My mother recently moved to the tiny Forest Hill neighbourhood of Toronto. Her new apartment features a splendid, unobstructed view over a tree-lined ravine of the downtown core, with – on clear days – Lake Ontario glistening behind. As in other cities around the world, many of the most prominent towers to populate the skyline are owned by banks.
There is the cluster of buildings in the TD Centre, designed by Mies van der Rohe – the Royal Bank Plaza – whose glass windows are insulated for heat with a thin coating of 24-carat gold; Scotia Plaza, which incorporates the historic Beaux-Arts Bank of Nova Scotia Building, and BMO’s 72-floor First Canadian Place (the name references the fact that the Bank of Montreal was the first Canadian bank), which is topped in height only by the iconic CN Tower.
Just as banks dominate the financial world, so they dominate in terms of real estate. They are the big-box retailers of the money world – with the difference that their boxes are piled high in the sky rather than along the sides of suburban roads. But just as the popularity of big box stores has fallen away with the take up of online shopping, so banks may be vulnerable to new forms of competition.
The comparison was brought home to me when my mother checked into the new local branch of her bank. She had recently sold her previous condominium, and mentioned that she would be expecting a large deposit. She was put in touch with an advisor who arranged an appointment to discuss what should be done with the funds. My mother asked me to attend, but on the day I had to cancel so she went alone. Two people from the bank sat down with her and told her she should immediately deposit the money, not into cash as planned, but into a ‘low volatility’ mutual fund, which they said was very safe. It also happened to carry a management expense ratio of 1.85 percent (a number of reports have shown that Canadian mutual funds are the most expensive in the world, prompting an F grade from Morningstar).
Just as banks dominate the financial world, so they dominate in terms of
My mother, who had been with her bank since 1961, mentioned a couple of times that she was a client of the bank’s private banking wing, but they didn’t seem interested. So, under some sales pressure, she took their advice and put the money into the very safe fund, which (this being the end of 2015) promptly plummeted in value.
After the holidays, we met with the private bank and asked that the transaction be ‘undone’ as much as possible. I argued that it was a clear case of misselling, since the branch office knew that, as a private banking client, she could use their service to obtain a tailored investment that properly reflected her aims at a much lower price.
As a first step the fund was transferred to the private banking division – a process that took more than two weeks, apparently because it involved two back offices and was harder than transferring assets to Ethiopia. Meanwhile, I wrote to the branch manager to ask for details about the commission structure for the mutual fund they had sold to my mother and asked for it to be returned as compensation. There was no response to that, or a follow up (late, breaking news: after some months, just before going to press, my mother was told she will be reimbursed in full. Banks can be great!).
Back to the future
Of course, in the scale of bank misselling episodes, this one is low on the list. In the UK alone, banks have brought more scandals than the Clintons and Kardashians combined. The ‘endowment mortgage’ scandal and the ‘payment protection insurance’ scandal come to mind, not to mention the giant banking scandal known as the ‘Great Financial Crisis’. But it does show, once again, the difference between banks and normal businesses – and the potentially precarious nature of their standing.
Most businesses that are concerned about retaining customers would be more careful to treat them in a fair and transparent manner, especially if significant amounts of money were at stake. Banks have been largely immune to such pressures, especially in countries such as Canada where they function as an oligopoly with a handful of big players and high barriers of entry to new firms. As Neil Gross from the Canadian Foundation for Advancement of Investment Rights noted, after a similar case of misselling mutual funds resulted in the return of $50,000 to two Ontario seniors, new standards are needed “to ensure that everything the financial planner does is done in the best interest of the client. And not for the purpose of selling products”.
The bank’s approach reminded me of how it used to be when you went shopping for electronics in Canada. One of the most popular big-box retailers was called Future Shop. As soon as you stepped inside sales people would attach themselves to you, help you find whatever you were looking for, and then, before you completed the purchase, launch into an elaborate pitch for an insurance policy that would replace your TV or whatever in case it mysteriously blew up or stopped working.
The exact sales pitch would vary from person to person, as if each had been encouraged to explore their creativity, but what they never mentioned was that a substantial fraction of their pay came from commission on the insurance policy.
It turned out that the once-dominant Future Shop didn’t have much of a future, and the remaining stores were closed last year. The reason of course is that people now prefer to order their electronics online. Any benefit from sales advice was offset both by the extra cost, and by the hassle of having things foisted on you that you didn’t want, such as expensive insurance (which rarely makes sense except for inherently risky things like cars or healthcare).
As people become increasingly comfortable with robo-advisors or purchasing low-cost ETFs themselves over the internet, and fintech firms provide a more rapid and responsive service, traditional bank branches may find their once-unassailable position under serious threat (selling overpriced funds to seniors is not a sustainable business model when even the seniors have iPhones). Unless they pay attention, they may be the Future Shop of the future.