The idea of one-stop shopping is a key facet of modern life. The busy lives that people lead today make all-purpose stores such as Target (NYSE: TGT ) popular destinations.
Similarly, businesses that provide financial services are now seeking to offer one-stop shopping for their customers. Brokerage firms such as Merrill Lynch (NYSE: MER ) no longer just sell stocks. Many of these firms also now offer credit cards, home mortgages, and trust management. Along the same lines, it's no longer enough for banks such as Washington Mutual (NYSE: WM ) just to offer checking accounts and to make loans; they must also offer stocks, bonds, mutual funds, and other investment products, along with various forms of insurance.
While it may be convenient for customers to take care of all their financial needs under one roof, it can also be confusing, especially for relatively unsophisticated investors.
That's insured, isn't it?
When the Glass-Steagall Act of 1933 was repealed in 1999, banking institutions were no longer prevented from collaborating with investment-brokerage firms or from selling the same financial products that brokerages offer. Now, many banks own their own brokerages or work in partnership with brokerages to remain competitive. A customer can walk into a bank branch and obtain CDs and savings accounts from one employee, or they can walk into the next office and buy stocks, mutual funds, or other investments from a registered brokerage representative.
But the increased availability of financial products within banks can leave customers confused about what's insured and what isn't. The FDIC provides insurance on bank deposits, but brokers who do business within banks are generally required to put up signs and make materials available to customers to make it clear that because the bank itself does not offer the brokerage products, FDIC insurance does not cover these products.
As a practical matter, however, these lines often get blurred. Since many bankers receive financial and other incentives to refer business to an in-house broker, customers may find their regular banker strongly suggesting a brokerage alternative to the bank products they have used for years. In some cases, bankers may even obtain their own licenses to cross-sell non-insured products such as fixed annuities. On the other hand, brokers sometimes sell FDIC-insured CDs from other banks as investments to their clients. The disappearance of clear separation between bankers and brokers makes it impossible to judge the nature of a product solely from the person offering it.
It's easy to understand why banks are interested in offering brokerage products. Even though banks tend to benefit from risk-averse investors during times of financial uncertainty, those same investors often withdraw their cash deposits in better times so they can purchase stocks, mutual funds, and other securities. By offering their own investment products, banks hope to prevent customers' money from leaving their doors when bank products are no longer customers' first option.
The key to dealing with bank-based brokers is to know exactly what you're being offered at all times. If you're looking at bank products, you would generally compare one bank's products against those of another bank. But if you're considering other types of financial products, you should compare them not only with the offerings at other banks but also with products from competing brokerage firms and other financial-service providers. If you're confused, ask as many questions as you need to get the answers you want. The regulations to which both bankers and brokers are subject require them both to give you the facts you need to make an informed decision about your investments.
In today's financial world, you always have to keep on your toes. Being aware of changing business practices can prepare you for offers that you might not have otherwise believed possible, and it will help you understand and evaluate these offers rationally.
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Fool contributor Dan Caplinger has dealt with quite a few confused bank customers in his time. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy won't confuse you.