In last month’s post, “Big banks in big denial,” I commented on an escalating CBC News exposé on how big bank employees feel under “incredible pressure” to push products on unsuspecting customers.
One question I didn’t explore then was: Why? As fond as many Canadians are of their banks, why would bank employees feel pressured to abuse that trusted bond?
I think I can answer that pretty easily: Compensation drives behaviour.
It’s human nature, whether you’re a butcher, a banker or a candlestick maker (to mangle a certain nursery rhyme). If certain behaviour is going to earn someone a higher income (or keep their job for that matter), then it is only reasonable to expect him or her to behave that way.
This is why I believe the first order of all large financial institutions, especially the banks, should be fixing the compensation model that drives many bankers’ behaviours. High-pressure “what have you sold for us lately” tactics run polar opposite to what should be all financial professionals’ true north: aligning their own incentives with their clients’ best interests.
What I learned firsthand during my time on Bay Street is that those beholden to big financial institutions are instead subject to a myriad of conflicting incentives that often pit their employer’s profits against their customers’ financial well-being. Big banks have many different ways to spell out the quotas or points employees must meet … and meet again. If they don’t, it affects their bonuses, performance reviews and even continued employment.
The big bank brokerage (BBB) firms are no different, but instead of quotas or points they use their “payout grids” to adjust behaviour. In a nutshell, a payout is the percentage of earned revenue an advisor keeps after the BBB takes its share. These grids are set up to give higher broker payouts to those who push in-house products, new issues, and other bank products and services du jour. Even if your broker is compensated by fees instead of commissions, he or she may be incented to only pick stocks from the bank’s proprietary focus list (with a focus that probably differs from yours).
Instead of establishing misaligned compensation models and off-base focal points, wouldn’t everyone be better off if banks leveraged their customers’ fond feelings into solid, long-term success for one and all? As I alluded to last month, personally I won’t be holding my breath waiting for this to happen.