When Lenders Take ‘Relationship Pricing’ to the Next Level

This article was originally published in the Wall Street Journal on July 25, 2019

What to consider when banks offer rate cuts, special pricing and other discounts and incentives

By Katy McLaughlin

Banks increasingly want to be your everything: your mortgage lender, your financial adviser and, of course, your banker.

To encourage deeper bonds, banks dangle “relationship pricing” that offers borrowers lower rates in exchange for holding specific sums in the bank. Special treatment for good customers is nothing new, but today it’s highly codified. On the Citibank web site, a schedule explains that borrowers who deposit—or already have—$500,000 to a penny under $1 million at the bank get 3/8% off the mortgage rate, for example. SunTrust Bank offers tiered rate discounts, starting at ¼ point off for a client with at least $1 million in either self-directed funds or managed assets at the bank, said Sherry Graziano, head of mortgage transformation. In May, PNC Bank rolled out relationship pricing for mortgage borrowers who put funds in the bank’s wealth management division, said mortgage executive Peter Boomer.

But consumers should question a bank’s motives: Is it worth it to move investment accounts for a half-point discount? Are the bank’s fees and rates going to be competitive?

These questions are especially pertinent ever since Wells Fargo paid $4 billion worth of fines and settlements between September 2016 and the end of 2018 to address accusations that it incentivized employees to open millions of unwanted accounts for unwitting customers. Tom Goyda, a spokesperson for Wells Fargo, said of the scandal, “we are making significant progress in our work to identify and fix any issues, make things right, and build a better, stronger company.”

Federal agencies are examining the bank’s wealth management division, according to a recent company filing, amid accusations by former employees that employees were encouraged to route investments into products that yielded high fees for the bank. Mr. Goyda said, “the Board’s review is substantially completed and has not, to date, uncovered evidence of systemic or widespread issues in these businesses.”

Wells Fargo’s troubles underscore the importance of examining cross-selling offers carefully.

Sam Dogen, a former investment banker who runs the personal finance blog Financial Samurai, is in the process of refinancing a loan on his house in San Francisco. The large bank where he currently holds a self-managed investment portfolio offered him a 3% rate on a 7/1 ARM, he said, but he wanted to do better. Figuring Wells Fargo would be in the mood to regain customer trust and loyalty, he called a “home mortgage consultant” (a.k.a. loan officer) there and negotiated the following deal: He would move his $1 million portfolio to Wells. In return, he’d get a 7/1 ARM rate of 2.75% on his loan of $705,000.

Mr. Dogen, 42, said the rate difference combined with fee waivers and a credit will add up to about $17,000 in savings over the course of seven years. He calculated that moving his account would take two to three hours of signing, faxing or emailing paperwork, but will not incur any fees or taxes, he said. To him, it’s worth it.

“Home mortgage consultants do not receive any additional compensation as a result of any transfers, and advisers in our Wealth and Investment Management group don’t get any incentives specifically for the transfer of assets in these situations,” said Mr. Goyda.

Financial planners counsel examining offers, particularly before putting assets into a big bank’s wealth management division. Jirayr Kembikian, co-founder of Citrine Capital, a financial planner in San Francisco, suggested asking a potential adviser, “Are you acting under a fiduciary standard of care on all of your recommendations at all times?”

Another crucial question, he says: “How are you paid?” The goal is to make sure a wealth manager is transparent about disclosing any incentive to recommend a particular investment.

Another key question when moving managed assets: Will there be a change of custodian and, if so, who will pay those fees? Custodians—financial institutions that hold securities—may charge between $75 and $150 per account for transfers, said Ben Lies of Delphi Advisers in Vancouver, Wash. Some investments may need to be liquidated in taxable accounts or may have surrender fees, Mr. Lies said. If a bank wants your business badly enough, their wealth adviser should be willing to look over your holdings and point out assets that will be tricky to move.

Banks often require customers to hold large amounts of cash in checking or savings accounts to benefit from relationship pricing, said Mr. Kembikian. Only move large sums into these accounts if you would hold that much cash anyway, such as to maintain a liquid emergency fund, he counseled. Lower interest rates and inflation eat away at those savings, he said.

Philip Blancato, president of Landenberg Thalman Asset Management in New York, said crunching the numbers—as Mr. Dogen did—is key before signing anything.

Relationship pricing can offer good deals for some high net-worth clients, Mr. Blancato said. “But generally, I prefer people go out and find the lender who is going to give you the best offer.”

• Pricing can be flexible at some banks, so negotiate. Ms. Graziano at SunTrust said that a loan officer recently realized that a prospective mortgage client had lots of assets he might bring over. The loan officer contacted the “dedicated internal relationship team” and got the customer “a fabulous interest rate” to close the deal.

• Make sure to understand all fees. It does no good to get a rate cut just to pay higher than necessary asset management or monthly account fees. Make sure everything is clear before signing.

• Deposits can be temporary. Inga Chira, who runs Attainable Wealth, a financial planning firm in Los Angeles, said this fall her clients got a steep mortgage discount by pumping up their Chase Bank accounts to $500,000. The loan officer told her the money only needed to stay at the bank until the mortgage closed. Mr. Dogen said Wells Fargo told him the same.