There are a host of suitable practices to build wealth over time. The most common examples include living below your means, avoiding credit cards and other high-interest debt, consistently saving and long-term investing.
The major U.S. providers of investment services include national banks and brokerages such as JPMorgan Chase, Bank of America, Merrill Lynch and Charles Schwab. When it comes to investing, often the local and regional financial institutions, such as community banks or credit unions, are overlooked.
Let’s explore the benefits of working with local financial institutions for wealth management.
Common Types of Local Financial Institutions
Community Banks: Community banks are generally smaller financial institutions that have a local or regional focus. The customers of community banks are residents and businesses from the area seeking individual or commercial deposit accounts and loans. Community banks often appeal to those seeking a personalized banking relationship with a local institution that provides excellent customer service.
Credit Unions: Across the U.S., local credit unions quickly emerged during the 1930s and 1940s. The credit union model is distinctive. Operating as a not-for-profit cooperative, a credit union’s customers are members and part owners of the institution. The overall concept is to provide financing and banking services featuring lower interest rates and fewer fees for members rather than fueling shareholder profits.
Local Brokerage Firms: These independent, locally owned firms specialize in assisting clients with creating portfolios and retirement plans containing various investment products.
Personal Banking Relationships and Customized Investment Services
Compared to larger banks and brokerage firms, community banks and credit unions are better positioned to establish enduring financial relationships with their customers. Financial professionals at these institutions will take the time to understand your current circumstances, risk tolerance and short and long-term goals. You may appreciate the continuity of working with a trusted local advisor who is a member of your community.
Local institutions may take a more comprehensive view of your financial situation and customize your investment strategy instead of proposing one-size-fits-all solutions. Those with an existing banking relationship with a local institution may benefit from having their finances centralized. The investment advisor will have a clearer view of your financial profile, including your checking and savings accounts, certificate accounts, mortgage loans, IRAs, etc.
Local Institutions Offer More Than Traditional Banking Services
Community banks and credit unions have traditionally served as depository institutions, providing individual and business checking and savings accounts, as well as various loan options. While they are typically not accredited to offer investment advisory services or buy and sell securities like stocks and bonds, expanding their offerings makes sense, given their existing financial relationships with customers.
Local Institutions Form Partnerships to Expand Their Offerings
To address this, many community banks formed partnerships with external strategic partners to broaden their service offerings. These arrangements can vary widely. In some cases, banks simply referred customers interested in investment services to their partner institutions. In other cases, financial professionals from the partner organizations worked onsite, integrated into the bank as if they were employees.
Credit unions took a similar path toward offering investment services by using Credit Union Service Organizations (CUSOs) during the 1980s. Here, the credit union and CUSO shared resources, which allowed credit union members access to investment products without “overstepping” the boundaries imposed by government regulators. Finally, the Financial Modernization Act of 1999 loosened many restrictions on credit unions that prevented them from directly offering investment products.
Aside from having access to a wider array of investment products, local financial institutions may also get other benefits. Some examples include analytical support, enhanced digital platforms, and more powerful cybersecurity. Conversely, the strategic partners gain access to a pool of new investors who have established a financial relationship with the local bank or credit union.
Common Types of Investment Products
What are some of the most common investment products available through community banks and credit unions?
Certificate Accounts (or CDs): The depositor agrees to place a sum of money in an account for a fixed term, often between six months and five years and earns interest or dividends.
Individual Retirement Accounts (IRAs): They are used to save for retirement and offer tax advantages.
Mutual Funds: A mutual fund typically contains a diverse mix of investments, which may limit risk. Investors may choose stock mutual funds, which generally include a mix of individual stocks. More conservative investors may prefer bond mutual funds, which largely contain government bonds.
Exchange Traded Funds (ETFs): An ETF is a fund containing assets such as stocks or bonds that are bought and sold on stock exchanges and usually offer reduced fees.
Annuities: An annuity has an investment or accumulation period where funds are contributed to an account. At some point in the future, such as during retirement, the funds are returned and serve as a stream of income.
Supporting the Local Community and Economy
Community banks and credit unions are financial institutions that often contribute much more to the region than banking or investment services. For example, credit unions were largely formed to allow residents access to affordable financing options. Similarly, community banks are known for supporting the area by offering small business or mortgage loans to those who otherwise might not qualify. These are only a few of the advantages, which are in sharp contrast to many national financial institutions.
Choosing to Build Wealth With Local Financial Institutions
Unlike in years past, many community banks, credit unions and other local financial institutions now provide a host of investment products. These small institutions offer many of the same investment options, such as stocks, bonds and mutual funds, offered by national banks and brokerage houses. However, the local financial institutions distinguish themselves by providing more personal service and customized investment services.
These institutions tend to be community-oriented and support local events, inspire economic growth and reinvest in the region. Consumers are encouraged to explore the different types of community-based financial institutions in their area.
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