenue through several channels when they promote their in-house investment products: interest income, capital markets income, and fee-based income. For instance, if you invest in a bank’s mutual fund, they collect management fees, custodian fees, and investment management fees - all of which go straight to their bottom line. Beyond investment products, banks also profit from everyday services like checking accounts, savings accounts, and the fees tied to mutual funds. They further benefit from the interest rate spread - the gap between what they pay on deposits and what they earn from lending or investing those funds. By steering your investments into their own mutual funds, banks maintain control over every aspect of the revenue stream.
Sales Quotas and Commission Systems
The way banks compensate their advisors plays a big role in why in-house products take center stage. Many advisors operate under commission-based systems that disproportionately reward the sale of proprietary products. In fact, 74% of salespeople report that money is their primary career motivator. Studies also show that monetary incentives can boost individual performance by 22% and team performance by 44%. Banks design these structures to encourage advisors to prioritize in-house products over external options.
"The inside sales team is a small extension of the CEO. When people call in and have questions, the inside sales team has to answer those questions and concerns and get new clients to buy into the vision on the product."– Braidan Beck, Asset & Wealth Management, Goldman Sachs
While many advisors genuinely aim to serve their clients’ best interests, their income often depends on meeting quotas tied to specific products. For instance, in 2023, only 43.1% of representatives in the B2B tech sector hit their quotas. Such pressure can lead to a stronger push for products that help advisors meet their targets. Moreover, commission structures often offer higher payouts for selling in-house products, reinforcing this bias and creating a disconnect between what’s best for the client and what benefits the advisor.
When Bank Incentives Clash with Your Financial Goals
Banks are businesses, and their primary focus is generating revenue to remain profitable. However, their financial goals don’t always align with your personal investment needs. Research shows that financial planners are more likely to recommend products they own, their spouses own, or those they’re licensed to sell.
When it comes to assessing risk, relying solely on your comfort level often misses the bigger picture. Experts suggest combining both your willingness and financial ability to take on risk:
"Considering both your willingness and your financial ability to take on risk is the best way to make asset allocation choices that work for you."– Anil Suri, Portfolio Construction and Investment Analytics Executive, Chief Investment Office, Merrill and Bank of America Private Bank
Banks generate revenue from a wide range of sources, including traditional services like checking accounts, auto loans, and mortgages, as well as investment banking activities like corporate transactions and wealth management. This diverse revenue model means your advisor might be incentivized to keep you tied to the bank’s ecosystem of products and services. Recognizing these potential conflicts of interest is key to evaluating the advice you receive and ensuring your investments align with your personal financial goals.
Spotting Bias and Conflicts of Interest
It’s important to recognize that banks and financial advisors, influenced by their own mental shortcuts and business pressures, may not always put your best interests first. This awareness is a critical starting point for identifying specific biases that can distort investment recommendations.
Common Mental Biases in Investment Advice
In addition to sales-driven conflicts, cognitive biases play a significant role in shaping investment advice. Even the most well-meaning advisors can fall into psychological traps. Behavioral finance - a field that blends psychology and finance - helps explain why people make certain financial decisions.
One common bias is overconfidence, where advisors may overestimate their ability to pick top-performing investments while underestimating potential risks. Similarly, confirmation bias can lead them to focus only on information that supports their pre-existing beliefs, ignoring evidence that contradicts their assumptions. For instance, if a bank is heavily promoting a specific mutual fund, advisors might highlight its strong past performance while glossing over periods of underperformance.
Another frequent issue is familiarity bias, where advisors lean toward recommending in-house products because they are more familiar with them through routine training. This can create a false sense of security for both the advisor and the client.
The numbers back up these tendencies. Research shows that 39% of all new money invested in mutual funds goes to the 10% of funds with the best performance from the prior year. This "chasing returns" mentality often leads to poor timing decisions. Investors, for example, are 1.5 to 2 times more likely to sell a winning position too early and hold onto a losing one for too long. According to prospect theory, losses feel about twice as painful as gains feel rewarding, which explains why advisors may prioritize protecting against losses over seeking growth opportunities.
