Why Buying Mutual Funds From a Bank Might Not Be as Smart as You Think
Investing in mutual funds is a popular way to grow wealth, thanks to their professional management and diversification benefits. While brokerage firms are commonly associated with mutual fund investments, many banks also offer these financial products. Because of their familiarity and integrated financial services, banks might seem like a natural choice for purchasing mutual funds.
This article considers the advantages and disadvantages of purchasing mutual funds through banks to help you decide if it’s the right choice for your investment needs.
Key Takeaways
- Banks offer convenience and potentially lower minimum investment requirements for mutual funds.
- Limited fund selection and potential conflicts of interest are key disadvantages of bank-sold mutual funds.
- Brokerage firms may provide a wider variety of funds and more specialized investment advice.
- Understanding fees and aligning investment goals are crucial before purchasing mutual funds from banks.
- Comparing banks and brokerage firms can help investors make informed decisions.
What Are Mutual Funds?
Mutual funds are managed investments that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. This investment vehicle offers professional management and diversification, making it an attractive option for both novice and experienced investors. These funds aim to achieve specific investment objectives, such as growth or replicating a broad market index. By investing in mutual funds, individuals can access a diversified portfolio without needing extensive knowledge of the financial markets.
When you invest in a mutual fund, you’re purchasing shares of the fund itself, not direct ownership of the underlying securities. Each share represents a proportional ownership of the fund’s holdings and any income they generate.
The fund’s structure is designed to provide several key benefits to investors. The portfolio manager invests the pooled money according to the fund’s stated investment objective, which might be growth, income, or a combination of both. As securities in the portfolio generate earnings—whether through dividends, interest, or capital gains—these are typically passed through to shareholders. Investors can choose to receive these distributions in cash or reinvest them to purchase additional fund shares.
Most mutual funds today are “open-ended” funds, meaning they continuously issue new shares to investors and redeem (buy back) existing shares from investors who wish to sell. The price per share, known as the Net Asset Value (NAV), is calculated daily by dividing the total value of all the fund’s assets, minus its liabilities, by the number of outstanding shares. This ensures that investors buy and sell shares at a fair price based on the current market value of the fund’s holdings.
Banks as Mutual Fund Providers
While banks are primarily known for traditional banking services like savings and checking accounts, CDs, and loans, many have expanded their offerings to include investment products, including mutual funds. These funds are often offered through the bank’s investment division or affiliated brokerage services. This expansion into investments and mutual fund offerings allows banks to provide more comprehensive financial services to their customers as a sort of one-stop shop.
Some larger banks (such as JPMorgan Chase, Wells Fargo, and Barclays Bank) have established their own mutual fund families, often operating as separate subsidiaries or divisions. These fund companies, while bearing the bank’s brand name, are typically structured as distinct legal entities to comply with regulatory requirements. For example, a bank might have its own asset management divisions that create and manage proprietary mutual funds, often focusing on core investment strategies that appeal to its existing customer base.
Other banks, particularly regional and smaller institutions, partner with established fund companies to offer mutual funds directly to customers. These partnerships allow banks to provide investment products without the overhead of maintaining their own fund management infrastructure. Under these arrangements, banks typically act as distributors or selling agents for the partner company’s funds, earning commissions (sometimes called “loads“) or fees for their distribution services.
it’s important to note that investment services are typically not a bank’s primary focus or area of expertise.
Advantages of Buying Mutual Funds Through Your Bank
One of the most compelling reasons to purchase mutual funds through your bank is convenience. Banks offer integrated account management across various banking and investment accounts, along with unified statements showing all your financial holdings. This means you can monitor your checking, savings, and investment accounts in one place. Physical branch locations for in-person assistance may also be available.
Funding your investments and moving money between accounts is also easy, as internal transfers are often instant and free of charge.
Importantly, a bank may have lower account balance requirements than a brokerage firm, making investing a real possibility for more individuals. If a bank mutual fund has, for example, a $1,000 minimum requirement, ask if you can have that requirement waived in light of your ongoing relationship with the bank and other deposits. This can make investing more accessible to those just starting their investment journey or those with limited capital to invest.
People often already have a long-standing relationship with their bank, which can provide a certain level of comfort when venturing into investments like mutual funds. This existing relationship can provide customer support and make the process feel less intimidating for first-time investors.
Disadvantages of Buying Mutual Funds Through Your Bank
Banks don’t generally specialize in investing since they are more about savings, day-to-day financial transactions, and loans. That means that a bank may offer a more limited variety of mutual fund families to choose from. In some cases, this limitation can restrict your ability to diversify across different fund categories, sectors, or investment strategies.
Relatedly, banks that sponsor their own mutual funds may focus primarily on their own proprietary funds, which can lead to potential conflicts of interest where the banks’ recommendations are based on sales targets rather than investor needs. These preferred funds may also carry higher fees or expense ratios than similar funds offered by competitors.
