8 Reasons why Clients prefer to place Money in Deposits than Investments
For many Bankers, Wealth Managers and Investment Professionals, they often meet clients who prefer to place money in deposits or fixed deposits.
Placing money in fixed deposit is cumbersome and time-consuming. To get higher deposit rates, one has to constantly track and compare for meagre returns.
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Isn’t it easier to invest into a money market fund, government bond or corporate bonds or set up an investment portfolio, get into an insurance savings plan such as endowment or single premium policies?
Here, we examine at 8 reasons why clients prefer to place money in deposits than investments:
No. 1 Why not?
Deposits and fixed deposits are the simplest financial instruments to understand. Almost everyone knows how a bank works. Deposit some money, and you get some interest. If you place the funds in a fixed deposit, you get a higher interest rate. You can withdraw the funds almost anytime by paying a small penalty or forgoing some interest earned, depending on the terms and conditions.
In some countries in Asia, there isn’t a need to do investments hoping for 5% returns when the deposit rates are 5.25% in India and in Indonesia, 6.5%.
Example of Fixed Deposit Rates in Asia:
|Country||12 Months Fixed Deposit Rate|
Selected Rates on 10th February 2016
No. 2 No Risk. No Fuss
Deposits are great. Clients perceive deposits carry no or little risks. So there isn’t any explanation to do. Although there is the risk of a bank-collapse or bank-run, no one really probe deep into it.
Everyone just assume it is great, safe and sound, except in panic years. In recent memories:
- Year 2008 (Global Financial Crisis)
- Year 1997 (Asian Financial Crisis)
No. 3 Other Source of Income
Majority of the clients don’t rely on investment returns for spending as they generate income from their jobs. Clients assume that they will be income productive for much of their life and when they retire, their retirement funds will always be sufficient, if they save more today.
They go for basic endowment plans (insurance) for savings. And because there isn’t a need for more source of income, there isn’t any urgency to do investments.
At times, the more adventurous move into property investments to generate rental income. A popular move in Asia.
No. 4 Bonds are unlike Bonds
In Asia, there is no major unified bond market. This creates a dysfunctional bond market as retail and individual investors are not able to actively participate, causing problems in price-discovery and debt-raising process.
For clients, this creates a major educational hurdle as they are not given the opportunity to learn about investments by taking the step into the next least risky asset class.
Common Asset Classes:
- Cash Equivalents
- Alternative Investments
No. 5 Have Bad Experience in Investments
Most people would have tried their hands at investments at least once in their life. Even if they have not, someone close to them such as their families or friends would had. Some would have horror stories of bankruptcies, divorce, suicide, broken families arising from investments.
The typical stories would be losing money in stocks or Unit Trust, and they swear by never touching those again.
Many never discover what went wrong with their bad experience. They don’t want to talk about it. Placing money in deposits avoid all potential trouble with investments.
No. 6 They had Received Wrong Advice
Another reason why they prefer deposits is they may had received wrong advice from Wealth Managers. It may be true or false, but the important point is, they believed and perceived they had been wrongly advised.
Example of their perceived conclusions:
- High Risk Products that result in loss of money
- Complex Products that result in loss of money
- Products that have long duration or no / less liquidity
- Products that didn’t fit their needs such as regular savings investment or savings plan for a retiree
- Products that have high fees or commissions
To avoid what they perceived as bad advice, deposits would be the best solution.
No. 7 Peace of Mind
Imagine you have $100,000 of assets. And the $100,000 is invested and fluctuating everyday.
Illustration of $100,000 Portfolio:
Sometimes you are happy, and sometimes you become disappointed as in the months of February and April (above illustration). In these months, there is a substantial change in value.
The difference, you could have paid for a new car downpayment, a nice vacation or dine extravagantly. The thought of counting the loss, just makes your mind goes a little jittery.
For some clients, they just couldn’t deal with the pressure of a fluctuating investment portfolio. They prefer to have less stress and a peace of mind.
No. 8 They Always Need the Money Soon
Having cash on hand is always a safe feeling. There is always something you could do with the money. Everyone wants to keep some cash for big spending items such as downpayment for a house or a car, doing a post-graduate course, going on a long holiday or for emergency use.
People always think they need the money soon. But they almost always never use it. This is great as that is likely how they accumulate more and more money. With the accumulated savings, they have now parked a decent or substantial amount in deposits or fixed deposits.
They have saved well to get there. They just haven’t thought of how to grow it.
These are 8 reasons why clients prefer to place money in deposits. Anymore?