September 5, 2017

Well, at least as long as you are solvent

Last year Locke Consulting Inc. assisted a particularly well paid professional who was having debt issues.  This person had a private banker at a major Canadian bank – which means that she was paying hundreds of dollars each month to have the banker attend to her financial needs.  The banker would essentially concierge the provision of other bank services – lending, investing, advising and so forth.

All of the client’s income was deposited each month to the bank where deposits and payments were monitored by the private banker.  The client would call up and say, “I’d like to buy a new car” and the banker would say “sure, what are you looking at and how much do you need?”  The banker was being paid a commission from the bank for “enhancing the client’s bank portfolio“.

In other words when the client deposited money into an investment the bank shares in the returns on the investment in the form of “management fees” and it would have been able to add the investment to its balance sheet as an asset held by the bank.  Similarly whenever the client borrowed money, even though the client would be issued a preferred interest rate (one of the benefits of having a private banker) the private banker would receive a bonus in the same manner any other salesman might.

So when the client reached about a million dollars in unsecured debt the private banker must have been nearly salivating over the commissions.  Making minimum monthly payments on borrowing, which clients are encouraged to do, has the effect of extending the term over more years but also frees up more money to facilitate further borrowing and investing.  Assuming an average rate of 10% with payments over a thirty year term the client is worth about two million in interest charges alone – the standard commission for selling a house is 5% so if that were a real estate transaction the realtor might be looking at a $100,000 payday.

After filing a proposal which had the effect of reducing the face amount of the debt, stopping the accrual of further interest and providing the client with the ability to be debt free in five years instead of thirty – we received a call from the private banker who expressed surprise at the client’s decision to seek an alternative debt solution.  Nonetheless, the file left the private banker’s desk and was sent to the bank’s insolvency department in Toronto where the insolvency specialist agreed to the terms of the proposal and the client continued to make payments and meet her obligations in accordance with the proposal.

But that’s not the end of the story – our office recently received a telephone call to check up on the status of the proposal, but not from the insolvency group rather from a newly assigned private banker who would like to win the “high value” client back.  After all there is less than one half of one percent of Canadians in that individual’s income bracket – in other words the commission value of that one client is about the same as 100 regular people.

Now certainly this is a less common scenario in the sense that we are talking about a high income earner and the private banker was scrutinizing everything for the client on a very regular basis, however, when average people walk into the bank we can all expect the same basic treatment.  Your account manager will look at your income and ability to invest your savings and acquire debt with the bank with a view to getting you as far into debt as you can be without missing payments.  That is something that many people forget in dealing with banks – “they are in the business of lending money”, in other words they WANT to be able to lend you money.  

If your banker is turning you down for a loan you should probably be speaking with a trustee about how to clean up the mess you are most likely in.  But even more importantly for all of us we should be trying to live debt free lives – staying within our budgets instead of spending tomorrow’s paycheck today.  That is our own responsibility!