The Importance of Consumer Reports When Shopping for Financial Products

Shopping for financial products is a task that practically no person the world over would ever argue to be anything other than a tedious chore at best and a living nightmare at worst. The problem with financial products is that in an ideal world, none of us would have to invest in them in the first place. As such, the very notion of searching and applying for various products with fees, charges and interest rates is something to rue from the very word go. Trouble is we’d be lost without our personal loans, credit cards, overdraft, mortgages and countless other everyday essentials, making it necessary to just bite the bullet and get on with it.

However, while it may be impossible to make the process anything close to a pleasure, it is in fact possible to take much of the sting out of its tail in terms of risks.

A Blessing and a Curse

The internet has proved to be both a blessing and a curse when it comes to seeking financial products of safety and value, with millions of critics now perched on entirely different sides of the fence. With each and every passing year, thousands of new providers and lenders make their way on to the web and offer their own take on products, packages and services ‘guaranteed’ to make our lives easier. True, most may be entirely intent on living up to their promises and offering something of value, but the sheer abundance of names and brands makes in inevitable that the odd bad-apple will slip through the net here and there. The larger the web gets, the more bad-apples to avoid, which mean that in essence we are living in riskier times than ever before when it comes to the possibility of getting well and truly fleeced.

However, the web also provides each and every one of us with all the tools and resources we could ever need to make informed and educated decisions the likes of which have never been possible. There would of course be no better way of ensuring a smooth and safe agreement/transaction than by looking into future to know what to expect, though by looking into the past we can benefit from the next best thing.

Comparison Sites

Today’s internet is simply littered with independent comparison sites and helpful consumer resources the likes of which have revolutionized the way we can approach personal finance. No matter what it is that you might be looking for, it is 100% guaranteed that the product, service and provider behind it has been put through its paces by hundreds, thousands or maybe even tens of thousands of fellow consumers.

A single word from the consumer is worth more than a million or more from the provider, therefore meaning that any and every consumer looking for a safe and attractive deal should make these resources their first ports of call. All the promises and guarantees in the world are worth less than the paper they are printed on if they are not kept – these are the places to find out who practices as they preach.

It has never been easier to access hundreds of thousands of consumer reports on any and every financial products imaginable and will never cost you a penny to do so.

Used Car Loans – Important Financial Products

In today’s competitive loan environment used car loans are much easier to find than they have been. In the auto industry, it is generally easier to find good car loans for new cars as the lender is less concerned about uncertainty as to the car’s history. Loan brokers have created much great ability for car buyers because of their ability to quickly access loan products from their large collection of provider relationships. Car buyers have the ability to go to a motor loan specialist web site, enter basic information about their needs, and receive car loan quotes based on their needs.

Used car loans can be obtained for very reasonable rates in today’s market thanks to generally low interest rates in most loan markets. Additionally, because of the fact borrowers have more access to loans now than they ever have before, lenders feel pressured to offer more competitive rates to compete for loan business.

Recent consumer awareness research has attempted to promote to consumers the importance of looking for a good motor loan before approaching a dealer. Dealers generally offer their own car finance. Unfortunately for many borrowers, dealer financing tends to be more expensive over the life of the loan. In fact, reports have recently suggested that the typical car loan costs well over 1,000 pounds more when obtained from the dealer. Dealers often pressure car buyers into taking their finance plans. Buyers that are unprepared with a finance plan become focused on driving away with their new car that they go along with dealer proposed loans.

Careful research before shopping for a car is a much better way to get the best used car loans. Independent brokers are very customer-oriented and have access to products from most of the leading market providers. This enables them to search for the best loan products to meet customer needs. Rates are usually much better which ultimately saves customers on monthly payments and in total loan repayment costs. It definitely makes sense for car buyers to get the best finance deal available.

Typical car loans come with repayment periods ranging from about 36 months up to 72 months. Borrowers generally make monthly principle and interest payments. Getting the best interest rate product enables customers potentially to pay extra principle each month and payoff the loan much more quickly. This is good financial management and helps with overall debt and expense management.

Again, borrowers need to be proactive with used car loans. Going to the dealer with predetermined financing makes the car purchase itself much more valuable. With the average savings from non-dealer financing, it is like getting more than a 1,000 pounds rebate on the purchase. Visiting a loan specialist web site is a great way to learn about car financing and get information about the most beneficial loan products. Car buyers are much more equipped when they are knowledgeable about their options and they are less likely to be vulnerable to dealer pressure. This helps the buyer focus on getting a good deal on the car itself.

Financial Products – Quick Comparisons

Stocks and Shares. Property. Fixed Deposits. Unit Trusts. Gold. Foreign Currency.