Pros and Cons of Buying Mutual Funds From a Bank
Comparing Banks and Brokerage Firms
To make an informed decision, it’s helpful to compare the features of banks and brokerage firms when it comes to buying mutual funds.
| Mutual Funds From Banks vs. Brokerage Firms | ||
|---|---|---|
| Feature | Banks | Brokerage Firms |
| Variety of Mutual Funds | More limited selection, often proprietary or from select partner institutions | Wide selection from multiple fund families and independent fund managers |
| Investment Advice | May have less specialized advisors; potential biases due to sales incentives | Specialized investment advisors with diverse expertise; generally unbiased |
| Convenience | High convenience with integrated accounts and unified statements | Requires separate account setup; may offer less integration; funds transfers may take time |
| Minimum Investment | Often lower minimum investment requirements | May have higher minimum investment thresholds on certain funds |
| Fees and Commissions | May include higher fees or hidden charges; need to inquire about all associated costs | Competitive and transparent fee structures; often lower overall costs |
| Technology and Platform Interface | Basic online platforms; may lack advanced tools and charts for investment analysis | Advanced trading platforms with research tools and real-time data |
| Additional Services | Access to banking services like loans, mortgages, CDs, checking accounts, and credit cards | Focused on investment services; may offer margin accounts, options trading, and retirement plans |
Considerations Before Buying Mutual Funds from Banks
Before committing to purchasing mutual funds through your bank, it’s important to conduct a thorough evaluation of both the financial implications and your personal investment needs. This decision requires careful consideration of several key factors that could significantly impact your investment outcomes.
Understanding the full cost structure of bank-offered mutual funds is essential. Banks may layer various fees into their mutual fund offerings, and these costs can add up to impact your long-term returns. Start by examining the expense ratio of any fund you’re considering; this ongoing cost reflects the percentage of your investment that goes toward the fund’s operation and management annually. However, expense ratios are just the beginning. Some bank-sold funds also carry sales charges, known as loads, which can be charged either when you purchase the fund (front-end load) or when you sell (back-end load). Look for “no-load” funds when available and appropriate. Additionally, banks may impose account maintenance fees, transaction costs for buying or selling shares, and early redemption penalties if you need to sell your holdings before a specified holding period.
But when evaluating these costs, it’s crucial to consider them in the context of the services you’re receiving. While higher fees might be justified if you’re getting valuable access to other banking services, investment guidance, and superior fund performance, they can be harder to justify if you’re primarily paying for basic fund access and minimal support.
Beyond the fee structure, take time to reflect on how bank-offered mutual funds align with your broader investment strategy. Consider your investment timeline. Are you saving for a near-term goal, like a home purchase, or are you building wealth for retirement decades away? Your time horizon should influence the types of funds you select and whether a bank’s typically more conservative offerings suit your needs. Risk tolerance plays an equally important role in this decision. Banks tend to favor more conservative investment options, which might align well if you’re a risk-averse investor. However, if you’re comfortable with more market exposure and seeking potentially higher returns, you might find bank offerings too restrictive. Consider how the available fund selection fits with your comfort level for market volatility and potential losses.
What Fees Are Associated With Buying Mutual Funds From a Bank?
Fees can include sales charges (loads), annual management fees (expense ratios), and account maintenance fees. Some banks may also charge a transaction fee—$20 to $50 per trade, for example—though many now offer no-transaction-fee funds. It’s important to ask for a detailed explanation of all fees before investing.
How Do Bank Advisor Incentives Affect the Mutual Funds They Recommend?
Most bank advisors are held to a less stringent “suitability” standard rather than a fiduciary duty, which would strictly mandate them to recommend the products that are in the best interest of their customers. Under this standard, they must recommend investments that are suitable for the client’s needs, but not necessarily the best or lowest-cost options. Thus they can prioritize their own interests or their bank’s interests over the client’s interests. Banks, moreover, may have only a limited selection of funds to offer, and these may carry higher fees. In addition, advisors are human and may receive commissions or incentives for selling certain funds, particularly those affiliated with the bank. This could ultimately lead to recommendations that favor the advisor’s interests over yours.
Are There Specific Mutual Fund Types That Banks Are More Likely to Offer?
Banks often promote their proprietary funds or those from partner institutions, which might limit exposure to funds from independent or competing fund families. In general, funds offered through banks may be more conservative than other offerings, and may include more simply structured funds, such as index funds.
How Do I Know if a Bank-Offered Mutual Fund Aligns With My Investment Strategy?
Always review the fund’s prospectus for information on its investment objectives, risk factors, fees, and historical performance. Also evaluate any additional fees or expenses layered on by the bank itself. Compare this data with your personal investment goals, time horizon, and risk tolerance.
The Bottom Line
While buying mutual funds from banks offers convenience and familiarity, it comes with important potential trade-offs in terms of fund selection, costs, and investment guidance. For some investors, particularly those just starting out or those who value integration with their banking services, bank-sold mutual funds may be an appropriate choice. However, more experienced investors or those seeking a wider range of investment options might find better alternatives through traditional brokerage firms.
Before making any investment decision, carefully consider your investment goals, compare costs and options across different providers, and ensure you understand all fees involved. Remember that the right choice depends on your individual financial situation, investment knowledge, and long-term objectives.