Even as a simple country Index Investor (to paraphrase Bones McCoy), you need to understand the Index you invest in. If you own a TSX-based, Canadian S&P Based or Dividend Royalty based index you hold a lot of Banks.
Two examples of this are:
S&P/TSX Composite Index, (OSPTX) which holds 36 % “Financials“. The top 10 holdings 4 are banks (Royal Bank RY, Bank of Nova Scotia BNS, TD Bank TD and Bank of Montreal BMO).
S&P/TSX Composite High Dividend Index ETF (TXEI) which holds 30% “financials”. You find 4 banks in their top 10 holdings (Bank of Montreal BMO, Bank of Nova Scotia BNS, Canadian Imperial Bank of Commerce CM, National Bank of Canada NA)
Why this imbalance? Banks are doing very well lately, and have done well for over 15 years.
Are banks likely to “Nortel out“, in the near future? No, but realize that you are holding a lot of Banks if you are investing in Canadian Indexes.
My problem is that I am highly exposed on Banks. From my days as a Stock holder, I still hold TD and BMO in one of my larger investing portfolios. In this same portfolio I also hold a TSX index fund, which means my exposure to banks is too large (given I may retire within the next 10 years).
As Interest Rates slowly rise to more normal rates, I should start thinking about some more stability and start building a GIC Ladder in my portfolio. I should be looking for more stability given I am within 10 years of retirement.
Treat This as Informational
I am not offering advice. I am simply pointing out that many passive investors are heavily exposed to the Financial Sector in Canada.
Consumers rarely do anything unless they feel they get something out of it. I keep wondering what savings motivating system banks could put in place?
Canadians are notorious for loving rewards systems, where they can accumulate points for later purchases, maybe something like that? A points system that would pay more monthly, the more money you had in your savings account?
I think I am on to something here, if banks paid people these points that they could use to purchase things, that might motivate people to save more money.
A Savings Motivating Refinement
What if this point system allowed you to swap points for money? Better still what if you didn’t accumulate points for having more savings, you accumulated money? Money that would be added to your account balance, and then the next month you might accumulate more money because of this added money?
This is possibly the greatest idea ever to motivate consumers to save money, isn’t it?
I got a very good comment from someone who calls themselves Anon Banker, about the Tied Selling Banking Regulations and how that should stop banks from forcing you to have a chequing account with them if you have a mortgage with them. The Tied Selling regulation is quite clear about this:
For example, if you apply for a mortgage at a bank, the institution cannot make you buy another product or service as a condition for obtaining the mortgage.
You don’t have to open an account, but the bank may not give you a great deal either.
Luckily for the banks there is a little wiggle room, with the following statement:
However, banks (and their affiliates) are allowed to offer consumers, in conjunction with one of their products, another product or service on more favourable terms than they normally would provide. This is similar to a company offering a deal or discount to its customers if they purchase more than one item from the company. For example, if you obtain a loan from a bank to purchase a Registered Retirement Savings Plan (RRSP) investment, the bank might offer you a better rate on your loan if you also purchase your RRSP investment from them.
Better Deals if You Get an Account?
So the bank can not deny your mortgage application if you decide not to have a bank account with them, however, they can offer you a better mortgage rate if you do open an account with you. I suppose that sounds fair.
Back in the good old days, my office at Nortel had a banking machine on site. This was before banks started playing silly games with non-subscribers, charging them White ATM fee charges. Even then, I did open an account with CIBC, and back then they had a Zero Fee Account. That stopped working when the CIBC ATM changed to a Credit Union machine.
My current employer has an RBC machine in the lobby, however, RBC doesn’t really have a zero fee banking account (unless I move all my banking there). No chance to resurrect my earlier brilliant idea there.
I did finally notice that across the street there is a Scotiabank branch, from my current office. After 2 years the light finally went on, I have a Tangerine Bank Account. As I have pointed out, Tangerine is owned by Scotiabank, and I can use their ATM machine with no fees.
This now means, I can use the Tangerine account which has zero fees (for now), and do transfers to it (for no fees) and withdraw money without fees, which seems to be ideal. You could also do this with Simplii and CIBC machines I assume.
Another stupid bank trick to add to my list of stupid bank tricks? Maybe, but if you have enough of them, you will have more money left in your bank account. Another way to live, is to simply take enough cash out every pay cheque that you need.
It seems to be normal practice for most banks these days to attempt to maximize their business with you. Many try to upsell services to you, but others go with a simpler strong-arm tactic, if you want the service you must bank with us. This is within the rights of the bank to demand this, but you don’t have to capitulate either.
An example of this is the practice of forcing anyone opening a debt vehicle with the bank, to also have to open a chequing account. This situation arises if you use a Mortgage Broker or have bargained with many banks for your Mortgage.
You don’t have to open an account, but the bank won’t let you play either.
Creating the chequing account typically forces the user to have to pay a monthly fee to have the account (not in all cases, but in some cases). I have seen this with Student Lines of Credit, Mortgages and HELOCs as well.
This “policy” seems a throwback to the days when banking was done during bankers’ hours, but also another cash grab to make consumers pay more for services they aren’t using. This implies that transferring money from a different bank is hard for banks. The real reason would be they can then see the funds are available to pay the loan in question.
A reason I have heard quoted by bank representatives is that if the customer wants to have access to on-line banking (e.g. to check their loan balances) they will have to open a chequing account. Seems a bit thin, as a reason, but I am not a bank.
Are All Banks Like This ?
These examples I have heard are from the “Big Banks” I am not sure about the on-line banks or trust companies.
As a stock holder in the banks it seems like a good business practice, but as a consumer I am tired of dying a death of a thousand paper cuts. Having to pay service fees to many banks a month does add up.