Few Singaporeans have not invested in one or more of these assets, and fewer still have not heard of them. Whether it’s for making our money work for us, receiving passive income (income we’d receive if we stopped working) or simply trying to achieve higher returns, investing – narrowly understood as enhancing our wealth – is a popular and fairly-well-understood activity in Singapore.

But: conditions change. Markets fluctuate. Nothing – property valuations, the stock market, gold prices – goes up for ever. We think it’s time to poke deeper into investment matters on our journey to understand how the different financial products and instruments available today can help us in our goal of consistently achieving higher returns while managing our risk.

Let’s define a few terms before making a detailed comparison.

The first distinction we’ll encounter often is between Investing and Trading. The fundamental difference between the two is that investing has a long-term perspective, typically at least a few years, while trading has a short-term perspective, typically less than a year (and sometimes a few months, weeks, days or even hours). Investors, therefore, are interested in the long-term appreciation of their assets while traders are interested in short-term price fluctuations.

Secondly, financial professionals generally classify investments into 4 classes (‘Asset Classes’):

  • Cash and its equivalents – eg, Bank Deposits and Spot Forex
  • Stocks(Shares, Equities) and other assets based on stocks such as CFDs, and some Unit Trusts, ETFs and Options
  • Property and other tangible assets such as Commodities (eg, gold, oil, silver), art (eg, paintings, pottery, sculpture) and fine wine.
  • Bonds and other Fixed-Income assets (explained below).

Thirdly, all financial products and instruments belong to only two families:

  • Exchange-Traded
  • Over-The-Counter (OTC)

Exchange-traded (public) financial products and instruments are listed by a national exchange, meet strict legal and listing criteria, and are usually considered highly-liquid investments. Examples include ETFs, most stocks and shares, most government bonds, most commodities and some unit trusts. They are traded on stock, commodity, futures or options exchanges such as the Singapore Exchange (SGX), the Malaysia Exchange (MYX, formerly known as the Kuala Lumpur Stock Exchange or KLSE), the New York Stock Exchange (NYSE Euronext) and the Chicago Board Options Exchange (CBOE).

OTC (private) financial products and instruments are issued by investment companies and banks. They are essentially private (bilateral) agreements between 2 parties, ie must be bought and sold with the same party, are far less regulated than exchange-traded products, and may not always be liquid investments. Examples include CFDs, Forex (Spot Forex), most unit trusts, preferred stock, state and municipal bonds and some commodities.

An important reason for distinguishing between exchange-traded and OTC products is product pricing. Prices quoted on exchanges are transparent – meaning available for everyone to see – so exchange-traded products are considered more fairly priced (though they do involve paying broker commissions). OTC products are priced by investment companies, banks or brokers at their discretion, so prices tend to be higher for retail purchases and more favourable for the big boys with their higher-volume purchases.

Finally, the term ‘financial products’ is often used interchangeably with ‘financial instruments’, ‘assets’, ‘investments’ and ‘investment products’; at this stage we’ll use ‘financial products’ as a catch-all and won’t split hairs except to point out that we don’t consider our residential property as an investment.

Disclaimer: There can be wide differences within a financial product (notably ETFs). Distinctions between products are also blurring: for example, some unit trusts are now exchange-traded. For these reasons, the comparison above is indicative only.

Notes:

1 Capital Requirement refers to the amount we typically need to invest or trade in the financial product. For example, stock is purchased in lots of 1,000 shares, so an investment in a $4 stock will cost us about $4,000. On the other hand, investing / trading in Singapore Government bonds, CFDs, forex and options can be done with $2,000.

2 Diversification Potential refers to the potential of a financial product to provide risk diversification, ie to ‘put our eggs in different baskets’, assuming minimum account sizes. For example, many unit trusts and ETFs invest in a basket of stocks from different sectors of the economy, thus providing some degree of diversification. With many of the other financial products mentioned here, however, diversification can be achieved only with much higher account sizes.

3 Leverage refers to the use of credit (borrowed money) from a broker or bank. The leverage available varies widely from product to product. Leverage is a double-edge sword: it can magnify both our gains and our losses.

4 Income Potential refers to the potential of a financial product to generate income while we hold the investment; this income can come in the form of interest (for bank deposits and bonds), dividends (for stocks, some Unit Trusts and ETFs), rental (for property) or simply the sales proceeds (options).

5 Public or Private refers to whether the financial product is public (traded on an Exchange) or private (traded Over-The-Counter). For example, Spot Forex trading is popular in Singapore, but traders don’t always realise that it is a private financial product: there are no exchanges for forex, and prices are set by market makers.

