In Part 3 of my Are You Financially Literate? series, we’re tackling taking investment advice from a bank teller: Yea or nay?

Here’s the question I posed in my Financial Literacy Quiz:

You go to your bank to resolve an issue with one of your accounts. While you’re there, the teller points out that you have a chunk of money sitting in your savings account not earning much interest. They could help you invest those funds in one of their bank’s GICs (think CDs, for my American readers) or possibly even a mutual fund.

Is that a wise choice for your money? Why or why not?

Rule #1 of Investing

No spontaneous decisions.

In my post on how to get the best deal for your mortgage renewal, I demonstrated that banks are not your friend. Their objective is to make money for their shareholders, which is fine. You just need to keep this in mind when you’re interacting with them and certainly when you’re getting investment advice from them.

Your objective is to a) protect the money you have; b) obtain the best available services for the lowest possible price; and c) grow your money and obtain the best returns you can while honouring your risk profile and financial goals.

When you boil it down to the fundamentals, it’s clear that the bank’s goals are not your goals.

Most tellers are great people who genuinely want to help. However, they are also bank employees with sales quotas. Even if they swear that they have your best interests at heart, the inherent conflict of interest baked into this situation should send up a caution signal for you.

Proceed with caution

If a teller says to you, “Hey, Sally, I see that you’ve had a consistently high balance in your savings account for several months now, and that money isn’t earning much interest. I think we can help you do better. Would you like to explore other options, like GICs and mutual funds?” go ahead and say, “Sure, let’s take a look.”

Look. Explore. Not commit and buy.

Take the info you received at the bank and go home to do some homework. If the investment advisor starts to turn on the heat, looking for you to act immediately, walk away.

Thank them for the information and let them know that you will reach out to them when you have reached a decision.

You are in control and you make decisions on your time.

Don’t let anyone push, pressure, guilt, badger or influence you to buy a financial product before you are 100% satisfied that it represents the right step for you and before you know exactly what you’re buying.

Dotting I’s and Crossing T’s

OK, you’ve received investment advice from the bank. Now, it’s time to do some homework.

If you’re tempted to complain that researching investments is boring, you haven’t a clue where to start, homework is just not your thing, and besides, you don’t have the time, I get it. Many women feel this way.

However, the consequences of avoidance are so significant that I’m going to take a bit of a tough-love approach and share these words from one of my uncles:

“Suck it up, Buttercup.”

My uncle always says it with a smile on his face, which makes it seem so palatable. Still, ouch. Harsh. And worth heeding.

Money is a ridiculously important and powerful tool in your life. You can use it to protect yourself and your family, create stress-reducing options when life happens and, provide opportunities for great joy – more time with family, travel, philanthropy, education and a million other life-enhancing things.

This tool is far too important to leave to chance. You owe it to yourself to spend some time figuring out how to use it in your highest, best interests.

Once you’ve accumulated a surplus of cash in a bank account (yay you!), it’s time to make it work hard for you.

Where to start

Before you invest, take some time to clarify your shorter-term and longer-term financial needs. In other words, what must you do to create a strong financial foundation for your immediate needs?

1. Do you have debt to pay off? There’s no point investing money in an asset that will earn 5% per year when you’re paying 20% in credit card interest.

2. Do you have an Emergency Fund in place?

3. Are there any necessary purchases coming up for which you need to save money, such as a new furnace or car? I call these Planned Spending.

Once you’ve addressed your immediate needs, it’s time to look at longer-term needs. Here’s the good news: You don’t need to have it all figured out before you get started with investing.

The beauty of index funds

The mutual fund industry is a massive money-maker for everyone except investors. Middle men, or financial intermediaries as Jack Bogle calls them, spend a boat-load of marketing money trying to convince you of the following:

• They have the best and brightest people to select top-performing superstars, which will mean better returns for you. You should invest with them.
  • Research says: Not so. Only a tiny fraction (i.e. less than 4%) of managers beat the market and their superior performance isn’t sustained year over year.
• Fees in the 1.5% to 3% range are small; not a big deal at all, certainly not for the benefit you’re gaining.
  • Research says: Fees are a HUGE deal. As little as 1% to 2% can cost you hundreds of thousands of dollars over the decades that your money is invested.

As the late Jack Bogle put it in The Little Book of Common Sense Investing:

Simply put, our fund managers, sitting at the top of the investment food chain, have confiscated an excessive share of the returns delivered by our financial markets. Fund investors, inevitably at the bottom of the food chain, have been left with a shockingly small share. Investors need not have incurred that loss, for they could have easily invested in a simple, very low-cost index fund tracking the S&P 500.

He goes on to say, “Costs make the difference between investment success and investment failure.”

What does John Bogle recommend? Investing in low-cost index funds, where the fund costs are well below 1%.

Warren Buffett, who knows a thing or two about investing, has said the following regarding his estate: “My advice to the trustee [of my wife’s inheritance] could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

Avoiding Analysis Paralysis

If you’re beginning to feel tense because you you’ve never invested before, stop for a moment and breathe.

The last thing I want you to do is to become paralyzed into inaction because of overwhelm. Start by finding a low-cost index fund, as Buffett and Bogle suggest, while you work on fleshing out the details of your investment strategy.

You can add more sophistication and breadth as you learn, but just get started. Bogle’s company, Vanguard, offers a number of terrific, low-cost funds.

Evaluating Investment Advice

Investing decisions shouldn’t be made impulsively; certainly not while chatting with a bank teller. By all means, gather information when it’s offered, but don’t commit to buying anything until you’ve had a chance to do your own homework.

A good rule of thumb is to ask, “What’s in it for them?”

Is the teller working under sales quotas?

What’s the benefit for the bank?

If the advice is coming from a financial advisor, what do they stand to gain? Do they earn a commission off the product they’re recommending? If so, there’s a built-in bias; you need to be aware of that. Anyone who tells you they’re not swayed by bias is, well, biased.

Don’t believe me? Pick up any book touching on behavioral economics. Dan Ariely is one of my favourite authors in this field. Then tell me if you still think they (and we) aren’t biased.

The bottom line in all this is that you need to do your homework. The recommendations from the teller might be good. I benefited from a teller’s suggestion to park some of our corporate funds into a GIC. I had plans for those funds, but I realized that nothing was going to happen for the better part of one year, so I invested them for that period.

After considering all the facts, I determined that the suggestion was a good one.

In another exchange, a teller told me that I would do well to invest some of my money into their “excellent mutual funds”. I smiled, thank him for his suggestion and declined. Now you know why.

How to Invest

If you’re still feeling overwhelmed and you’d like some help deciphering the world of investing, I tackle it from A-Z in my financial literacy course Money Power 2: How to Invest. I don’t tell you what to buy; I just show you how the system works, what research has to say about it all and how to get going. It’s a no shame, no judgment, women-only safe zone. Reach out if you have any questions.

Happy banking and remember, spontaneity is best left for your relationships, not your investments.