Don’t trust the financial services industry
I invest in shares and some other funds as well as property. But in this article, I explain why it is best to not trust the financial services industry too much. (This article is based on my experiences working in the industry from 1988 to 2003).
Let’s go back in time to sometime in the early 1990s.
Why It is Best to Not Trust Financial Services
Back then, I was working at Lloyds Bank in their insurance services division in sunny Sussex. A colleague and I were wondering quite how it could be that around 75 to 80 per cent of the bank’s customers who were taking out personal loans were also opting for payment protection insurance (PPI).
Even at the time, some in the media were questioning the need for so many folks to buy payment protection insurance from banks when large numbers of people would not be able to claim anyway – because they were retired, not employed at all or were self employed. (For these people, PPI was pretty worthless). Generally, the financial pages of newspapers at the time advised their readers to opt out of this insurance.
At the time, people had to actually positively opt out of getting this insurance by ticking a box on the loan application form. (This was later changed by the government, so that people had to actually opt in).
The reason the percentage of people opting for this cover was so high was because bank staff in branches, (this was in the days when call centres were in their infancy), were heavily incentivised to sell it.
This did not just happen at Lloyds Bank. It was the same at pretty well all retail banks.
My colleague and I were still relatively junior staff, so we did not have the power to do anything, but we wondered whether this obvious (to us) (mis)selling of payment protection insurance would one day come to haunt the bank.
My colleague actually wrote or spoke to the managing director of the insurance division, querying the payment protection sales strategies, but whilst he was treated with some sympathy, the boss told him that it was policy set at the highest levels of the bank and there was nothing he could do to change it, especially as it was such a huge earner for the bank.
Well, we all know what happened years later.
Lloyds Bank alone will have paid out £19.2bn settling PPI claims by August 2019, when the deadline for PPI claims ends. Yes, that figure was really over nineteen billion pounds, just in case you were struggling to comprehend the figure and wondered if I mis-typed billions for millions. I didn’t!
Extraordinary isn’t it?
More on Not Trusting in Financial Services
If you have read my biography, you will know that I worked in financial services from 1988 until I finally decided to leave wage slavery in financial services in 2003 and become a full time property investor. (I had started moonlighting as a landlord from around the same time I started in financial services). As you may know, I have never looked back and only wish I had struck out fully on my own earlier than I did.
Later on in my career in financial services, I saw many other things that have convinced me that the really sly thing about the financial services industry is that they are really clever at making people pay for things without people even realising they have actually paid for it at all.
So, here are some more examples from my past career showing why you are advised not to trust too much in the financial services industry.
I saw how the bank suddenly made millions of pounds every year by switching the exchange rate on overseas card transactions that customers had made, from wholesale rate to a much wider-spread (and better for the bank) retail rate. The vast majority of people never noticed, unless they happened to have a job as a FOREX dealer and carefully checked what sort of rate they got before this change and what sort of rate they got after.
Then, later, when I had moved to Direct Line, I was there when they came up with a clever trick to make money on “mid term adjustments” on motor insurance. So when someone called to report that they had moved address, the company would recalculate the premium for the remaining term of the policy year (to reflect the new risk address), but would always add in a charge for making the change. There was no need to make this charge clear to the customer – it was all wrapped up in the new premium calculation.
Just this week, I received a letter from one of my fund managers, Fidelity, telling me that one of their very poorly performing funds (where I have some money) was to be merged with a high performing fund and the name would be changed to the high performing fund.
Magic! The duff fund disappears from all the performance tables, as if it never existed! How smart is that?
So when you read that the average fund manager under-performs their benchmark index, this is actually an under-statement because loads of the duff funds have been quietly retired and effectively “disappeared”. If they were included, the under-performance would be much worse and you would wonder even more about how it is that all the brokers and fund managers are able to pay themselves so handsomely for what is often crap performance.
Trusting in Financial Services
So why am I telling you this?
Well, this is not a tale to make you all sell your funds and buy property instead. This is not what I do.
I have a number of funds and individual stock investments. Generally, I prefer to buy individual shares rather than funds, because the cost of the administration for funds is a drain. Where I buy collective funds, (which is usually to get overseas exposure), I prefer investment trusts where the charges are generally lower than with open funds (OEICS and unit trusts).
I invest in property as well as having stock market investments. Recently, I have also bought a lot of fixed interest long term bonds because I think the stock markets are overvalued.
But what I like about my direct investments in property though, is the fact that I’m in charge and that I can control my costs. With any investment through a financial service firm, it is not the same. With this, I have to accept that a lot of my money will go in fees – and most of the time I won’t even know how much has been disappeared in this way.
When you buy a house or flat and have full ownership, it is you who controls things, not some anonymous fund manager in the city.
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