Tips on Buying Financial Products

We all want to protect ourselves, our income and our families. To ask someone if these are important is silly. The two most important questions surrounding financial products must be WHAT and WHEN.

I would like to give you my guide on what products to obtained and when you should obtain them. There is absolutely no need to buy all the products at one time. Take things in easy stages. 

  • A Will: The first thing to do is write a Will. To do this you need to be over the age of 18 and you don’t need a solicitor. So this is the first thing you must do. Write a Will today and have two people witness that Will. You may not have a lot to put in the Will but you do have a body and probably a preference for burial or cremation. You may even have strong feelings about organ donation. Everyone should have a Will if they are over the age of 18.
  • A Trust: Put a Trust in the Will you have just written. You can start a pilot Trust with just 5. Everything you own can go in that trust and having one is a wonderful foundation for protecting your future wealth for your future family. This can be the start of your Inheritance Tax Planning.
  • Income protection: If you are working you should protect your income in case you become long term ill or are have an injury. That should go without saying. Many employers provide this free, in the form of six months full pay and six months half pay. If income protection is not part of your employment package then you need to address this shortfall quickly.
  • Critical Illness Cover: Once you have protected your income the next logical step is to protect your health. If you are unfortunate enough to be diagnosed with a critical illness then this type of policy would provide you with either a lump sum or an income. Most people start with a policy which lasts until State Retirement Age. These policies have no surrender value and should be viewed as a life policy which pays out while you are still alive. You don’t need any life cover at this stage unless you have financial dependents such as elderly parents or relatives who are ill.
  • A Pension: It is a good idea to start funding for retirement as young as you can. Many employers will provide you with a pension paid for from deductions from your pay. If you want a bigger income in retirement than the one provided by your pension then a discussion with a financial adviser would be beneficial. Not funding for retirement is a folly. Sometimes, as with many public sector schemes, there is Death in Service benefits built into the pension. If this is the case it is a good idea to ask that the payout is made into the Trust within your Will. Remember the pilot trust above. This will reduce tax liability and speed up the payout. Instantly you should now see the benefit of writing the Will and starting the Trust.
  • Marriage and a Family: At this stage many people are thinking about getting married and starting a family. As far as protection is concerned the foundations have been laid and the first priority is a home. Protection is now for the family and not just for yourself.
  • Mortgages: If you are buying a home you will probably need a mortgage. There are only two types of mortgage, Repayment and Interest Only. Seek professional advice from an independent mortgage broker before choosing a mortgage. It may be difficult to explain why many first time buyers opt for repayment mortgages but many do. I would suggest that you opt for a mortgage which lasts until State Retirement Age and possibly discuss never completing your mortgage. It is always wise to seek advice.
  • Life Cover: You don’t need life cover for a mortgage. Many lenders force borrowers to have life cover to protect the loan, but it is not necessary. Life cover is there to protect a family and not a lender. As a rule of thumb the level of life cover should be about ten times your income. Don’t worry, it is cheap. Please try to avoid any form of joint policy and ensure that the policies are written in trust. Once again you would be wise to seek advice.
  • Investments: Once again, seek advice. Remember that your investments should match your attitude to risk. Try not to put all your eggs into one basket because spreading your investments over several investment options is lie spreading the risk. There is so much to choose from. Examples include bank accounts, buildings society accounts, bonds, ISA’s, Unit Trusts not yo forget pensions and property.
  • Please Remember: I would suggest that you should start you financial portfolio as soon as you leave school and begin with the writing of a Will which includes a pilot Trust. From there, protect yourself and your income. Take advice when choosing a mortgage and never buy a joint life policy. Make sure when investing that the products your choose match your attitude to risk. Always try to seek professional advice. It is usually free.

These are the personal preferences of the author and in no way represent the strategy of any particular financial institution. They are my personal preferences and should not be regarded as global recommendations. Each person’s financial requirements are specific and thus require a fact find to be carried out by a qualified and authorised adviser before any recommendations can be given. 

Thank you for reading this article.

What to Know Before You Compare Financial Products

If you are considering any borrowing then you need to know a couple of things before you go putting pen to paper.

