Earning interest on loans and charging fees for things such as overdrafts aren’t the only way that banks make money. Many of them offer to serve as your broker or investment house as well.
However, money expert Clark Howard does not recommend investing with a bank.
“Something that I have discouraged you from doing is never, never, never — not ever — do any investing with the investment side of a bank,” Clark says.
Outside of your specific investment choices, Clark consistently highlights two areas worth prioritizing when it comes to investing: fees and fiduciaries. Banks tend to miss the mark in both areas, which I’ll explain in this article.
I’ll also point out Clark’s favorite places for you to invest if you decide to avoid going through a bank.
Table of Contents
- Fees Crush Your Investment Portfolio Over Time
- What Is Fiduciary Duty and Why Does It Matter?
- Clark’s Favorite Investment Companies
Fees Crush Your Investment Portfolio Over Time
The average savings account pays 0.06% interest as of March 2022. The median account balance in the United States is $5,300. So the average United States bank customer is getting $3.18 in interest per year.
Now let’s say that instead of $5,300, you have $200,000 in your account. And instead of 0.06% interest, you’re getting 1.5% interest. Now your bank is paying you $3,000 in interest a year instead of $3.18. That’s a big difference, right?
For some reason, when we’re talking about fees instead of interest, many of us have a tendency to pay far less attention to those types of differences — especially if our investments are appreciating in value. However, the fees you pay on your investment portfolio can have a far greater impact than the interest rate in your savings account.
Banks, especially the Big Four, have a reputation for drowning everyday customers in an array of fees. It’s one of the financial realities that get Clark upset. It’s not a surprise that these same companies pick at your money like birds at a birdfeeder when you invest through them.
“The investment products typically sold by the investment arms of banks are sold at extremely high fees,” Clark says.
The Math: How Much Can High Fees Cost You?
There are so many differences in costs depending on how you’re investing (on your own, through a robo-advisor or through a financial advisor). So it would be difficult to cite every example in which a bank’s investment fees look exorbitant versus the other options in the marketplace.
But as a quick example, let’s take a 30-year-old with $100,000 to invest. Let’s say this person adds $25,000 to their portfolio per year for 30 years with an annual ROI of 7%.
The difference between 0.25% and 1% in fees for this hypothetical investor is $450,572.12.
|Annual Investment*||Years||Annual ROI||Expenses||Total Fees||Net Value|
If you’re Clark, you celebrate saving a few dollars on laundry detergent. But not everyone is going to comparison shop and revel in the chase to save $10 here or there.
However, comparison shopping is definitely worth doing to decide where and how you will invest. Instead of wasting $10, you could be wasting hundreds of thousands of dollars by choosing the wrong investment company.
What Is Fiduciary Duty and Why Does It Matter?
If you hire any type of investment advisor, the most important question you need to ask is whether they’re bound to you by a fiduciary duty.
A fiduciary is a person or legal entity that has the power to act on behalf of someone (often called a “beneficiary”).
Fiduciaries are legally obligated to act in the best interests of their beneficiaries. They must avoid or disclose conflicts of interest. They also must prioritize what’s best for their beneficiaries over their own interests.
Investment or financial advisors that are not fiduciaries can direct you toward choices that benefit them regardless of whether they’re best for you. Banks tend to fit into that category.
“The reality is, the banks overwhelmingly do not take on what’s known as fiduciary duty. Meaning that they will sell you stuff that makes them more money at full detriment to you,” Clark says.
“[Investing through a bank] is the worst of all possible worlds. You’re paying really high fees and you’re not getting somebody who legally is bound to do what’s best for you.”
Clark’s Favorite Investment Companies
So if you should never invest with a bank, where should you invest?
Clark has given the same answer every year: Fidelity, Schwab or Vanguard. Those are his three “children,” as he calls them.
All three are known for extremely low fees. Fidelity has zero-fee index funds, for example. And Vanguard has pushed the boundaries on the cost basis of index funds for many years.
However, Clark has taken Vanguard to task a few times recently for what he perceives as an outdated user experience and declining customer service. He still counts them among his three favorite choices. But Fidelity and Schwab tend to offer more overall products and options beyond inexpensive funds.
If you have any doubts, go back to fees. For trading stocks and ETFs, there are plenty of free options. As far as 401(k) plans, Clark doesn’t want you to pay more than 0.5%. For robo-advisors, you can get great options for less than 0.40%. Looking for a full-blown financial advisor? The typical benchmark is about 1%.
Just remember that Clark says you should never invest with a bank.
The investing and banking spaces are both gigantic. It would be irresponsible to say that there’s not a single investment made through a bank that makes sense.
But in general, it’s a better idea to invest through one of Clark’s favorite investment houses than with one of the big, fee-heavy banks.