Navigating the Banking Landscape: A Guide for Canadians

In light of the recent story by CBC’s Marketplace (video, article) about the pressures bank employees face to meet sales targets, Canadians must become more vigilant when navigating financial products and services. I offer the following suggestions to help you protect your interests and ensure that the financial advice you receive is in your best interest.

 

Recommendations for Canadians

Know Your Rights

Familiarize yourself with the Financial Consumer Protection Framework. This framework outlines your rights as a consumer, including an expectation that you be offered products and services that are appropriate for your needs. This framework comes from the Financial Consumer Agency of Canada, which, unfortunately, has a bit of a reputation for toothlessness when it comes to overseeing the sector for which they have responsibility. Nevertheless, you may find it worthwhile to read the Framework and even print a copy to give to the person you are dealing with the next time you go to a bank.

 

Ask for Credentials

Ideally, I would like to see every customer-facing advisor with the Qualified Associated Financial Planner® (QAFP®) or Certified Financial Planner® (CFP®) designation. These marks indicate a person who adheres to rigorous standards set out in FP Canada’s Standards of Professional Responsibility. Among other things, these standards require those who hold these designations to always act in their clients’ best interests. Who you are more likely to meet, however, is someone with a licence to sell mutual funds and internal training to sell other products and services. If they have a stronger interest in the investing world, they may hold the Canadian Securities Course, which is a more rigorous exam.

 

Demand Transparency

Request a clear explanation of how your advisor is compensated. Advisors who are compensated through commissions may have incentives to sell certain products. I spent about eight months at a local bank branch. That brief sojourn in the wilderness ended about 16 years ago. At the branch level, income is generally through a combination of salary and incentive bonuses based on volume and dollar value of sales, whether that is “money in” (investing) or “money out” (lending: credit cards, lines of credit, mortgages, etc.). Certain products paid more “SR” (sales revenue) than others. The structure of compensation has no doubt changed in the last many years, but the pressures remain the same, unfortunately. That was just one of the experiences I had that persuaded me to join the small group of “Advice Only” financial planners who are paid only for the advice provided and do not receive compensation based on the sale of a certain product.

 

Seek Second Opinions

Don’t hesitate to get a second opinion from another financial professional, especially for significant investment decisions or complex financial products. Canadians have a reputation for sticking with “their” bank. It’s understandable, too. The banks are among the largest companies in Canada. Of the 15 largest companies in Canada, five are banks, and Royal Bank and TD are ranked number 1 and 2, respectively. These large companies offer a full suite of financial products and services, and they integrate well with each other. For the sake of convenience, it makes sense to work within that single environment. This doesn’t mean, however, that it is in your best interest to do so. Look for an independent advisor, someone not limited to a single “product shelf,” for different options. Mortgages can be found through mortgage brokers and a variety of other sources. You can find GICs with higher rates through a member organization of the Registered Deposit Brokers Association. Online or “discount” brokers can be a good platform for investing, even those from the major banks. They are not permitted to offer investment advice. Positively, that limits at least some of their sales practices. Negatively, you will be solely responsible for making your investment decisions, a daunting prospect for many.

 

Become Informed

Educate yourself on basic financial products and services. The more you know, the less likely you are to be swayed by persuasive sales tactics. This is a tough recommendation, to be sure, because there is so much “out there” that is pure misinformation. Before you watch a video or read a blog post, you may want to check on the credentials of the author. A great resource for the Do-It-Yourself-er (DIYer) is the Canadian Portfolio Manager blog run by Justin Bender. His colleague, Dan Bortolotti, also runs a blog, the Canadian Couch Potato; I highly recommend Bortolotti’s book, Reboot Your Portfolio. Preet Banerjee is another great source of personal finance content. The Ontario Securities Commission runs a website called Get Smarter About Money with valuable information on a wide variety of financial topics. And lastly, for now, I would suggest you look over the members of the Financial Planning Association of Canada (FPAC). Many of them (including yours truly) provide blog posts, podcasts, and/or YouTube videos on a wide range of financial planning topics. Readers may also be interested to know that membership in FPAC requires signing onto a “Fiduciary Pledge.”

 

Is it Necessary?

