Financial advice from a bank is never ‘free’

With deposit rates on the floor, and markets continuing to rocket – the S&P 500 is up 13 per cent so far this year – it’s no surprise that disgruntled savers are wondering how they can earn more.

Given this potential risk appetite, as well as the wealth of savings built up over the pandemic, it’s also no surprise perhaps that the banks are eyeing the potential to step up their sales of investment products.

More than €16 billion alone was saved over the past year, while overall Irish deposit levels are at record highs, at some €128 billion, according to latest figures from the Central Bank of Ireland.

And much of this isn't even earning derisory sums on deposit – it's languishing in current accounts. Figures from AIB show that current account balances jumped by 24 per cent in 2020 to €32 billion.

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Not only that, but billions on deposit may be forced to find a new home in the coming months and years, given the uncertainty around Ulster Bank and KBC Bank.

Stepping into this breach are retail banks, eager to ramp up their income by targeting savers turned investors.

Banks target investors

KBC Bank (whether or not it gets to reap the rewards of this venture remains to be seen) launched a mobile app last month, allowing you to invest from as little as €10 a month in a range of six funds.

Bank of Ireland, meanwhile, is hosting a series of webinars aimed at helping both experienced and first-time investors, make the most of their money, while AIB is understood to be in advanced talks about a potential joint venture with Irish Life, in an effort to fill "product gaps" in the bank's arsenal – a gap that includes investments.

While an offering from a bank may be just what your personal investment strategy calls for, it’s worth understanding how the service works before leaping in.

Limited choice

Most banks act as intermediaries or brokers for investment products – in other words they don’t “make” the funds themselves, rather they sell them on behalf of other investment managers.

Typically, they will only offer a limited range of products, often from just the one provider.

Bank of Ireland, for example, is a tied agent of New Ireland, which means that the “vast majority” of the investment products it offers, the bank says, comes from its subsidiary.

Similarly, AIB offers products from Irish Life, such as its MAPS range of funds, as does Permanent TSB, Ulster Bank and EBS.

KBC Bank is a tied agent of Irish Life for its insurance products, but distributes investment products from KBC Asset Management, an affiliate within the Belgian financial services group.

If you opt for a bank for your investment advice, you’ll be limited to a small pool of asset managers – just three across the whole market, and just one from your bank.

“Free” advice

You might think that arranging a financial review with your local bank to consider such investments won’t cost you.

In one sense this is true. You won’t have to get out your cheque book (if you still have one) or swipe your card for your session with a bank advisor, but that doesn’t mean it is free either.

If AIB is selling Irish Life’s products, it’s doing so for a reason – to boost its income. And one of the ways it does this is by earning commission on all products sold by one of its financial advisors.

It’s a similar case with Bank of Ireland. As distributor of New Ireland products, it earns commission. And these figures can be hefty.

Thankfully, at least it’s now easy to find out just how much.

Under Central Bank rules, intermediaries are required to display all fees, commissions, rewards and remuneration they receive from product providers in return for the sale of products, or the services they provide, to consumers.

So before handing your money over, you can check out these commission summaries online. Many of the figures represent the maximum commission paid out, but they can be a useful guide.

Bank of Ireland, for example, receives an up-front commission from New Ireland of up to 22 per cent of the first year’s premiums on each regular pension or PRSA product it sells, while for a single premium investment product, it receives 3.5 per cent up-front.

It’s a similar story with the other banks. Irish Life pays Ulster Bank initial commission of 14 per cent on its savings products, or 3.2 per cent on investment bonds. And EBS gets 5.2 per cent on investments, or up to 25 per cent on pensions, while AIB gets up to 20 per cent on pensions and up to 3.25 per cent on investments from Irish Life. Not only that, but “trail” or annual commissions can also apply.

This means a €100,000 lump sum could earn a bank up to about €5,000 in commission up front, while other incentives could apply over the following years. This money has to come from somewhere and it’s most likely you.

How you pay

Customers will typically pay for the commission-based distribution and advice structure through higher charges and fees on their investments, or allocation charges, whereby just a certain percentage of your money is actually invested.

For example, EBS Choice investors will pay an annual fee of 1.65 per cent on Irish Life’s indexed world equity fund.

It’s a hefty charge for a passive fund, given that it tracks the FTSE World Index – and there is a Vanguard exchange-traded fund that does just this for an annual charge of just 0.22 per cent. So annual fees of €1,650 versus €220 on a €100,000 investment.

Early withdrawal fees are also common. If you withdraw your funds early from an investment policy purchased from AIB, you’ll have to pay an early withdrawal fee, of as much as 5 per cent of your investment. So €500 on a €10,000 investment.

As with most things in life, when it comes to receiving financial advice there’s no such thing as a free lunch. Even if it does take place over Zoom.