Uncle Doug's Bank
Apart from owning Profile Investment Services, I have a
make-believe company, which I call a "private bank." It's so exclusive, in fact, that in
order to be a client of this pretend institution, you must be either one of my
children or one of my nephews. The
name of the bank: "Uncle Doug's Bank."
Unlike a normal bank whose mission is to make money, the reason
d'etre of Uncle Doug's Bank (UDB) is to educate children about different
aspects of handling money. Some of
the important lessons they've learned are relevant to all investors:
"Uncle
Doug, how come the bank is never open?"
It's not that
UDB is never open, it's just that the hours aren't convenient to the
so-called "clients."
Since I’m working at Profile during standard business hours, I can't
meet with the kids at those times.
In fact, they usually ask me to do banking about five minutes before
Shabbat starts or moments before bedtime.
The last thing I want to do at those times is to open the bank. So I've created a few unique services
for my young clients. My favorite
is the "drive-through window."
A child can write his name on an envelope, seal in his deposit, and
leave it on the kitchen counter.
Later on, at my leisure, I record the transaction in his account.
The
lesson?
Make sure
your financial institution’s hours are convenient. Some folks in Israel still prefer to keep their money in a
no-interest checking account in America or in current accounts in Israel that
also pay nothing. Since some of
the U.S. banks refuse to send correspondence overseas, the customers have their
statements mailed to a friend in America.
If these banks don’t have internet services available, depositors can't
log on to check their balances.
Compare that with the advantage of doing business with a local
company. Working with a company in
the area allows you the opportunity to visit and speak with a member of the
firm, and get personalized attention. Also, working with a local financial office means that
local business hours apply in addition to overseas market trading hours. The youngsters who play
"bank" at UDB are too naive and often too busy playing other games to
think about quality service, but adults should understand the importance of
this aspect of their investing and should choose to work with a financial
institution where customer service comes first.
"Uncle
Doug, what happens if you lose the plastic cup that you keep our money
in?"
The “vault”
for UDB is a cup in the cupboard.
The question that the worried kids ask, however, has led to discussions
of the safety of the institution where the money is kept. If there is a bank
robbery at UDB, the children know that Uncle Doug himself will guarantee their
deposits out of his own capital. That's
no problem when the assets total less than a hundred shekels. However, when your money is in a real
bank, what are the guarantees?
The
lesson?
The U.S. has
the FDIC (Federal Deposit Insurance Corporation) to protect depositors in the
event of a bank failure. That
insurance covers your first $100,000.
Above that, however, you may not be protected. When a responsible financial firm buys CDs (Certificates of
Deposit in a bank) for clients with over $100,000, they advise the client
to divide the CDs among different
banks, to avoid exposure to the risk of a bank defaulting. Israel doesn’t have an FDIC
equivalent. Even though the
general feeling is that the government will help banks in default pay off the
investors, that’s not official policy.
Often advertisements boast of investments with certain assurances
associated. Check carefully. A guaranteed product is only as good as
the guarantor. My kids and
nephews sleep well at night knowing that Uncle Doug will back UDB; do you know
who's protecting your investments?
"Uncle
Doug, how come I earn so little interest on my deposits?"
UDB pays a
very high rate of interest to the young investors in hopes of teaching the
value of saving. However, because
small sums of money are involved, the children don't really feel they're
getting very much. If a child
deposits ten shekels and receives 5%, the resulting 50 agarot will seem
miniscule - and it is. Therefore,
the children will sometimes get one or two shekels every few months on their
deposit (which annualizes to 20% or more). Unfortunately, in the real world, banks don’t offer such
generous interest.
The
lesson?
Different
banks offer a variety of terms for deposits. When a trusted financial adviser buys bank deposits (or
bonds, stocks, funds) for clients, he shops around to try to get the best
value. If you choose your own
investments, be sure to learn exactly what the terms are. Check out which firm is backing the
investment, and make certain that the investment house through which you make
your purchase is properly insured.
While Uncle Doug’s
Banking Services don’t parallel those of the real world, the lessons learned by
the young investors should serve them well when they (and their meager sums)
mature.
Douglas Goldstein is the
director of Profile Investment Services. He is a licensed financial
professional both in the U.S. and Israel, and helps people who invest in the
U.S. He is a member of the
Financial Planning Association, and
offers securities through Portfolio Resources Group, Inc. a registered
broker dealer, Member NASD, SIPC, SIA. For more information, call (02) 624-2788
or (03) 524-0942.