FOOL'S EYE VIEW
Financial Mis-Selling Still Alive And Well

By David Kuo (TMFDragon)
May 2, 2002

How difficult can it be to invest in a Cash ISA? If, like me, you thought it was going to be easy, then think again. You would have assumed that banks and building societies would be falling over themselves to get their hands on your money. But you couldn't be further from the truth.

ISA providers don't make that much money out of Cash ISAs. You might have seen banks and building societies emblazon their office windows with eye-catching ISA interest rates. But these are normally just hooks to get you through the door. Once inside, you need to fight tooth-and-nail to get hold of one of those tax-free savings products. And in my case, I failed miserably.

For those who are still unsure what ISAs are, here's a quick lowdown. ISAs come in two flavours, namely the Maxi and the Mini. In any tax year, you can invest a maximum of £7,000 in any ISA product. ISAs are made up of three separate components, namely cash, shares and insurance (Heaven only knows why Insurance ISAs were ever introduced because no one ever seems to offer them).

You can have a maximum of £3,000 in a Mini Cash ISA, £3,000 in a Mini Shares ISA and £1,000 in your Mini Insurance ISA. In the case of a Maxi ISA, you could, if you wanted to, have more than £3,000 in shares. In fact, you could go the whole hog and allocate all £7,000. But here's the important bit -- if you plump for a Mini ISA, you cannot then invest in a Maxi ISA in that tax year. You can read more about ISAs here.

So why would anyone want to choose Mini ISAs over a Maxi ISA, given the restrictions of this product? The answer, of course, lies is in flexibility. With a Mini Cash ISA, you can shop around for a provider that offers the best interest rate and perhaps use another provider for your shares. Indeed, some providers, such as National Savings, only offer Cash ISAs, which means you need to use another ISA manager for your share investments.

Anyway, armed with that rudimentary knowledge of ISAs, I wandered down to the local branch of my High Street bank to open a Cash ISA account. After a protracted wait, because only one Personal Banker was present, I finally got to see the solitary adviser. I got straight to the point and asked to open a Cash ISA. The adviser went through the usual ritual of asking whether I had already opened any ISAs in the current tax year. My response in the negative prompted him sit up, straighten his tie and rub his hands with glee. (That last bit might just be my overactive imagination at work.)

I was quizzed, nay interrogated, as to whether I had thought the matter through carefully. I pointed out that I wanted the money intact and payable in full after twelve months and that riskier investments were not an option here. But my requests appeared to fall on deaf ears. He was more interested to know who was advising me on my financial affairs and had I sought help from a qualified adviser. I stressed I was capable of advising myself, at which point he whipped out his ISA product pack that was crammed full of ISA literature. The pack contained glossy brochures that spanned Corporate Bond ISAs, Index Tracking ISAs and those elusive Cash ISAs.

However, the hard sell was not quite over just yet. I was introduced to the benefits of non-Cash ISAs and of sheltering my investments from the taxman through the use of these clever products. All very interesting, but not very useful if you are only looking for a short-term home for your money. The adviser then pointed out how badly technology shares had fallen (tell me about it!) and that now was a good time to revisit some of the companies within this sector. His recommendation of down-trodden Colt Telecom (LSE: CTM) almost caused me to fall out of my chair. He did, however warn that shares could rise as well as fall but there was the potential for huge capital appreciation. A £1,000 investment in this company, according to him, could go up 5-fold in a year. Sadly, had I taken his advice and opened up a self-select Share ISA immediately, my investment would have fallen by over a fifth in less than a week.

There are several learning points from this sobering experience. Firstly, even after the pension and endowment mis-selling scandals of the past, there are still 'advisers' pushing unsuitable products that are more profitable for them than you. And secondly, you should try to learn as much about the products that you want to buy before seeking advice. The right product in one situation may not be appropriate in another. Always let your investment goals dictate which products you choose.