The Financial Industry Preys on Inertia

by Mr. Cheap

Thicken My Wallet recently made the brilliant statement “The Financial Industry Preys on Inertia”. Tied in with Money Gardener’s Relationship Banking post I think this single statement summarizes a great deal of the problems of banking and personal financial management, and at the same time points out a simple solution.

When a bank offers a teaser rate, what they’re basically saying to you is “you’re so stupid and lazy, we don’t even need to offer you much of a deal. We’ll offer you a good deal for a short time, then milk you for the rest of your life. Ha ha, ha ha, ha ha”. The pathetic part is they’re right – we are stupid and lazy. Apparently bank’s love sending out mortgage renewal forms right before the end of a mortgage term (I’m not sure exactly how this works, I’ve never renewed a mortgage), so that you don’t have time to shop around. Most people sign the form, get the mortgage from the same institution again, and pay a higher rate then what that institution is offering new mortgage applicants!!! If you do this I hate you (as Ramit Sethi would say). Inertia makes the bank money (at your expense).

A buddy of mine is a teacher and didn’t even know what his salary was (he made two guess, $10K apart and said it was “one of those, I think”). I can’t criticize him too much, as I’ve lost checks a few times and discovered that I missed payment (once for around $1500). He didn’t bother contributing to his RRSP, because one of his colleagues had told him “it’s better not to”. I asked him what her reasoning was for such advice and he had no idea (the only thing I can think of is that their pension is so good they can rely on that for retirement planning – I’m not so sure about this myself, but I’m not a teacher). Its great when we work a job we love, and earn enough money that we don’t need to think about it, but we’re stupid and lazy beasts (things might change in the future, why not spend a bit of time planning for it).

We work very hard for our money (in most cases). It blows my mind how willing people are to throw away thousands of dollars (often many, many weeks of labour once you factor in taxes and living expenses) rather than think about something for a couple of minutes or make a 30 minute phone call.

The advantage to this is that if we’re willing to correct our behaviour: to take advantage of the teaser rates then move on to the best deal once its finished, to get pre-approval for a mortgage renewal 120 days before it comes due, and to keep track of our on-going finances, catch money that disappears and plan for retirement, you will be paid handsomely for your time – regardless of what you earn or your lifestyle.

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{ 10 comments… read them below or add one }

1

Bang on.

Except, instead of “inertia” I’d say the financial industry preys on ignorance. We all know that sometimes you’re willing to pay for convenience. Even frugal old me has, very occasionally, used a white label ABM (shocking I know) once in a blue moon.

But the key thing is that I’m actually aware of the cost, and it’s a choice I make. I don’t use the dirt-cheapest discount broker because I like having my accounts in one place. I chose my bank because it has the most ATM’s in my city. I don’t buy mutual funds for simple things like indexing because I can do that myself for cheaper. But I would, theoretically, pay someone a MER for handling my investment in an asset I don’t understand very well or can’t readily deal with (specific sectors, or countries, or precious metals, for example.) When presented with options, sometimes I’m willing to pay for the added service. But usually not. I’m never blind to what’s going on.

They’re a choice I make. When my friend signs up for the first high-load high-MER mutual fund her adviser recommends just to end the boring phone call, she’s also paying more, but it’s not a choice because she hasn’t made herself aware of the options.

It drives me batty. The best remedy is can figure out is for us all to keep harping on the subject in the hopes that people take it in thorugh osmosis.

The financial industry preys on ignorance and laziness. That’s great for me as a shareholder in a bank. BUt it’s up to individuals to put themselves on the profitable side of that ledger.

2 Anonymous

I used one of those bloody white label ATMs in Vancouver years ago. The damn thing kept telling me I was trying to withdraw too large an amount, but wouldn’t tell me what the limit was. I finally got money out of it, and you guessed it, the damn thing charged me for 4 transactions (each ATTEMPT to withdraw money). Since then I’ve sworn they’ll never get another cent out of me.

3

Not that I go very often but a few years ago I went to the ‘ballet’ and used an atm and I think the charge was 15%. Quite a ripoff.

As for teachers – they have a great pension plan which they (and us) pay into. Unless they are planning to retire pretty early or have some specific retirement plans which require more $$ then I would agree that it’s probably not worth it for most teachers to save outside of their pension.

Once they get closer to retirement though and have paid off their mortgage then they might start saving more so that they don’t suffer a standard of living decline upon retirement.

Mike

4

Forgot to mention – Rob Carrick said in his latest book that 30% of people just sign the renewal notice for their mortgage.

As for how it works, the bank sends you a form letter about a month before the mortgage is due with the posted rates for various terms (ie 1 yr, 2 yr etc) and you can just check the term off, sign and return. Very easy!!

Mike

5

Banks, and other financial service companies prey on the following:

Ignorance
Worry (Safety)
Laziness
Habit
Comfort
Trust

Teachers who are retiring now have an amazing pension plan. I believe the amount they receive in retirement is equivalent to about 5% below their actual income pre- retirement. Whether this can continue into the future remains to be seen.

6 Mr. Cheap

4P: To be able to invest tax free is hard to turn your nose up at though! Even if the pension is going to account for most of their pre-retirement income, I’d be really tempted to max out my RRSP too and either retire early or retire in MAJOR style (with retirement income > working income). Perhaps the high taxation after retirement if they’re getting such a generous pension would minimize the advantage (I’d still rather pay 40% tax in the future then 40% tax right now).

And when you get the renewal notice, have you compared the rates to their posted rates? Are they higher in the renewal notice?

MoneyGardener: Your absolutely right.

7

Mr. C – yes the high taxation in retirement is certainly a factor but the tax free investment would probably be worth it.

However…one other thing though is that when you have a pension – the contributions (employee & employer) count as rrsp contributions so in the case of my Dad (this might be way out of date), he told me he used to contribute 8% of his salary for pension and the Ont gov’t also contributed 8% so in most cases there will be very little, if any rrsp room to use. At least that’s the way I remember it.

I don’t remember if the renewal had the exact posted rates but I think they did. Even so, if you are a new customer and go into a bank and start asking about a mortgage, I’m sure you’ll get at least a quarter % off the posted rate just for walking in the door which you don’t get with the renewal notice.

Mike

8

Sorry to go on about teachers but I’m the only non-teacher in my family so after having to listen to their whining for many many years, I do know a little bit about them 🙂

One more thing – teachers are limited in their early retirement options – they have to reach certain amounts of years experience + age to qualify for various percentages of their salary in retirement. You might have heard the term “90 factor” – this is age + years of experience. In my dad’s case he retired with an 85 factor which gave him an indexed pension equivalent to 70% of the average of his best five years of full salary.

If you consider that teachers pay a lot of tax while working and don’t have much rrsp room, it makes it pretty hard for a teacher to retire really early ie 45 or earlier.

9

The teacher pension varies from state to state, and even from district to district in some cases. Does anyone have any advice in how to determine if a pension is good enough not to save or save less?

10

What are these expiring mortgages?

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