6 Liquidity here refers to the number of working days required for a financial product to be converted into cash, without a substantial price discount. For example, the shares we find on stock exchanges are traded in the millions and are highly liquid; proceeds from their sale are realised within 5 working days. Property, clearly, is very illiquid – it typically takes several months to see the proceeds.

7 Charges refers to the amount of fees or charges – commissions, management fees, sales charges, entry fees, stamp duties, etc – that are levied on entering into, maintaining or exiting that investment. Taxes are excluded. For example, management fees are typically 1-3% for unit trusts and 0.3-0.6% for ETFs; total transaction costs (agent commission, stamp duty, legal fees, etc) for investing in private residential property in Singapore come to about 5% (assuming you sell the property only after 5 years).

8 Bank Deposits here refers only to Singapore dollar deposits, the norm for most of us.

9 An Investment-Linked Product (ILP) is an insurance plan that combines protection and investment. The advantage of ILPs is that they offer life insurance.

10 A Unit Trust is a pool of money professionally managed according to a specific, long-term management objective (eg, a unit trust may invest in well-known companies all over the world to try to provide a balance between high returns and risk diversification). The idea here is to gain from the experience and active decision-making of an investment professional.

11 An ETF or Exchange-Traded Fund comes in many different forms: for example, there are equity ETFs that hold, or track the performance of, a basket of stocks (eg Singapore, emerging economies); commodity ETFs that hold, or track the price of, a single commodity or basket of commodities (eg Silver, metals); and currency ETFs that track a major currency (eg Euro). ETFs trade like shares (on stock exchanges such as the SGX), and typically come with very low management fees.

The main difference between ETFs and Unit Trusts is that ETFs are publicly-traded financial products while Unit Trusts are privately-traded financial products, meaning that we can buy and sell ETFs ourselves anytime during market hours.

12 Bonds are a type of product called Fixed-Income that involves lending out money to a government or company; in return we get regular fixed interest payments and eventual repayment of the entire amount lent. The main attraction of government bonds is their safety. However, because there is so little risk, the returns are also much smaller than with other financial products.

13 Forex (Spot Forex or FX) trading refers to the world-wide, decentralised, OTC markets for the trading of currencies. Forex trading has exploded in recent years: average global daily turnover in forex markets in 2010 crossed the $5 trillion mark (that’s $5,000,000,000,000). The main reasons for this are the IT/Internet revolution, allowing trading from home; the 5-day, 24-hour operation of the markets; the huge leverages (credit) typically available; and the relative simplicity of forex trading.

14 Contracts For Difference (CFDs) are essentially contracts (agreements) between a buyer and a seller stating that the seller will pay the buyer the difference between the purchase price and the price at the end of the contract, of an underlying asset (if the difference is negative, the buyer will pay the seller). CFDs currently exist for stocks and market indexes in Singapore. They mirror the movement of their underlying and require less capital than trading stocks directly (because of the leverage provided).

Because the value of a CFD is derived from something else (the underlying stock or index), CFDs are classified as financial derivatives.

15 ‘Options’, like futures, are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a specified future date. The underlying asset is usually stock but can also be an ETF, a market index, a currency (forex) or a commodity futures contract. Options trading has 2 unique features: we know our maximum risk, ie the maximum amount of money we can lose, from the start of the trade; and options are the only instrument that allows us to make money in all market conditions (rising prices, falling prices and sideways-moving prices).

Options, like CFDs, are financial derivatives.

16 Commodities used to refer to physical goods such as coffee, corn, soya beans and wheat. Today the term has expanded enormously to include metals (eg, copper, gold, silver); energy (eg, crude oil, natural gas); currencies (eg, the British Pound, the Euro, the Japanese Yen, the US Dollar); and financial constructs such as stock-market indexes and interest rates (eg, the S&P 500 Index, 30-Year US-Government Bonds).

Commodity Futures are contracts to buy or sell a certain quantity of a commodity of standardised quality at a fixed price at a specified future date. Futures markets started as a way for producers and consumers to hedge their risk (from unexpected future price falls or rises), but today the markets are dominated by traders who try to make money from price movements.

Commodity futures are another type of financial derivative since they are based on a physical or financial underlying commodity.

Conclusion

This article has tried to provide a glimpse of the great variety of markets and financial products and instruments available, whether for investing or trading.

Many of these markets have become arenas of feverish speculative activity. Several of these products and instruments have been the vehicles of huge fortunes made – and lost. Some have been charged as the culprits behind modern market crashes.

None of these is any reason to shoot the messenger. Our perennial philosophy of risk management and diversification is best practised by understanding how these financial products and instruments work, then using them to grow our wealth in good times, create our wealth in uncertain times and protect our wealth in bad times.