"All investors have tendencies to make decisions based on emotion. Awareness is key, and putting sound practices in place is essential."– Eric Freedman, chief investment officer, U.S. Bank
The Problem with Selling Only Your Own Products
Individual biases are just one part of the equation. Structural incentives within banks can further limit your investment options. When banks focus exclusively on promoting their own products, a clear conflict arises between hitting internal sales targets and serving your financial interests. This approach narrows the range of available investment choices and can ultimately cost you more over time.
A key issue here is the difference between the suitability standard and a fiduciary duty. Under the suitability standard, advisors are only required to recommend investments that are "appropriate", not necessarily the best options for you. This can result in higher fees and lower returns. For example, a $100,000 investment in a bank mutual fund might cost you around $2,000 annually in fees, compared to just $100 for a similar ETF.
Data also shows that limited product selections often lead to underwhelming long-term results. Despite this, many banks continue to push higher-fee active funds, prioritizing their sales goals over building your optimal portfolio.
Banks also design compensation systems that reward advisors for selling proprietary products. These performance-based incentives can encourage decisions that boost short-term results at the expense of your long-term financial health.
Regulatory efforts have aimed to address these conflicts. For example, Ontario’s 2021 Capital Markets Modernization Taskforce called for clearer disclosures about the lack of independent advice when selling proprietary products. It also recommended giving consumers greater access to non-bank investment products within branches. However, progress has been uneven. In some cases, banks have even reduced access to non-proprietary products following Client Focused Reforms.
Adding to the challenge is information asymmetry - banks have detailed insights into their products’ fees and profitability, while you may lack a full understanding of all available options. This imbalance can lead to decisions that don’t fully align with your financial goals.
How to Evaluate Bank Investment Recommendations
Now that you're aware of the biases and conflicts that might influence bank investment recommendations, it's time to take a more hands-on approach. Here's how to independently evaluate any bank's investment suggestion and identify the key metrics that matter most.
Key Numbers to Check Before Investing
Before you commit to any investment, it's essential to dig into some critical factors - fees, performance, yield, credit quality, and liquidity. For instance, consider the cost difference: a $100,000 mutual fund charging 2% annually costs $2,000, while one with a 0.1% fee costs only $100 per year. Over time, these fees can significantly impact your returns.
When looking at performance, don't just focus on last year's results. A longer history gives a clearer picture of how the investment performs under different market conditions.
For fixed-income investments, pay close attention to yield and credit quality. High yields often come with increased risk, so understanding what you're getting into is crucial. Check the credit ratings of bonds or bond funds - AAA-rated securities are generally safer, while anything rated below investment grade (BB+ or lower) carries higher risk.
Liquidity is another key factor. Make sure you can access your funds without penalties, especially if you might need the money on short notice.
Your time horizon is equally important. If you plan to use the funds within a couple of years, a long-term growth fund might not be the best fit, no matter how appealing it seems.
"The first step to successful investing is figuring out your goals and risk tolerance - either on your own or with the help of a financial professional." - SEC
Using Independent Research and Comparison Tools
Once you've reviewed the basic metrics, validate your findings with independent tools. Avoid relying solely on bank-provided materials when making investment decisions. There are plenty of third-party resources that can help you make smarter choices.
- Online comparison tools: These allow you to analyze fixed-income products side-by-side, comparing performance, fees, and risk.
- Portfolio analytics tools: These help you see how an investment fits into your overall financial strategy by simulating performance and risk under various scenarios.
- Bond calculators: For fixed-income investments, these tools can calculate actual yields, tax-equivalent returns, and the impact of interest rate changes on your investment's value.
When working with any financial advisor or firm, check their Form ADV. This document discloses potential conflicts of interest and explains how the advisor is compensated. For example, if your bank advisor earns higher commissions for recommending certain products, this will be outlined there.
It’s also a good idea to get a second opinion from a fee-only advisor. Since these professionals are paid solely for their advice, they are less likely to have conflicts of interest.
