What I Heard From a Banker at A Private Resort
“It’s been a great summer so far!” said Dan as we watched our kids slide down the water slide last week. Dan and I had just met after our kids struck up a friendship by the pool.
“My clients’ schedules have been light, which gives me a chance to fly around the country and meet with them. And with the market hitting new highs, it’s easy to convince them to put more money in their accounts.”
“Aren’t you worried that they’ll invest too much now, and get hurt by a market pullback?” I asked him.
“Well, as long as my commission checks keep rolling in, I’m not worried about anything! Am I right??” Dan laughed as his 7-year-old emerged at the bottom of the slide and splashed into the resort pool.
I couldn’t have disagreed more…
Last week, I took a family vacation to Sea Island, Georgia.
Every year, my father-in-law rents a house on this small resort island, and invites his three kids and their families to drive down for a week. Imagine spending a week in a beach house with 14 children (all cousins) running around.
We had a great time, although there were definitely some chaotic moments.
Sea Island is unique because it is a vacation spot for many professionals in the banking and investing industry. My father-in-law is a financial advisor for Merrill Lynch, and has been vacationing at Sea Island for a few decades now.
I always enjoy the time there. Not just because of the swanky amenities. But more so because of the conversations I get to have with many of the brokers and advisors who are also vacationing there.
It seems that at the beach with their families, these professionals let their guard down a bit more. Which gives me a chance to see a better picture of what is really happening behind the scenes in the financial industry.
And right now, what’s happening is that business is booming!!
A Strong Environment for Investment Banks
The unanimous story from the investment advisors I spoke with last week was that business is not just good… it’s exceptionally good.
That’s largely because the U.S. stock market is trading higher. And the higher the market moves, the more confidence the investment bank’s customers have.
When investors are more confident, they’re willing to put a larger portion of their capital into the stock market. And that leads to larger fees and commissions for the big U.S. banks.
Keep in mind, most of these customers will be steered toward mutual funds and investment programs that are managed by the investment banks. So the fees and commissions keep adding up (and paying for bankers to take their families to Sea Island).
On top of the strong market, there are other factors that are helping to boost profits for these investment banks.
First, the Fed has begun raising interest rates. When this happens, banks enjoy wider profit margins on their loans because they can still borrow very cheaply and lend to customers at higher rates. Also, with the economy continuing to grow, more companies are comfortable borrowing large amounts of money for new projects, giving the banks more profit along the way.
I don’t expect rates to advance too much higher. The Fed simply has too many reasons to keep rates low. But for now, the prospect of higher rates is adding to bank profits.
Perhaps the biggest opportunity for the major investment banks is the prospect for reduced regulation under the Trump Administration.
We’ve talked a bit about the “Financial Choice Act” which was passed by the U.S. House a few weeks ago. This bill sets the stage for banks to put more of their capital to work (instead of holding large cash balances), it reduces the costly regulations that banks must conform to, and it allows big banks to invest their own capital — potentially driving stocks even higher as banks invest in new opportunities.
In short, this is a great time for big banks and the advisors who work for them.
But as an individual investor, you need to keep your guard up!
Never Trust a Banker, But Invest in Bank Stocks
I won’t mince words…
My conversation with Dan left me completely disgusted by the way the financial advisor relationship works.
Essentially, customers (individual investors like you and me) come to the financial advisors for help investing for retirement. But instead of getting sound advice, these customers are steered toward whatever products make the most money for the financial institutions.
Advisors simply take investor money, and put it into an assortment of funds or programs managed by the advisors’ firm. The advisor charges his customer a fee for his “expertise” in picking out the funds. (When for all intents and purposes, he’s just passing your money onto a computer that divvies up your assets into a bunch of different funds.)
It’s not enough to charge you a direct fee for “advising” you. The bank then charges commissions and additional management fees on the funds that your advisor puts you in. Some of these fees may be disclosed. But most of them will be hidden in the fine print and it would take a lawyer weeks to figure out exactly how much you’re paying.
Bottom line: Don’t trust the banks or some financial advisor with your retirement.
If you do, you’ll likely pay way too much. You may or may not even see how much you’re paying. And the chances of you getting great advice that is tailored to your own situation is slim to none.
With that said, now is a great time to invest in these profitable businesses. You just want to use your own discount brokerage account instead of trusting an advisor with your money.
I recommend buying shares of four big investment banks today… before new financial regulations are signed into law and these stocks move even higher.
Here are the four banking stocks I’ve got on my radar right now:
- Morgan Stanley (MS)
- Bank of America (BAC)
- Goldman Sachs (GS)
- JPMorgan Chase (JPM)
All four of these banks are in great shape to profit from investors allocating more capital in the current bull market. All four will benefit from lighter regulations which will likely be signed into law this year. And all four pay a dividend (which should increase once new regulations allow banks to hold less capital and pay more to investors.)
You don’t have to like the banking industry or the “professionals” who work there. But there’s no reason you can’t grow your retirement as these companies profit from the current environment.
Here’s to growing and protecting your wealth!
Editor, The Daily Edge