The APR for Financial Product Comparisons
A company will always claim that the APR that they have placed on a product is inclusive of all the costs; it never is. There are always going to be hidden extras and the sooner you realise this the better. Financial institutions use clever wording and other underhanded techniques in order to make a product look more favourable than it actually is.

As aforementioned they will always say that everything has been considered so that a customer can look at their product and compare it to similar products being offered by other companies. They never include everything, and by the time you have been charged for the likes of insurance and administration, and only brief you about it in the fine-print when the contract is sent out to be signed.

The Credit Score Issue
There are always nice big banners everywhere advertising this irresistible APR and it is only natural for people to assume that this APR is applicable to all and sundry. The truth is though that people who benefit for such rates are those that have a coruscating credit record.

Good for you if you do have an immaculate credit rating as you can get these deals, but for the people that have made the mistake of perhaps making one late payment it is a case of having to get a product with a far less favourable APR attached to it. You see this is the trick that the banks like to play. They get people interested and in their typically insidious, insipid manner, they turn a good deal into a not so good deal. people think ‘Oh well now I’m here I might as well…’

Make sure if you are about to get sucked into the ‘ostensibly good APR on a product’ vortex, that you speak to a person from the financial institution and you find out what the actual cost of a policy is going to be once they have actually added everything up and charged you what they had every intention of charging you in the first instance.

Can You Trust Your Financial Adviser?

Heroes or villains?

“All industries have a few bad apples. I would say that 80% of financial advisers are either good or very good” or “It’s just 99% of financial advisers who give the rest of us a bad name”

Financial advisers, also called financial consultants, financial planners, retirement planners or wealth advisers, occupy a strange position amongst the ranks of those who would sell to us. With most other sellers, whether they are pushing cars, clothes, condos or condoms, we understand that they’re just doing a job and we accept that the more they sell to us, the more they should earn. But the proposition that financial advisers come with is unique. They claim, or at least intimate, that they can make our money grow by more than if we just shoved it into a long-term, high-interest bank account. If they couldn’t suggest they could find higher returns than a bank account, then there would be no point in us using them. Yet, if they really possessed the mysterious alchemy of getting money to grow, why would they tell us? Why wouldn’t they just keep their secrets to themselves in order to make themselves rich?

The answer, of course, is that most financial advisers are not expert horticulturalists able to grow money nor are they alchemists who can transform our savings into gold. The only way they can earn a crust is by taking a bit of everything we, their clients, save. Sadly for us, most financial advisers are just salespeople whose standard of living depends on how much of our money they can encourage us to put through their not always caring hands. And whatever portion of our money they take for themselves to pay for things like their mortgages, pensions, cars, holidays, golf club fees, restaurant meals and children’s education must inevitably make us poorer.

To make a reasonable living, a financial adviser will probably have costs of about £100,000 to £200,000 ($150,000 to $300,000) a year in salary, office expenses, secretarial support, travel costs, marketing, communications and other bits and pieces. So a financial adviser has to take in between £2,000 ($3,000) and £4,000 ($6,000) a week in fees and commissions, either as an employee or running their own business. I’m guessing that on average financial advisers will have between fifty and eighty clients. Of course, some successful ones will have many more and those who are struggling will have fewer. This means that each client will be losing somewhere between £1,250 ($2,000) and £4,000 ($6,000) a year from their investments and retirement savings either directly in upfront fees or else indirectly in commissions paid to the adviser by financial products suppliers. Advisers would probably claim that their specialist knowledge more than compensates for the amounts they squirrel away for themselves in commissions and fees. But numerous studies around the world, decades of financial products mis-selling scandals and the disappointing returns on many of our investments and pensions savings should serve as an almost deafening warning to any of us tempted to entrust our own and our family’s financial futures to someone trying to make a living by offering us financial advice.

Who gets rich – clients or advisers?

There are six main ways that financial advisers get paid:

1. Pay-Per Trade – The adviser takes a flat fee or a percentage fee every time the client buys, sells or invests. Most stockbrokers use this approach.

