Tag Archives: mutuals

When Commissions Clash With Customer Service at Banks and Financial Institutions

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Overheard at the Bank Branch: “I Don’t Handle GICs.”

Yesterday, while waiting at the bank branch I overheard a conversation between two staff. Frankly the one Advisor was so loud the entire branch had to hear him whether they wanted to or not. Anyway, what caught my ear was he was basically refusing to see a client as requested by the Receptionist because “I don’t handle GICs. I don’t believe in them. I can’t get behind them.”

After feeling a bit sorry for the Receptionist, who wasn’t asking his religion but was just asking if he was available to meet with a customer, I wondered why he was pontificating so loudly. A peek as I passed his door later confirmed he had an audience. A new hire was being trained. So likely he was bragging and trying to score himself some points.

He lost big points with me. Which is too bad for him because we actually have quite a lot of money to invest and could have involved him if we’d wanted to. He may have also lost a few other customers who heard him dissing a Receptionist to make himself sound more important.

Why Would a Bank Advisor Not Want to Handle GICs?

The answer to those of us who are cynical is painfully obvious. There is no direct financial benefit to an Advisor for selling a GIC to a bank customer. The bank makes money on GICs. And some financial institutions and brokers make money on selling GICs offered by other financial institutions because there is a referral commission. However, for an Advisor at a bank branch there is (usually) no direct personal compensation for selling a GIC from that bank.

What Does the Bank Advisor Want to Sell to Customers?

There is, however, a big personal incentive for selling a mutual fund. Bank advisors earn personal commissions for selling mutual funds. The commission is part of the “trailer fee” paid by the mutual fund each year. Many bank advisors earn part of the trailing commission on a mutual fund for as long as the customer owns the fund. They even make the commission if the fund loses money, which is more than the customer does.

Lack of Fiduciary Interest and Bad Customer Service Combined

The problem with this difference in compensation is that the Advisor now is in a position where he or she makes more personal income if he or she recommends one product instead of another. This means that they may be tempted to recommend a product not because it is the best fit for the customer but because it is the most lucrative for them.

This is a horrible situation. It gets worse when the customer genuinely needs financial advice.

Case Scenarios for Guaranteed Income Certificates (GICs)

Saving for a Short Term Goal with No Income and No Way to Regain a Loss

Imagine an elderly person comes into the bank wishing to invest $5000 for one year. She just inherited the money from her sister. They need all of it next year (14 months from now) to pay for an electric scooter and a ramp into their home that they have been saving diligently to buy. Her husband is getting his hip replaced in three years but the doctors have warned them he will be wheelchair bound soon and for months after the surgery.

This person wants her money to be completely safe. She needs it. She just wants to earn a few dollars more than if she left it in her chequing account which pays no interest at all. She has banked here for forty years and has no personal computer, nor the interest or aptitude to get one.

What do you think she should invest her $5000 in?

There really aren’t many options that suit her needs. The obvious one is a GIC. It won’t make much interest, but even 1.7% is better than nothing. (If you don’t think $85 is important, you are not old, infirm and living on a very small income. Many people are.)

With the high probability of interest rate hikes, a bond fund could lose money in the short term. A money market fund probably pays less right now than a GIC and it carries a (small) risk of loss.

What do you think this Advisor is going to recommend she invest the money in?

Saving for Education Which Starts Next Year

Here’s another possible scenario. A person walks in with $5000 to contribute to their only child’s RESP. The child is starting his last year of high school in the fall and plans to start university in just over one year. Although the parents contributed $100 a year to the RESP each year till now, they have never had a chance to save more. They just got a bonus from work and decided to put it in the RESP to get the 20% matching CESG ($1000!) for their child.

Should this person’s money be invested in equities? Probably not. This family is looking for the 20% grant, not for a potentially huge capital gain. And a mutual fund with a high MER isn’t a great choice for them either.

A GIC may be boring and very low paying but it’s easily understood, easily managed, and safe. A bank advisor should be at least presenting it as a sound choice to the client.

