I Didn't Know What I Didn't Know

My career in banking started about 25 years ago as a teller at a national trust company, later absorbed by the Royal Bank. I had a couple of years experience as an account cashier at the old Eaton's, so handling relatively small sums of money was nothing new. I was good at my job and was quickly promoted to a desk job, handling term deposits and mutual funds. As is common with most financial institutions, I was the newest employee so I was expected to handle the majority of the client enquiries, both in person and by phone. It was irrelevant that I knew next to nothing!

I remember clearly one of my favorite clients. He was a young Asian businessman, and would bring in $1,000 cash each week and buy a 5 year compounding term deposit. I understood that this cash was the weekly net proceeds from his small business, where he and his family worked hard 7 days a week. In five years time, he would have these term deposits plus interest coming due each and every week, at which time he could then choose to use the cash for business or family purposes, or reinvest it for another 5 year term.

I continually complemented him and expressed admiration at his financial discipline. He went away happy and I felt I had done a good job with a satisfied client.

Nothing could be further from the truth.

If I knew then what I know now, I would have spent much more time with him, making numerous inquiries prior to recommending an investment perhaps more suitable for his and his family's needs. Here is a partial list of what I would ask him:

• Term deposits produce interest income , which is fully taxable. Would he be interested in discussing other types of investments, which are more tax efficient?
• The term deposits were all set up in his name only. Can he take advantage of income splitting between his wife and his children?
• Is he incorporated, and if so, perhaps these investment should be made in the name of the corporation.
• Has he considered tax sheltering some of the proceeds in a registered retirement savings plan for himself or his wife? She could make personal contributions, or if she was not employed in the business, he could make spousal contributions.
• Does he have any debt, such as a mortgage, that might be a better use for some of these funds?
• Does he have a savings plan in place for his children's education?
• Has he considered making the term deposits joint ownership with his wife? In the event of his premature death, this would at least avoid probate on the deposits.
• We knew that the funds would not be touched for at least 5 years. Did he have the risk tolerance to consider an alternate investment, such as equity mutual funds, that had the potential to grow at a better rate than what interest income was paying?

You get the idea. The point is certainly that, even though this client felt he was well served, he did not in fact receive the advice he should have. And sadly, I know now that even if I had the knowledge, I could not have spent that amount of time with him. Front line individuals must be quick; there is always a line-up.

Things have changed somewhat since I started in the financial business. I don't find that front-line staff are any more educated in providing quality advice. But they are far better trained at spotting and referring opportunities to a more senior staff member. In fact, they are expected to do so and likely have a component of their pay structure based upon their referrals. When you must use a live teller for any transaction (they are called CSRs today, Customer Services Representatives), you will inevitably be probed for a so called "need" that you didn't know you simply must have. "Have you bought your traveller's cheques yet for your summer vacation?" "Have you made your RRSP contribution?" "Have you made your children's RESP contribution?" "You don't have one of our Visa cards yet. Let me give you this pre-filled application. Simply sign here." Every financial institution that I am aware of puts their staff through intensive sales technique training.

There is a huge difference between providng advice and selling products. Far too many investors need advice but are only getting a sales pitch. More on this later.