2. Fee only – There are a very small number of financial advisers (it varies from around five to ten percent in different countries) who charge an hourly fee for all the time they use advising us and helping to manage our money.

3. Commission-based – The large majority of advisers get paid mainly from commissions by the companies whose products they sell to us.

4. Fee-based – Over the years there has been quite a lot of concern about commission-based advisers pushing clients’ money into savings schemes which pay the biggest commissions and so are wonderful for advisers but may not give the best returns for savers. To overcome clients’ possible mistrust of their motives in making investment recommendations, many advisers now claim to be ‘fee-based’. However, some critics have called this a ‘finessing’ of the reality that they still make most of their money from commissions even if they do charge an often reduced hourly fee for their services.

5. Free! – If your bank finds out that you have money to invest, they will quickly usher you into the office of their in-house financial adviser. Here you will apparently get expert advice about where to put your money completely free of charge. But usually the bank is only offering a limited range of products from just a few financial services companies and the bank’s adviser is a commission-based salesperson. With both the bank and the adviser taking a cut for every product sold to you, that inevitably reduces your savings.

6. Performance-related – There are a few advisers who will accept to work for somewhere between ten and twenty per cent of the annual profits made on their clients’ investments. This is usually only available to wealthier clients with investment portfolios of over a million pounds.

Each of these payment methods has advantages and disadvantages for us.

1. With pay-per-trade we know exactly how much we will pay and we can decide how many or few trades we wish to do. The problem is, of course, that it is in the adviser’s interest that we make as many trades as possible and there may be an almost irresistible temptation for pay-per-trade advisers to encourage us to churn our investments – constantly buying and selling – so they can make money, rather than advising us to leave our money for several years in particular shares, unit trusts or other financial products.

2. Fee-only advisers usually charge about the same as a lawyer or surveyor – in the range of £100 ($150) to £200 ($300)) an hour, though many will have a minimum fee of about £3,000 ($4,500) a year. As with pay-per-trade, the investor should know exactly how much they will be paying. But anyone who has ever dealt with fee-based businesses – lawyers, accountants, surveyors, architects, management consultants, computer repair technicians and even car mechanics – will know that the amount of work supposedly done (and thus the size of the fee) will often inexplicably expand to what the fee-earner thinks can be reasonably extracted from the client almost regardless of the amount of real work actually needed or done.

3. The commission paid to commission-based advisers is generally split into two parts. The ‘upfront commission’ is paid by the financial product manufacturers to the advisers as soon as we invest, then every year after that the adviser will get a ‘trailing commission’. Upfront commissions on stock-market funds can range from three to four per cent, with trailing commissions of up to one per cent. On pension funds, the adviser could get anywhere from twenty to seventy five per cent of our first year’s or two years’ payments in upfront commission. Over the longer term, the trailing commission will fall to about a half a per cent. There are some pension plans which pay less in upfront commission. But for reasons which should need no explanation, these tend to be less popular with too many financial advisers. With commission-based advisers there are several risks for investors. The first is what’s called ‘commission bias’ – that advisers will extol the massive potential returns for us on those products which earn them the most money. So they will tend to encourage us to put our money into things like unit trusts, funds of funds, investment bonds and offshore tax-reduction wrappers – all products which pay generous commissions. They are less likely to mention things like index-tracker unit trusts and exchange traded funds as these pay little or no commissions but may be much better for our financial health. Moreover, by setting different commission levels on different products, it’s effectively the manufacturers who decide which products financial advisers energetically push and which they hold back on. Secondly, the huge difference between upfront and trailing commissions means that it’s massively in the advisers’ interest to keep our money moving into new investments. One very popular trick at the moment is for advisers to contact people who have been saving for many years into a pension fund and suggest we move our money. Pension fund management fees have dropped over the last ten to twenty years, so it’s easy for the adviser to sit a client down, show us the figures and convince us to transfer our pension savings to one of the newer, lower-cost pension products. When doing this, advisers can immediately pocket anywhere from three to over seven per cent of our total pension savings, yet most of us could complete the necessary paperwork ourselves in less than twenty minutes.

