Bank Brokerage: Where the Money Is

"Don't like our CD rates? Step right over here and let that nice saleperson sell you an annuity."

Banks get plenty of bad press for selling expensive annuities to seniors who need them like they need holes in their heads. In The Wall Street Journal, Jeff Opdyke told how bank brokers ripped off his grandmother and tried to rip off his mother.

Will the Opdyke family turn to those banks for trust or other wealth-management services? Don't think so.

So why do banks persist in dragging customers into close confinement with bank brokers?

Here's the answer, from the appendix to the Rand study of brokers and advisers mentioned in an earlier post:

Bank-owned brokerage firms have much higher profit margins than do nonbank brokerage firms (28 percent versus 14 percent, pretax, as of 1999). A bank-owned brokerage firm has ready access to existing clients, which lowers marketing costs, and, due to easy customer access, representatives are paid less, which lowers compensation costs. Bank-owned brokerage firms also focus on higher-margin products, such as annuities and funds, as opposed to stocks and bonds. Moreover, the bank-owned brokerage firm is reported to offer a narrower product selection with less research, all of which reduces expenses.