Here is a new article by CBC considering some of the aggressive sales tactics of big Banks in Canada, and how they may be giving skewed advice that benefits themselves but hurts their clients!
I like the fact that some of the branch managers are finally starting to speak up about what banks want out of their customers and how they make money. Most of us in the financial industry have always known that banks make a large part of their profits by giving out more and more loans to clients. What the public often believes, is that ‘the bank is trustworthy and has their best interest in mind’, but this may not always be the case. I think its very important to understand how any business makes money and how they get paid and “what is in it for them” if you take their advice.
SO the next time you go into the bank and someone says “great news, you are up for an increase in your line of credit”, please remember that they are giving you this information so that they can make a “sale”. If you take on more debt, they make more profit; they make money off their products, so that is why they recommend more credit cards for you or other credit products. They are simply looking to maximize the profit off every client as this article points out.
Maximizing profit is not in itself wrong, but its only a problem when in making a profit a company gives a consumer advice that will hurt them in the long run. What the public does not understand is that in general, the bank is making this recommendation because it will “help the bank”.
In our opinion it is always a bad idea to take on more debt for “a rainy day” or simply because you can. We feel a person should only take on more debt if it is specifically for a purchase of an asset that you can afford such as a house or business or other. The best type of debt is borrowing money for something that can put money in your pocket once its paid off (business or rental property for example), not consumer debt for buying consumer goods or experiences.
It takes much longer to pay off a credit card debt than people estimate, so please think twice before taking on more debt, even when the bank offers it to you. It may make you feel good that you are “doing so well” with your credit that the bank wants to up your limit, but remember, they want to up your limit so that you pay them more in interest. This is simple banking basics, but most people have not thought about.
Please understand I am not anti-bank, and in fact I quite like my banker and his advice has been great. I also have friends in the Banking industry and they understand the balance of offering advice that helps people while still trying to meet their own targets. But my friend and my banker are well balanced in their approach, and they are not one of the types of bankers to push unhelpful products to meet targets like the ones mentioned in this CBC article.
Now, I need to make sure I don’t paint all bankers with the same brush here and assume that everything the bank offers is bad. I am not saying that at all. I feel our banks are quite good in Canada, they are stable and have many good products that can help people be more productive and efficient. BUT, what I really want people to understand is that a bank is a business, and it is looking to make profit just like any business, and the advice they give sometimes may be skewed to what gives them the most profit, not what gives you the most financial security. It is simply a matter of being an informed consumer and understanding who wants what, and why, and what they get paid. So remember, banks make money off you carrying more debt; don’t forget it!
And for the record, since you might be thinking the question “well how does 4 Pillars make money”, I will tell you. We do make money like all services in the debt industry, there is no free series in the debt industry that I am aware of. So yes, we have a fee, but our fee is based on the services we provide not the products we sell and the results we are able to achieve in clients overall savings. We are in a way like hiring a great accountant, if they cost a bit of money, but the services are able to save you money in the long run, then they are worth it. Then did not have any ‘net cost’ to their fee even though they did do work and did get paid for the work.
I just thought I would fully disclose that we make money and how we make money since were on the topic. And we always recommend for people only what will benefit them the most and will go as far as turning down business for ourselves if we feel it is not the right program for a situation.
What I love the most about working in this field, is being able to help people reduce their debt, and turn their financial lives around for good.
Update: CBC has posted a new article on March 15th 2017 noting that all of the banks do this, not just TD. Check it out here!
For a free quote on what we can do to help you out of debt and the costs/savings of the process please contact us.