4. As many fee-based advisers actually earn most of their money from commissions, like commission-based advisers they can easily fall victim to commission bias when trying to decide which investments to propose to us.

5. Most of us will meet a bank’s apparently ‘free’ in-house adviser if we have a reasonable amount of money in our current account or if we ask about depositing our savings in a longer-term, higher interest account. Typically we’ll be encouraged by the front-desk staff to take a no-cost meeting with a supposed ‘finance and investment specialist’. Their job will be to first point out the excellent and competitively high interest rates offered by the bank, which are in fact rarely either high or competitive. But then they will tell us that we’re likely to get even better returns if we put our money into one of the investment products that they recommend. We will be given a choice of investment options and risk profiles. However, the bank will earn much more from us from the manufacturer’s commission selling us a product which is not guaranteed to return all our capital, than it would if we just chose to put our money in a virtually risk-free deposit account. A £50,000 ($75,000) investment, for example, could give the bank an immediate £1,500 ($2,250) to £2,000 ($3,000) in upfront commission plus at least 1% of your money each year in trailing commission – easy money for little effort.

6. Should you have over one million pounds, euros or dollars to invest, you might find an adviser willing to be paid according to the performance of your investments. One problem is that the adviser will be happy to share the pleasure of your profits in good years, but they’ll be reluctant to join you in the pain of your losses when times are tough. So, most will offer to take a hefty fee when the value of your investments rises and a reduced fee if you lose money. Yet they will generally not ever take a hit however much your investments go down in value. The benefit with performance pay for advisers is that they will be motivated to maximise your returns in order to maximise their earnings. The worry might be that they could take excessive risks, comfortable in the knowledge that even if you make a loss they’ll still get a basic fee.

Am I qualified? I’ve written a book!

One worrying feature with financial advisers is that it doesn’t seem to be terribly difficult to set yourself up as one. Of about 250,000 registered financial advisers in the USA, only about 56,500 have the most commonly-recognised qualification. Some of the others have other diplomas and awards, but the large majority don’t. One source suggested that there may be as many as 165,000 people in Britain calling themselves financial advisers. Of these about 28,000 are registered with the Financial Services Authority as independent financial advisers and will have some qualifications, often a diploma. But only 1,500 are fully qualified to give financial advice. The in-house financial advisers in banks will usually just have been through a few one-day or half-day internal training courses in how to sell the particular products that the bank wants to sell. So they will know a bit about the products recommended by that bank and the main arguments to convince us that putting our money into them is much more sensible than sticking it in a high-interest account. But they will probably not know much about anything else. Or, even if they are knowledgeable, they won’t give us any objective advice as they’ll have strict sales targets to meet to get their bonuses and promotion.

However in the world of financial advisers, not having any real qualifications is not the same as not having any real qualifications. There are quite a few training firms springing up which offer financial advisers two- to three-day training courses which will give attendees an impressive-looking diploma. Or if they can’t be bothered doing the course, advisers can just buy bogus financial-adviser qualifications on the Internet. A few of these on an office wall can do much to reassure a nervous investor that their money will be in safe and experienced hands. Moreover, financial advisers can also pay specialist marketing support companies to provide them with printed versions of learned articles about investing with the financial adviser’s name and photo on them as ostensibly being the author. A further scam, seen in the USA but probably not yet spread to other countries, is for a financial adviser to pay to have themselves featured as the supposed author of a book about investing, which can be given out to potential clients to demonstrate the adviser’s credentials. If we’re impressed by a few certificates on a wall, then we’re likely to be doubly so by apparently published articles and books. In one investigation, journalists found copies of the same book about safe investing for senior citizens ostensibly written by four quite different and unrelated advisers, each of whom would have paid several thousand dollars for the privilege of getting copies of the book they had not written with themselves featured as the author.

Of course, only a very small number of financial advisers would resort to tricks like fake qualifications, false articles and bogus books. But the main point here is that far too many of them may know a lot about a few specific products which they are highly incentivised to sell, but may be insufficiently qualified to offer us genuine financial advice suited to our particular circumstances.