Always ask why a recommended product is suitable for your financial goals. I can’t tell you the number of times I have received an email or in-person recommendation to open a line of credit or accept an invitation to transfer the balance from one credit card to another. The worst offer, in my opinion, is credit card balance insurance. If the offer or recommendation doesn’t align with your objectives, “just say no.” Occasionally, the recommendation may have value; nevertheless, I think the wise choice is to decide in advance that you will not accept anything without taking a day or two, perhaps a week or a month or more, to consider whether it has value for you. Often salespeople (in general) are trying to impress upon you the urgency of deciding at that moment to purchase a product or service. Walk away. If it didn’t feel urgent to you before, it’s certainly not urgent for you now.

 

Review

I don’t think this is something you should do too often. The tendency we humans have when we review our financial assets, and the associated products and services, is to make a change in the hopes of improving our situation. I regularly remind myself of the analogy that an investment portfolio is like a bar of soap. The more you touch it, the smaller it is likely to get. To be sure, reviews are important. If you have a well-thought-out financial plan and you have an appropriate mix of financial products and services, you may only need to do an annual review. If you are meeting your goals, then the appropriate thing for your advisor to say is, “Stay the course,” not, “I have this great structured note for you that will give you the potential for stock-like returns with no downside.”

 

Report

If you feel pressured or misled, report the incident to the bank’s internal complaint department. If not resolved, escalate to the Ombudsman for Banking Services and Investments.

 

These recommendations, potentially among others, can help you better manage your engagement with banking staff and protect yourself from harmful sales practices.

 

Recommendations for Regulators

Far be it from me to think that I will have any influence over the regulators of the banks; even the regulators don’t have much influence over the banks. (See regulatory capture.) Nevertheless, here are a few ideas to consider.

 

Enhanced Transparency

Banks should be required to provide more detailed disclosures about the terms and costs associated with their products and services. In fact, they often do this, but the terms are often so lengthy and burdened with jargon that it is difficult for the average consumer of financial services to know what is written. Brief plain-language versions of documents need to be provided.

 

Strengthened Whistleblower Protections

Whatever whistleblower programs are in place are inadequate given the story told by Marketplace. Allowing the Canadian Bankers Association to get away with a statement that dismisses these findings as “not reflect[ing] the experience [of] millions of Canadians” is to reward ongoing bad behaviour. For something as important as Canadians’ financial lives, a caveat emptor standard cannot be considered adequate. Bankers will say that they operate in a highly regulated environment, and I agree that is true. But are the regulations – and more importantly, the enforcement of the regulations – fit for the task?

 

Employee Compensation Structures

Review and regulate how banks compensate their employees to eliminate incentives that prioritize sales over the best interests of customers. Bonuses tied to sales as measured by volume and dollar value cannot do this, especially when up the management chain, the same incentives are in place. Other incentives need to be developed.

 

Conflicts of Interest

This is closely related to compensation structures. Regulators need to prohibit the sale of products and services that result in a conflict of interest. This prohibition exists for portfolio managers who have discretionary control over the investments of their clients. Why not simply extend this prohibition to the rest of the financial sector? Profits and the best interests of consumers can co-exist.

 

Replace the “Suitability Standard”

Financial advisors need to meet a suitability standard when they offer a product to a customer. Suitability is inadequate because, while it may fit the customer’s needs, it may not be the best option available. For example, it has long been found that there is a clear relationship between fees and [mutual fund] performance. On average, the higher the fee, the lower the returns. This is not to diminish the value of advice, but advice is only of value when it is good. When a bank financial advisor is rewarded more for recommending higher-cost Fund A over lower-cost Fund B, even though Fund B has been the consistently better performer, an objective assessment has to conclude that the suitability being determined is not that of the customer but of the advisor. Suitability is simply not an adequate standard.

 

Consumer Education?

While I support consumer education, many (most?) Canadians rely on their financial institutions for guidance. Despite my recommendations for Canadians earlier in this post, I do not think regulators should be in the business of admonishing consumers to become more educated. Rather, they should be providing strict oversight over the banks that offer financial services to the Canadian public.

 

The Ethical Bank Advisor

I want banks and their employees to thrive. They provide an essential service easily accessible to the broad public. However, the culture operating in these institutions must evolve. Advisors should be supported by their employers to prioritize the best interests of their clients. It is time for Canadians to consistently encounter the level of trustworthiness they expect and deserve in every financial interaction. As we move forward, let’s work toward a banking environment where ethical guidance is not just encouraged but ingrained in every aspect of service.

 

This is the 240th blog post for Russ Writes, first published on 2024-03-25

 

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.