Fixed-Income Investment Evaluation Checklist
When evaluating fixed-income investments, there are several factors to scrutinize:
- Credit quality: This indicates the likelihood of recovering your principal. Government bonds are typically the safest, while corporate bonds vary in risk.
- Duration risk: Longer-duration bonds are more sensitive to interest rate changes. If rates rise, these bonds may lose more value than shorter-term ones. To mitigate this, consider bond laddering, which involves purchasing bonds with staggered maturities to create steady income and reduce interest rate risk.
- Yield-to-maturity: This metric shows the total return if the bond is held until maturity. Don’t forget to account for taxes - municipal bonds, for instance, may offer lower yields but could provide better after-tax returns depending on your tax bracket.
- Diversification: Avoid putting all your money into a single type of bond or issuer. Spread your risk across various sectors, credit qualities, and maturities.
- Expense ratios: Pay close attention to fees, especially for bond funds. Since fixed-income returns are often lower than stock returns, high fees can eat into your gains. ETFs typically come with lower costs and greater transparency compared to mutual funds.
- Call provisions: Some bonds allow issuers to redeem them early, which could disrupt your income plans. If this happens, you might be forced to reinvest at lower rates.
Lastly, make it a habit to review your portfolio regularly. This ensures your investments align with changing market conditions and your personal financial goals.
Steadfast Equity's Ethical Fixed-Income Options
When you look at how banks often prioritize their own profits over their clients’ best interests, it’s worth asking: what does a more transparent approach to fixed-income investing look like? That’s where Steadfast Equity stands apart. Instead of focusing on products that primarily benefit the institution, this firm emphasizes creating real value for its investors. Let’s break down how their approach differs.
Steadfast Equity's Transparent Investment Strategy
Steadfast Equity takes a straightforward, no-nonsense approach to fixed-income investing. Unlike banks that often hide fees in complicated structures, Steadfast Equity operates under SEC Regulation D 506(c), a regulatory framework trusted by some of the largest firms in the industry. With over $800 million in assets and less than $200 million in liabilities, the firm’s financial strength provides a solid foundation.
"When we issue a bond at 12%, you earn 12% - contractually. It doesn't matter if markets crash or the headlines turn red - you get paid what we said you'd get paid. No hedging, no disclaimers, no guesswork."
The firm focuses on high-yield, short-term private credit investments, including royalty streams, secured advances, and receivable portfolios. With a perfect track record of on-time payments and fixed-term bonds that avoid early liquidations, Steadfast Equity offers the kind of predictability that traditional bank products often lack.
Comparing Bank Bonds with Steadfast Equity Bonds
Here’s a side-by-side look at how traditional bank bonds stack up against Steadfast Equity’s offerings:
Feature | Traditional Bank Bonds | Steadfast Equity Bonds |
Yield Range | 2-5% APY (savings/CDs) | 10-19.7% APY (various terms) |
Minimum Investment | $500-$1,000 | $50,000 (accredited investors) |
Return Certainty | FDIC-insured but low returns | Contractually fixed returns |
Investment Access | Limited to bank products | Private credit opportunities |
Fee Structure | Often hidden in spreads | Transparent, no hidden fees |
Regulatory Constraints | Restrictive portfolio limits | SEC Regulation D 506(c) flexibility |
Banks are bound by regulations that limit their ability to pursue higher-yield opportunities. Steadfast Equity, on the other hand, offers DualYield™ Bonds with a total annual yield of 19.7%. These bonds combine monthly income with compounded growth, offering a more dynamic alternative for investors.
"As a bondholder, your returns are not dependent on company performance - they are contractually defined. You receive fixed interest payments and principal repayment, regardless of market conditions. Your primary concern should be credit risk, which is why our strong financial position is the key factor to consider."
Steadfast Equity’s bond options are designed to cater to various time horizons, with yields ranging from 12.5% APY for 1-year terms to 16.5% APY for 12-year terms. Most investors start with $200,000 to access features like DualYield bonds, principal bonuses, and additional yield benefits. This approach marks a clear departure from the traditional banking model, where returns can fluctuate at the institution’s discretion. Instead, Steadfast Equity locks in terms from day one, ensuring transparency and a focus on the investor’s needs.
