4 Alternatives to Big Banks and Their Record-High Fees

Originally published CNBCBig bank fees are at an all-time high while the interest they pay is at an all-time low. Worse yet, evidence recently has come to light of the criminal abuse of a practice common among large banks since the fall of Glass-Steagall: cross-selling.

Cross-selling is rooted in consumer research that large financial institutions tend to salivate over. It shows that customers are more profitable for longer when they own more products. How else could they get us to settle for deposit products for which we pay them? Does this absurdity leave you wanting to bolt the big banks?

Fortunately, you have alternatives. Here are the top four:

1) A good option for most is to flee the big brick-and-mortar bank for its younger virtual sibling: the online bank. Online banks, which lack the overhead of their more traditional rivals, can offer higher interest rates, lower fees, free ATM withdrawals and low or no minimum balance requirements. And they do.

I’ve been using an online bank for several years now and haven’t paid a single ATM fee for that entire time—and I can go to any ATM in the known universe (seriously). In the past year alone, I’ve received more than $200 in ATM fee rebates!

I recommend that you choose an online bank that best serves your needs and lifestyle. Mine, for example, offers unlimited ATM reimbursement, but others will cap the reimbursement amount or restrict you to a (typically large) number of “free” ATMs. Those banks, however, may pay a higher level of interest than my bank. Nerdwallet did an excellent job summarizing the best online checking accounts of 2016.

The Financial Industry Does Not Exist For You

What, you say?  The financial services industry is not in business for the primary benefit of its clients?  Maybe you thought this would go without saying, what with news of Knight Capital Group’s near collapse only days old, Morgan Stanley’s unapologetic botch of the Facebook IPO still stinging and J.P. Morgan Chase’s “trading error” now expected to top $7 trillion (not to mention that little issue of a financial crisis).  Yes, we all know WHAT has happened, but the information that will benefit you most is to learn WHY it happened.

And while most explanations of WHY tend only to turn into deeper, more complex discussions of HOW and WHAT, the WHY, while not at all simplistic, is actually quite simple:

The financial services industry is not in the do-good-ing business so much as it is in the profit business. 

Let me be clear—there is NOTHING at all wrong, evil, immoral or unethical about profit, nor in profiting from doing good.  It need not be one-or-the-other.  What I do take issue with, however, is an industry hell-bent on convincing us that its primary motive is something verging on altruism when the primacy of profit in its eyes is so blatantly apparent.  What they SAY they are, respectively,…

  • “The Standard of Trust”
  • “Dedicated to giving individual investors the finest thinking, products and services in the financial world”
  • “First class business…in a first class way”

…should begin to somewhat resemble what they DO, don’t you think?  So when someone—anyone—says one thing and does another, which do you believe—what they say or what they do?

A consistent track record…of failure and deceit

One of my favorite financial industry failings evidencing its self-centered posture is the appalling number of mutual funds that “don’t beat the index.”  Most notorious is the large-cap growth discipline, 79% of which did NOT beat their respective benchmark—the S&P 500—last year.  Of course, many aspects of the market were anomalous last year, but this glaring indictment isn’t actually that far off from the long-term average deficit between active large-cap managers and their benchmark.

This and scores of other stories beg the question, then, who is benefiting primarily and most from the core activities of the financial industry?  Well, the financial industry itself!

When forced to answer that question under oath, the industry has no choice but to tell us as much.  And almost hysterically, they seem to be ok with it.   Senator Carl Levin was interviewing the CFO of the most venerable Wall Street firm in the wake of the financial crisis, and asked him how he “felt,” specifically, about seeing emails from inside his firm explicitly (really) communicating that investments they sold to clients (while they were subsequently shorting the same investments) were indeed “a shitty deal.”  The CFO, expressing his feelings, responded without so much as a smile to indicate he meant it as a joke, “I think that’s very unfortunate…to have on email.”  As the courtroom broke out in laughter, he had this inquisitive look on his face that said, “What?  Did I say something funny?”

This is not a Wall Street bashing party.  It’s important for us to recognize that each of “The Big 3”—banks, brokerage firms and insurance companies—are in business primarily for the entity (and its shareholders) and secondarily for their representatives.  You, as a client, are at best a tertiary concern.

What’s it to you?

But what does this dilemma matter to you?  It is important, because if you recognize the inherent conflicts-of-interest in the industry for what they are, you’ll be better served by it—the industry.  After all, it’s not going anywhere, and yes, we need it.

When you recognize your friendly banker gets paid to put your money in THEIR deposit instruments and borrow at THEIR lending terms—not necessarily the best—you need not feel burned.  When your insurance agent bypasses the inexpensive but efficient policy that accomplishes your NEEDS for the bells-and-whistles policy that will send them on the vacation they WANT, you need not feel conned.  And when you realize your financial advisor is charging you 1.5% to babysit a static portfolio with training wheels, you need not feel gipped.  In each of these cases, you can calmly recognize this is simply how the industry is structured and incentivized…and tell them you’ll be taking your business elsewhere, with a well-informed smile.

Don’t get me wrong; I’m rooting for the industry—I mean it!  As big and powerful as it is, the good it could do if it was willing to genuinely align its values and objectives with that of its clients is unimaginable.  I’m hopeful, but not waiting…and certainly not holding my breath.