One of my long-term clients - for clarity, we'll call him Jim - recently approached me asking how he should help his aging mother grow the estate destined portion of her investments.
Jim had recently taken on Power of Attorney (PoA) for his mother who was in her 90's. His initial review showed some GICs, money in a chequing account and over $100,000 in a savings account, all at a BC branch of the Royal Bank of Canada (RBC). Certainly, a very conservative investment strategy, and a typical one for a retired person at any bank branch. Wanting to make sure that his mother was getting value for her money, Jim checked out the account statements. What he found shocked him! The savings account was accumulating $0.80 interest a month! That's an apparent interest rate of 0.01%
What happened?
Jim enquired as to account history, and found out that the account was of a type no longer offered by RBC, and was likely over 30 years old! The account initially was offered to the mother as a way to get bank service charges covered by the branch, for a minimum daily balance of $5,000 at the time. The interest rate paid for the account had never changed, meaning the mother had earned $300 over an assumed 30 year period.
Jim's mother said she only wanted one savings account. Her previous account wasn't earning much money either. It made sense to her to save the monthly account charges (about $7.50 at the time). No one had ever suggested she put the extra money not needed to cover the "no fee" clause into any other investment which might have paid her more interest.
To have the same purchasing power as she would have had with $100,000 in 1995, Jim's mother would need $184,810 now. She only has the initial investment, as essentially, there has been no growth in 30 years. She's lost almost half the purchasing power she once had!
But, there are two sides to every transaction!
What about the Bank?
In our article
How Banks Make Money, we show that these funds would have been used to fund floating rate mortgages and loans. Since the mortgage rate is lower than other rates, we'll use the mortgage rate to provide a minimal impact on bank profitability.
Floating rate mortgages were above 7% in 1995, but declined to average over 4% until the US mortgage scandal in 2008. From there to the end of Covid, the rates were around 3%. Subsequently, they have increased to over 6% on average. For detailed mortgage rate history, check websites like
this one. Since the bank also uses funds like this savings account to back consumer loans, we will use an average rate of a 5% return on floating rate money loaned out by the bank in this period. Finally, remember that RBC and the other banks have the ability to use leverage, so that this $100,000 account allows the bank to lend out $1 million!
So RBC was generating revenue of over $50,000 a year from this account! Over 30 years, that's a minimum of $1.5 million added to their revenue. Their annual costs? $10 in interest, and less that $100 in foregone account fees! RBC took advantage of a senior to increase their profitability, while significantly negatively impacting the mother, and her estate!
Simply unconscionable!
What Can You do?
While this story involves RBC, I don't believe that it is unique to that bank. If you have an elderly parent, take an active interest in their finances, as much of this can be confusing to the elderly
Prior to Ronald Reagan's deregulation efforts, this type of situation would never have occurred. The banks were required to operate in the customer interest (called having
fiduciary responsibility). The regulator of the day would have had a major concern with such a story. Sadly, the current regulator apparently does not regard this as an issue. The resolution has to come from public activism. There are 2 things you can do.
Copy a link to this post to all your social media, asking fellow Canadians to spread it widely. Hopefully, the unwanted publicity will cause some embarrassment to the banks. Ideally, the banks should reimburse all the elderly similarly affected, Retroactively credit these accounts with the GIC rate for each year the account was open. Such an action would at least restore the purchasing power lost by Jim's mother! The bank would lose less than 2 years of the income they have generated at her expense!
Call or write your federal politician asking for changes to the Bank Act. The banks should share more of the profits with the people who provide the money they use to make more money! My favourite idea? Requiring savings accounts with balances in excess of $10,000 to pay interest rates equal to the current floating rate mortgage. The bank would still be keeping 90% of the revenue generated through their loans activities. The benefit to Canadians would be receiving 10% of that revenue in return for the use of their money.
Finally,...
Keep educating your self, and get involved when you don't like what you see.
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