3 Things Your Banker Doesn’t Want You to Know
You’re ready to buy your next investment property, so you walk into your local bank branch and sit down with the lending manager. She begins to ask for all sorts of personal information that you would not usually divulge to a stranger. Before you realise it, you feel like you’re the one there begging for money, rather than expecting the bank to fight for your business.
So, what isn’t your banker telling you? Here are the three most important things:
Your banker has limited options for you.
She isn’t afforded the opportunity to be impartial. Maybe your banker is in a position to offer you the best finance solution, or maybe not. She lacks the incentive to advise you of possible alternatives outside of her institution.
If her best solution isn’t your best solution, she likely won’t mention it. This doesn’t mean she isn’t trustworthy or honest as a person. Knowing all your better options isn’t in her job description. Her role is to sell you products offered by her employer on terms that are most beneficial to the bank.
The lack of impartiality of bankers often leads to customers accepting sub-optimum rates and, more importantly, poor loan structuring. It is in the bank’s interest to have as much control over you and your assets as possible. The bank’s default position is generally to take as much security as possible whether it is necessary or not.
Your banker is secretly incentivised to sell you a specific solution.
Your finance choice when dealing with a bank may impact your banker’s income, but you’ll likely never know it. For example, she may receive benefits for the advice or products she recommends to you.
You’ve probably heard a lot in the media about the commissions that mortgage brokers and financial planners earn from selling financial products. Both of these professional groups are now required to fully disclose to the client any benefits received. I doubt you will ever hear your banker disclose the terms of her employment.
Bankers are generally incentivized in some way. This may be in terms of the volumes of sales made, success in cross-selling, or in the size of the portfolio managed.
You yourself have probably experienced a banker trying to sell you a secondary product, such as insurance, when seeking a loan. This can be annoying and can lead to sub-optimum decisions by buyers of financial products.
Often, the best interests of the banker and the customer is diametrically opposed. A very common example of this is when an investor frequently flips properties. If the banker is incentivised by the size of the loan portfolio she manages, then a sale at the wrong time can affect her bonus.
In other cases, a client may be managed in one part of a bank but may be more suited to another area. This happens most commonly where there is a change of strategy by the investor. For example, if you move from a buy and hold strategy, where the residential lending or private banking areas are probably most suitable, over to property development or investing in commercial property, then you may not be referred to a business banker, where you would likely be better suited. If she hands you over to her colleague down the hall, she loses you as a client and may lose money.
Your banker is eyeing a better job.
If your banker knows what she’s doing, she probably won’t be with you for long. A good banker, one you not only trust but feel good about working with, can be very valuable. The problem is she is not only valuable to you but to lots of other people too. Unless you are already managed by a very high-level banker then she is most likely going to be promoted quickly or else she will move banks to further her own career.
Keep Your Eyes Wide Open
Lenders are an important part of the financial system. If you are going to be a successful investor, you will need to deal with them, whether you use a broker or go directly to a bank.
Knowing what your banker will never tell you should help you to better manage your relationships with these professionals and better evaluate the advice and information you receive from them.
If you have any queries about dealing with bankers or would like an independent view about some advice you have received, either click here to fill in an enquiry form or contact me directly on email.
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Great article Alistair. Most of the downsides you mention I can attest to having personally experienced. Borrowers are well advised to know the nature of the beast they are dealing with.
Thanks Alistair, I remember going to a bank for a loan and was interrigated and then turned down, as a non vialble customer. I found a local brocker which was much more helpful, we now own a unit that is positive cash flow.
From your article I can understand why it is such a hassle to get a loan from a bank.