Banking On Your Investments
A pamphlet alerting consumers to the fact that investments are not federally insured - even if you buy them at your bank. Topics covered include a new banking law that has radically changed the way banks do business, the benefits and costs of investing, things to consider before investing, protecting your privacy and what to do if you have a problem with an investment.
Investing At Your Bank
You probably know that you can use your bank to get cash, write checks and deposit money in a savings account. Now many banks also can sell you mutual funds, stocks, insurance annuities and other investments—and give you personal investment advice.
In 1999, a federal law, the Gramm-Leach-Bliley Financial Services Modernization Act, was passed making it possible for banks to merge with insurance companies and investment firms to create one-stop financial supermarkets. Hundreds of banks nationwide have converted themselves into financial holding companies as the law permits. The banking industry also is lobbying Congress to allow banks to sell real estate—someday you might be able to buy a home and get a mortgage through the same company.
Many banks offer deposit accounts, insurance and investment (brokerage) accounts at their branches and on the Internet. Investments are also sold by investment firms known as brokerages—these include “discount brokerages” which allow you to buy and sell investments for a low fee.
Investments available at bank branches include:
- Annuities—contracts between life insurance companies and individuals which guarantee a fixed or variable payment to the holder at some future time, usually retirement, in return for a lump sum or periodic payment.
- Bonds—debts incurred by government agencies or corporations that entitle investors to a fixed return over a certain period of time.
- Mutual funds—professionally managed portfolios of actively traded stocks, bonds and other securities. Each investor in a fund shares in the fund’s gains, losses and expenses.
- Stocks—shares in the ownership of a company. The value of stockholders’ investments may rise or fall daily.
- Unit investment trusts—fixed portfolios of income-producing securities.
- U.S. Treasury securities—obligations of the federal government.
Investments Are Not Insured
The fact that you purchase an investment from your bank does not mean that your investment is government-insured.
Mutual funds, annuities and other investments are NOT insured by the Federal Deposit Insurance Corporation (FDIC). Even if they are sold by your bank or an affiliate, these investments are NOT deposits or obligations of the bank.
Securities Investor Protection Corporation (SIPC) protection is not the same as FDIC coverage. SIPC is a nonprofit membership corporation created by Congress. If your bank’s holding company is an SIPC member, your accounts are partially protected if that company fails. However, you are not protected from any decline in the value of your investment.
If you are not sure whether a particular product is FDIC-insured, ask a bank representative.
Investments Involve Risk
All investments have an element of risk. This means there is a chance you could lose some or all of the money you invested or not gain as much return (profit) as you expected. In contrast, savings accounts are insured and your money is not at risk.
The amount of risk in an investment often determines its return. Usually, the higher the expected rate of return, the greater the risk.
Benefits of Investing
There are also risks to putting all your money in savings accounts. In a savings account, your money may not earn enough to keep up with inflation. To reach your long-term financial goals, you want your investment earnings to exceed the rate of inflation. Over long periods of time, investments in stocks and bonds have outpaced inflation, but savings accounts and certificates of deposit (CDs) have not.
Mutual funds can be an effective way to invest in a wide range of stocks, bonds and other securities. Your money is pooled with that of other investors and placed in a variety of financial instruments. This enables you to diversify your investments and manage your risk while potentially still earning a higher return than in a savings account.
Investments Have Costs
Before making any investment or opening a brokerage account, ask about fees, sales charges and commissions. Compare them with the charges at other companies. (With mutual funds, sales charges or commissions are called loads.)
Fees and commissions reduce your initial investment and the profits you earn. It is possible to avoid such costs by purchasing no-load mutual funds directly from fund companies. However, consumers with limited investment experience may prefer having access to the research capabilities and guidance of brokers or advisors.
Never allow yourself to be pressured into making an investment.
Before You Invest
The law requires that you be given certain disclosures before you sign up for any investment. This may include an annual report or a copy of a prospectus—a description of the investment and all costs associated with it.
Take the prospectus home and read it. Show it to someone you trust, someone who knows about investments. Make sure you understand what the investment is about.
Never allow yourself to be pressured into making an investment. Invest only if it makes sense for you and fits your financial goals.
Before you invest, be clear about your financial situation and goals. Ask yourself what degree of risk is appropriate for you. Each person’s tolerance for risk—the ability to withstand financial losses—is different. It can be influenced by your age, goals and financial circumstances, and by your temperament.
A general rule is that before you make any investments you should have emergency savings equal to at least 3 to 6 months of your living expenses.
Protecting Your Privacy
In the 1930s, banks were prohibited from selling insurance and investments, and investment and insurance companies were prohibited from owning banks. But since late 1999, banks can merge with insurance companies and investment firms. This has the potential to give companies access to a wide range of information it can use for cross-selling: your checking and savings balances, credit accounts, investment portfolios and insurance information.
You have choices when it comes to learning about new offers and services from your bank and its affiliates. You can choose not to receive marketing offers by mail, telemarketing and/or e-mail.
Every year, the financial services companies you do business with must send you a privacy policy notice that includes information about how to opt-out if you don’t want your information shared for third-party marketing. These companies also are required to notify you before they share your information with a third party—unless the third party is a subsidiary or partner of the bank. However, many financial services companies will honor your request not to share your information with subsidiary or partner companies for marketing purposes.
If You Have a Problem
Usually, when you lose money on an investment there is nothing you can do about it. But you may have legal recourse for certain kinds of investment complaints. These include promises of unrealistic profit, guarantees that you will not lose money on a particular transaction, or a broker who invests your funds without your authorization.
If problems with an investment arise, first contact the company that sold it to you.
If that doesn’t solve the problem, contact the National Association of Securities Dealers (NASD). The association offers a third party arbitration system for arguments between customers and brokers. Call the NASD arbitration department at (212) 858-4400 or visit its dispute resolution web site (www.nasdadr.com).
The Securities and Exchange Commission (SEC) investor complaint center is part of its Division of Enforcement and Office of Investor Education and Assistance. It accepts complaints about bad brokers or firms, unfair practices or Internet or e-mail investment frauds. You can file a complaint online (www.sec.gov/complaint.shtml), by fax (202-942-9634) or by mail: SEC Complaint Center, 450 Fifth Street, NW, Washington, D.C. 20549-0213.
Finally, you may want to consider legal action. Your local bar association can assist you in locating an attorney knowledgeable about securities law.
Credit for this Publication
Consumer Action's Managing Money Project.
Published / Reviewed Date
Published: April 01, 2002
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