August 5, 2009, 5:00 am

Look Out Rate Shoppers!

by: The Financial Blogger    Category: Banks and You,Personal Finance
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shopperIf there is something I hate about my job it’s dealing with rate shoppers. But before I start with why I hate them, let’s define a typical rate shopper:

The Rate Shopper:

The Rate Shopper, also known as “the little rat”, lives comfortably in your neighbourhood. It usually has a lot of free time on hand and spends most of its day wondering around. It likes to look at every minute detail and keeps its documents preciously in a file. Since the rate shopper is averse to risk, it feeds itself only with certificates of deposit. It has little financial experience and the only thing it knows is the 5 year certificate of deposit. The rate shopper likes its stable environment and doesn’t want anything else and only looks for the “best” rate.

Each time it has a hunger (maturity date), it comes out of its hole to see where it can get the most generous 5 year CD rate. It can spend a whole week going from bank to bank in order to find the most satisfiying rate. While the little rat is currently starving in the very low interest rate environment, it can walk miles to find a CD with 15 basis points more. The reason we commonly call it “the little rat” is because the rate shopper has no fidelity what so ever. It will seem willing to do business with you, ready to eat your 5 year CD but at the last minute, it will turn around with your “best and final offer” and get the famous 15 basis points more with a competitor without returning your call.

Why Rate shopping is not necessarily a good idea:

As you know already, I am a financial planner. When I started this career, I decided to run my book with one thing in mind: I am not an order taker. My job (and responsibility) is to provide solid and smart strategies to my clients according to their needs in order for them to make as much money as they can by considering their personal situation, their risk aversion and their financial goals. I hate when people call me simply to “get a rate”. Most of the time, I ask them why they want the famous 5 year CD or a 5 year mortgage (‘cause the rate shopper also looks for a great mortgage deal as well). They often don’t have a clue why they absolutely want a 5 year term…

”Because it is the best rate available on the market?”

True. Yes and no. 5 year term products will always provide a benchmark rate to clients at a specific time. However, what if your 5 year CD is due this year? You are stuck dealing a new 5 year CD below 4%… Are you getting such a great deal? I don’t think so. So Rate shoppers will traipse from one bank to another and ask the very same questions without listening to what advisors have to say. In the end, they get the best rate at that specific time giving in to a cash poor financial institution, and they end up with a poor yield strategy… The only strategy they had was to take a week and speak to as many banks as possible to renew their CD.

They not only get a poor strategy but they also might end up with poor rates too. I noticed a drastic change in the financial industry recently. In these rough times, branches take a closer look at their profitability. They started to realize that cutting off an arm and leg to offer a great rate to a new client doesn’t bring any additional income. It is awfully expensive for the branch to acquire this new client in this fashion and the banks nave learned they will lose these clients for a better rate when the CD comes due. This is why I never give my “best rate” to those calling me for a rate. I will give it to someone that is willing to meet with me and hear about other strategies (like a CD ladder or looking for Federal and Provincial bonds for example). Smart investing strategies are beneficial both for the client aa well as the bank. While there will always be branches who will give the shirt off their back to gain a new client, those branches may become harder to find.

Finally, since they are not loyal to any bank, no advisor will actually give them the “time of day”. They will usually end-up at the bottom of the priority list and have already (or soon will…) become frustrated by banks since “they” only want “this” money without providing a good service. Well, rate shoppers hear this: a good relationship with a banker is built through trust and confidence on both sides. Don’t get me wrong; I think you should shop around once in a while to make sure your advisor is on the ball and offers not only a good service but competitive rates. He will usually not be able to offer the best rate on the market each time. But if his offer is in the ball park, you will benefit much more from a positive relationship with a sound financial advisor than swinging your money from one bank to another every 5 years.

image source: turtlemom4bacon

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If they were smart they could come to GIC Financial where I work. One of our major advantages is our ability to act as brokers for GIC ‘s, we have access to the “best” rates from all the CDIC insured financial institutions, therefore we can do the legwork for the client. Like you, I usually suggest a laddered approach. For instance Manulife offers a 5 year GIC ladder that has an annual 3% yield, each year 1/5th comes due and hopefully this can be renewed at a higher rate when rates start to move up.

I spoke too soon. Manuife just dropped the % year ladder rates to 2.75%.

TFB, don’t you think thatt investors that do not shop around will usually end up with lower rates??

by: The Financial Blogger | August 6th, 2009 (5:21 am)


this is why I wrote:
“Don’t get me wrong; I think you should shop around once in a while to make sure your advisor is on the ball and offers not only a good service but competitive rates.”

looking at the market to make sure you get a competitive offer is a great idea. But in the end, you get what you pay for… even in banks. So if you are looking for the ultimate rate, this is all you going to get. No wonder mortgage brokers will ship you loan anywhere in your states even if it’s at 300 km from your house…. it was the best rate offer 😉

by: The Financial Blogger | August 6th, 2009 (5:30 am)

Finance Matters,

I agree with you, I also work with a broker when it is the time to build a CD ladder. however, I never call him when a client is only “looking for a rate”.

We like doing investment strategies, not taking orders 😉

[…] last week, Mike had this post about watch out rate shoppers. He mentioned how he hated it when rate shoppers called him “just for a rate”. What […]

You would think that the bank should love CD investors. They deposit their money in the bank for 5 years, accept a pitiful interest rates, and allow the bank to use their deposit to make some real money by lending it back (perhaps to the same customer) at a much higher rate. In fact, I’m a little surprised that you wouldn’t be compensated for selling a CD and therefore consider it “easy money”. I’m not even sure if there is easier money for the bank. As long as you offer the advice, if the customer won’t take it then at least you’ve made contact and you can make a commission.

I checked a couple of banks and personal deposits+personal loans make about half the total profit for a bank. Banks probably love CD shoppers.

by: The Financial Blogger | September 2nd, 2009 (8:33 am)

We are compensated for CD as well. However, they don’t offer much profitability anymore.

If you look at the latest quarter, most banks made a killing with their trading division while regular banking (spread between CD and loans) is not making as much money as it did.

About 6 months ago, I have seen banks giving away 3.85% on a CD for 5 years while offering 3.59% for a 5 years mortgage… negative spread… interesting isn’t?

Except that banks don’t need to keep 100% reserves, so they can make those 3.59% mortgages maybe 10 times = 35.9% from the 3.85% CD. Not a bad deal being able to fabricate money like that.

You have a good point. But still, the spread is pretty small considering all their expenses (branches, network, computers and my salary! hahaha!)

[…] are not only crawling the web, they are everywhere. A long time ago, I wrote a piece about rate shoppers, this is another kind of freeloader. Therefore, they also are clients who want a bigger slice of […]