Further Reading

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What do you think of a bank Advisor that won’t talk about GICs when clients ask for investment advice? Do you think the compensation structure for Advisors needs to be changed so they receive the same amount no matter which product the client purchases? Please share your opinions with a comment.

When Can I Buy a GIC or Mutual Fund After I Sell a Stock in my BMO InvestorLine Self-Directed Account?

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In 2023, when you sell a stock in a self-directed brokerage account, such as a BMO InvestorLine account, the actual settlement date is 2 full trading days later, which is abbreviated as T+2 for transaction date plus 2 business days. So, for example, if I sold a stock on a Thursday, and Friday and Monday are normal trading days, the settlement will take place on Monday. So when can you buy a GIC or a mutual fund after you sell a stock in your InvestorLine account?

Note: When this was written in 2012 settlement occurred 3 trading days after the purchase or sale order was filled, which was called T+3. And now, in 2023, the USA regulators are already at work trying to shorten the settlement date to T + 1, the date of the transaction when the order was filled, plus one business trading day, starting in the fall of 2024. Please confirm settlement dates with your brokerage!

Written: 2012
Reviewed: 2023
Revised: 2023

What is the Settlement Date?

Settlement is when my broker hands over the share certificates (admittedly electronically nowadays) and the other broker hands over the enormous sum of cash to pay for my shares. It dates back to the days of paper certificates which had to be physically moved from a secure location to the buyer.

So If I Want to Buy a GIC, How Long Do I Have to Wait After Selling a Stock?

When I sold some shares on a Thursday in 2012, to my surprise, the sale value showed up immediately in my “cash” listing with BMO InvestorLine. Being a suspicious sort, I emailed BMO and asked when I could actually use that money to buy a GIC.

BMO replied that I have to wait until at least Monday, 2 full business days after the trade because in 2012 trades settled in T + 3 business days.

The GIC purchase order would go in overnight to take place on Tuesday, and the settlement of my stock sale would also take place over that same night, so the cash would be in my account on Tuesday to pay for the GIC.

GICs, as you can see, settle one full business day after the purchase order is placed. Stock sales settled 3 full business days after the purchase or sale order is placed in 2012. Because these deadlines don’t line up, you have to be careful.

Now, in 2023, with a settlement date of T + 2, if I sold a stock on Thursday, I could place an order to buy a GIC on Friday, and both the purchase and sales would close on Monday.

Being a naturally cautious person, I think I would wait till the settlement date to place a GIC order. Although if there was a super-incredible rate available, I guess I might test the system and place the order on the day before settlement, as suggested.

If I Want to Buy a Mutual Fund, How Long Do I Have to Wait After Selling a Stock?

Presumably, the BMO answer would be the same for a mutual fund. In 2023, with T+2 settlement, the order could be placed on the first full business day after the sale of the stock, since it would not be effective until the second business day after the sale. Again, as an ultra-conservative investor, I would likely wait till the trade had settled before placing the order.

If I Want to Buy Another Stock, How Long Do I Have to Wait After Selling the First Stock?

Stocks are easier. For either a purchase or a sale of a stock in 2023 the settlement date is the trading date plus 2 trading days. So if you sold a stock and then bought another different stock later that same day, it would work, because the settlement dates would be the same day.

The settlement dates would also be the same if we do migrate to T+1 in the future.

The Moral of the Story: Watch Out for Differing Settlement Dates!
I have a sneaking suspicion that these self-directed brokerage accounts have been set up so that they will not let you buy or sell unless your settlement dates line up. But I guess if you have the option (little financial pun there, catch it?!) to spend money you don’t have in your account (I believe that’s called working on “margin”) then it might let you put through a purchase when you don’t have the funds available yet from your sale. So make sure you know your dates will line up, and as the Sergeant used to say on Hill Street Blues “Be careful out there.”

Related Reading

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Have you ever ended up buying something with money you didn’t have in your self-directed brokerage account? Did it turn out Happily Ever After, or did you get burned with an unexpected fee? Please share your experiences with a comment.