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Should I Invest With My Bank, or Seek Out a Broker?

2020 has been a long overdue wake-up call for everybody. We all need a nest egg, not just for retirement, but for rainy days, too.

When disaster strikes, cash reserves can buy valuable time. As we sat in quarantine this spring, we began to dabble in equity markets. For some, that was enough. But not you – you threw yourself into the art & science of investing.

That quest for knowledge has brought you here. Along the way, you’ve likely read conflicting information about banks and brokerages. So, which of these institutions should you invest with?

Below, we’ll lay out the pros & cons of each entity.

Bank or Broker: Which is Best?

You’re stuck in a “paralysis-by-analysis” funk. Initially, you were going to go with your bank, but then you read multiple sources that claim their fees are too high. Brokers sound like a good option, but do they really live up to their hype?

Below, we’ll analyze the good and bad of each investment channel.

Pros of Using Your Bank

1) It’s convenient

Making change in our lives, no matter how impactful, is hard. As humans, we’re hardwired to crave routine. By contrast, change is dark and scary.

The easier it is to make a shift, the more likely you are to follow through. This fact gives your bank a huge advantage. On their website, you can start investing with them within minutes.

2) Banks are stable

Financial institutions like RBC, BMO, and Scotiabank are Canadian business bedrocks. RBC has been around since 1864. BMO has issued dividends for 190 years straight. If you’re looking for a reliable company to invest your money with, Canadian banks are as good as it gets.

Now, there haven’t been any high-profile failures of Canadian brokerages lately. However, these firms are more likely to take risks than the banks mentioned above. If losing your investments due to broker failure is keeping you up at night, investing with institutions like RBC may be better.

3) They employ experienced finance professionals

You’re too busy advancing in your career and raising kids to learn about investing. Thankfully, banks employ financial advisors & analysts that do the intellectual heavy-lifting for you. You need only tell these professionals your goals. Do so, and they’ll put together the investment plan most likely to get you there.

To learn more about bank-driven direct investing accounts, check out this RBC direct investing review.    

Cons of Using Your Bank

1) Their fees are much higher than private brokerages

Ever notice how much more milk costs at a convenience store? It’s the same product, so what gives? Well, it’s easier to pop into a corner store than drive to the supermarket. The shop owner knows this, so they charge a “convenience premium” on everyday staples (like milk).

The same rules apply in finance. Your bank already has a financial relationship with you. They know how hard it is for people to trust a firm with less brand recognition. Because of this, they can charge higher fees for trades, expense ratios, and so forth.

Ultimately, these charges erode your principal, limiting the long-term growth of your investments.

2) Some limit your selection of mutual funds and ETFs

Banks are moneymaking juggernauts for a reason. They know their best customers are risk-averse, so they charge high fees with abandon. However, their profiteering doesn’t stop there. Banks also get higher commissions from specific mutual funds.

As a result, your financial institution may limit selection of funds to those that deliver the highest profits. Sadly, these funds have higher fees than competitors, which can limit your investment gains.

Pros of Using a Broker

1) Their investment fees are much lower than the banks

In a perfect world, you’d be able to hang onto every dime you invested. In this world, though, you need to pay brokers to buy funds on your behalf. And so, paying fees is an unavoidable necessity.

Fortunately, non-bank brokerages charge much lower rates than the banks. These firms lack the overhead that banks are stuck with. Furthermore, they also set lower prices to overcome the built-in inertia of existing bank customers.

Either way, the result is the same. More of your principal remains intact, leading to greater gains in the long run.

2) You can personalize your investments

What good is saving for retirement if there isn’t a livable world to retire to? That’s the question on the minds of many investors these days. Unfortunately, many bank ETFs and mutual funds contain morally questionable investments.

When you have a brokerage account, you can invest in your future without selling out your conscience. There are two ways you can do this – by buying ethical/green ETFs or mutual funds, or by selecting stocks yourself.

3) You’ll learn how markets work

Nothing worthwhile ever comes easy. If you could get 20% annual returns parking your money in an ETF, everybody would be doing it. But, if you pick your own stocks, you’ll eventually learn what works and what doesn’t.

ETF managers actively avoid risk, but because of this, these investments don’t earn much. If you have a high tolerance for risk, you could eventually find investments that outperform most ETF/mutual funds.

Cons of Using a Broker

1) It’s riskier

ETF managers avoid risk for a reason. People who invest in these products want a “sure thing”.  “Sure things” don’t exist in the real world, but these funds come close. By taking matters into your own hands, you can earn more, but you can also lose – a lot.

2) You’ll have to do research

Too many of us employ a “set-it-and-forget-it” approach to investing. If 2020 proved anything, it’s that markets can shift on a dime. In January, who would have predicted the DOW would crash 40% before setting an all-time high?

Answer: Not many. Nonetheless, investors with years of investing experience knew trouble was brewing in February. After markets crashed in March, they also knew there was huge potential for gains in sectors like biotech.

You only gain these insights by doing your homework. For most, that’s a deal-breaker.

Convenience vs Performance: It’s Your Call

It’s better to invest than to sit on the sidelines. If you invest with your bank, you’ll be miles ahead of those who haven’t saved a nickel. However, if you want to maximize your returns, non-bank brokerages are the clear winner.

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