Is your bank involved in questionable selling practices? Last year’s bombshell involving Wells Fargo – that its employees opened more than two million accounts without their customers’ consent in order to accrue bonuses – looked like it might be an inflection point for the banking industry, which has become accustomed to cross selling products. (For more, see What Advisors Need to Know About Cross-Selling.)
Questionable Selling Practices Involve Conflicts of Interest
But there’s already evidence that ridding the sector of such conflicts of interest may be easier said than done. This month Bloomberg reported that salespeople in the private banking unit of JPMorgan Chase & Co. have been aggressively pushing the bank’s own financial products, even when they may not be the best option available for the client. Several former employees of the firm told the news outlet that it was virtually impossible to reach sales targets if they didn’t sell funds that generated outsized fees for the bank. Their only option, they said, was to steer customers toward in-house investments or ones from partner firms that had a fee-sharing arrangement with the bank.
The allegations are the latest embarrassment for JPMorgan – which, in December 2015, was ordered to pay federal regulators $307 million due to improper practices in its asset-management operation. In that case the company failed to notify investors that it favored its own proprietary funds over those of competitors.
Questions Over Cross-Selling
These latest claims underscore the pressure that employees are sometimes under to hawk more-expensive products, even though they may not make the most sense for the customer. And they serve as a reminder that affluent consumers can be victims, too.
At a time when most major banks offer a wide menu of services, including asset-management services and mutual funds, there’s often an accompanying push to cross-sell products. The appeal of such a strategy is especially strong at JPMorgan, which, according to Morningstar, owns a family of funds with roughly $269 billion under management. That makes its mutual fund holding by far the biggest of any U.S.-based bank.
The company has argued that it discloses to its customers that its advisors favor proprietary products. And there are those that argue that cross-selling is perfectly within the rights of a bank, which is, after all, in the business of generating profits.
Regulators, however, are increasingly suspicious. There are reports that as far back as 2012 the Office of the Comptroller of the Currency cautioned JP Morgan that the practice could be at odds with its fiduciary requirement to select investments that are in the best interests of its clients. And in the wake of the Wells Fargo scandal, the Financial Industry Regulatory Authority launched an industry-wide investigation of broker-dealer cross-selling programs. (For more, see FINRA Examining Cross-Selling Among Broker Dealers.)
How to Avoid Over-Priced Products
The reality is that it can be hard for consumers to do much about banks that have pushed them into ill-fitting products. Banks often proactively safeguard themselves against civil actions by disclosing them in the fine print of a contract. In the case of Wells Fargo, customers unwittingly signed agreements that forced them to handle disputes through arbitration rather than the courts. So when it comes to financial products, it’s largely “buyer beware.” Consumers should be especially mindful of potential pitfalls when dealing with private banks.
While some like the convenience of these exclusive banks – which handle everything from savings accounts to investment and trust services – it’s hard to avoid the inherent conflicts of interest. What’s more, corporate policies may prevent your personal banker from choosing outside financial products, even if you ask him or her to do so.
As the Wells Fargo incident demonstrates, traditional banks also can have perils. The Consumer Financial Protection Bureau offers the following tips for making sure you don’t fall prey to over-aggressive sales tactics:
- Banks frequently offer credit cards and other products to their existing account holders. Make sure you ask the same questions, whether you actually seek out the product or not. Don’t sign up unless you understand what the features are and how much it’ll cost.
- If you’re offered a product that carries a fee, ask if it’s a one-time charge or a recurring fee that you’ll have to pay every month or every year.
- Ask what’s included in the base price and which features or services you have to pay extra for. Inquire whether the price will change later, as is the case with teaser interest rates.
- Be careful about agreeing to automatic renewal. If you end up not needing the service and forget to cancel, you’ll incur a fee anyway.
- When bankers pressure the customer, it’s usually a red flag. If you’re told the deal is only available for a short time, you should probably say “no.”
The Bottom Line
While Wells Fargo has taken a number of steps to rectify its former sales practices, consumers shouldn’t be lulled into a false sense of security there or at any bank. Employees are likely still under a lot of pressure to bring in additional revenue, and that might come from selling you expensive in-house products. Scrutinize carefully anything you are offered and compare it to other products on the market before you sign up.