Yesterday we covered some of the basics of banking. Now we will go deeper to explain how banks make money today.
The new trend in banking is fees. Instead of making profits on the spread we discussed previously, the profit is generated in fees. You know them, Loan fees, overdraft fees, NSF fees, maintenance fees, etc. Those fees are my big beef with banks, but that is for another day.
There are good fees too. Banks have evolved into financial service powerhouses. Outside of traditional loans and deposits there are many other services a bank offers. My bank offers: insurance, financial planning, estate & trust planning, retirement, tax preparation, and investments for the consumer. Its beneficial to have all of these under one roof. With my hypothetical company from yesterday, the bank can help me write a business model, find private funding, or fund it themselves. If I desired to become a publicly traded company, they can help with that too.
Most of the larger banks have specialized teams targeted to certain markets. We have teams divided based on the amount of money you want to keep with us. We have teams that cater to lawyers, another for doctors, and my personal favorite are the teams for the super wealthy and celebrities. Part of my job is to monitor the accounts of these specialized groups, and its fun to see the money a certain politician or celebrity is keeping with us. The level of sucking up our bankers put themselves through is sometimes shocking. One such banker has flown across the country to feed the dogs of his client while they were in Europe. Here’s a job I wouldn’t want, personal banker to the executives of my own bank. Don’t want to lose those clients!
There are many out there that appreciate the level of service provided to them at banks. And they may be willing to pay the sometimes ludicrous fees charged to them for this convenience. However, unless you need stash $10 million or more, they don’t offer anything that can’t be done yourself. A savings account with a $5 million balance doesn’t offer better rates than ING Direct does. When it comes to investments, stay away from the banks. Stick with a fee only financial planner, the bank will take 2% off the top before you even get started. The ongoing fees are upwards of 3%, and many can be hidden with ease. A fee only planner will only charge about 1% every year. What’s 1% of $10 million vs 3%?
Wrap up – banks have grown to offer a full range of financial services. If you are like me, and have to work for a living, you are better off using the banks for just the basics. Go elsewhere for your other needs. Thanks for reading.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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