Conclusion: Taking Control of Your Investment Decisions
The next time your bank promotes its "best-in-class" products, be prepared with the right questions. Taking charge of your financial future starts with understanding what to ask and why it matters.
Begin by looking into how your advisor is compensated. Fee-only advisors earn their income solely from the advice they provide, while fee-based advisors may also receive commissions for selling specific products. This dual compensation model can create potential conflicts of interest.
"A conflict of interest arises when personal or self-serving interests clash with an entity or individual's professional duties or responsibilities, undermining their reliability." – Londra Ademaj
Beyond understanding advisor incentives, it’s crucial to regularly evaluate your portfolio. Use a straightforward tracking tool to review your investments annually, focusing on fees, taxes, and returns. Incorporate transaction costs, taxes, and inflation into your analysis, and compare returns over multiple years to see how your investments perform in varying market conditions.
Another essential step is to expand your research beyond your bank's recommendations. Relying solely on one source can limit your perspective. Instead, consult independent outlets, research reports, and foundational books like by Benjamin Graham. Academic studies can also provide valuable insights, offering a broader and more impartial view. This approach ensures your analysis remains unbiased and not influenced by the agendas of financial institutions.
Transparency and full disclosure are critical when managing conflicts of interest. If your bank falls short in these areas, it’s up to you to dig deeper and conduct thorough due diligence.
As Davidson Capital Management emphasizes, continuous education is vital. Whether you're assessing your bank's advice or exploring options like Steadfast Equity's fixed-income strategies, the goal is not to avoid banks but to approach their recommendations with the same scrutiny you would apply to any significant financial decision.
Ultimately, your financial success depends on investments that align with your goals, risk tolerance, and values - not on meeting a bank's quarterly sales targets. By staying informed, asking critical questions, and challenging institutions that claim to have all the answers, you empower yourself to make decisions that truly support your long-term interests.
FAQs
Why do banks usually push their own investment products instead of others?
Banks frequently promote their own investment products because doing so supports their business goals. These proprietary products often bring in higher fees or profits for the bank, which can lead to a conflict of interest. In such cases, the advice you receive might not always be centered on what’s best for your financial needs.
Another reason banks push their own products is the control they have over them, making these offerings easier to market and manage. While these products may work well for some clients, it’s important to assess whether they truly align with your financial goals. Taking the time to explore and compare other options can empower you to make decisions that better serve your interests.
How can I make sure my bank's investment advice is truly in my best interest?
To ensure you're getting impartial investment advice from your bank, start by asking if your advisor is a fiduciary - someone legally obligated to prioritize your best interests. Also, request a clear breakdown of any fees, commissions, or incentives tied to the products they suggest.
It’s smart to cross-check the bank’s recommendations with independent resources, like certified financial planners or reputable online tools, to confirm they align with your financial objectives. Make sure to verify your advisor’s qualifications and check if they’re registered with the relevant regulatory agencies. Staying informed and asking the right questions can help you make well-informed and confident investment choices.
How can I evaluate the fees and performance of bank mutual funds compared to ETFs?
To weigh the differences between bank mutual funds and ETFs, start by examining their expense ratios. ETFs typically come with lower expense ratios, often falling between , whereas mutual funds can climb to 2% or even higher. Over time, these lower fees can make a noticeable difference in your overall returns.
Next up is tax efficiency. Thanks to their unique structure, ETFs tend to be more tax-efficient, reducing the likelihood of capital gains distributions. Mutual funds, especially those that are actively managed, often trigger more taxable events, which could impact your after-tax returns.
Lastly, take a close look at their performance history. Analyze how each has performed over various time periods, factoring in market conditions and your personal financial goals. While past performance doesn’t promise future success, it can offer valuable clues about how well a particular investment might fit your risk tolerance and long-term objectives. By carefully assessing these aspects, you'll be better equipped to choose the option that aligns with your financial priorities.
