FOOL'S EYE VIEW
Four Valuable Lessons I Learned From Banks

By Cliff D'Arcy
November 13, 2003

Before joining the Fool at the beginning of this year, I spent fifteen years working for a string of banks and insurance companies. In my time, I had various jobs in claims and litigation, product development, client management, research and sales & marketing.

One of the reasons why I decided to become a financial writer was my desire to draw on my broad experience of financial services to help the public to make better financial decisions. And where better to do this than at the Fool, with its funky motto, "Educate, Amuse, Enrich!"?

Anyway, let's cut to the chase – here are four valuable lessons I learned during my slapdash career on the dark side:

1. Earning interest is more fun than paying it!

We're constantly bombarded by advertisements encouraging us to borrow money. My guess is that there are at least ten times as many adverts for borrowing products as there are for savings accounts, and maybe more. Obviously, that's because lending money is enormously more profitable than taking deposits!

By law, all ads for credit must include a mention of the cost of borrowing – the Annual Percentage Rate, or APR. A credit card that has an APR of 18% will charge £180 in annual interest for every £1,000 borrowed (that's 0.18 x 1000 = 180 a year).

However, because of the effect of compounding (interest being charged on interest), a £1,000 debt growing at 18% a year will have almost doubled after four years. Fast-forward to year twenty, and our original £1,000 has ballooned to £27,393!

On the other hand, a £1,000 deposit growing at a more leisurely 4% a year will be worth £2,191 after twenty years. I'd much rather be two grand in the black than twenty-seven grand in the red, wouldn't you?

2. Hidden charges mean fatter profits!

Bankers love to make large profits, but a whole raft of legislation and codes of practice prevent them from becoming out-and-out highwaymen. So, they get sneaky by putting the good stuff in the headlines and the nasty stuff in the small print.

For example, you see a mortgage advert with a table-topping discounted rate of 3.25% for the first three years, which looks mouth-wateringly good. At this point, stop drooling and read the fine print. In it, you'll always find a list of charges that make the deal far less attractive. Watch out for:

• Upfront arrangement fees, which can exceed £500
• Property valuation fees, which can exceed £1,000 for bigger homes
• 'High lending' fees, if you have a deposit of less than, say, a quarter of the purchase price
• Compulsory insurance products, which are always over-priced
• Stiff redemption penalties, which sting you if you repay your loan early
• Deeds and Discharge fees when you finally settle your mortgage.

Do you see what I mean? The first thing you're told about a financial product is always its best feature. Keep digging until you understand all its nasty faults, too!

3. Tomorrow's products will be better than today's

Thanks to fierce competition among financial services companies, product development tends to lead to better products. After all, which product manager is going to launch a product that is inferior to existing designs? All that will happen is that it will get criticised in the press and lose out to its rivals (and s/he'll get the chop!).

For example, the mortgage market has evolved enormously in recent years. In the bad old days, getting a home loan was a pain in the proverbial. However, increased competition and an easing of the lending regulations let loose market forces. Lenders started undercutting each other in order to beat their opponents and steal larger market shares. Along the way, this led to the creation of:

• Lower profit margins, which meant lower rates for borrowers
• Special-rate deals, such as fixed, capped, discounted and tracker loans
• Interest calculated daily instead of annually (this was a real rip-off)
• Flexible, offset and current account mortgages - the new generation.

The point I'm trying to make is that it's not wise to buy any financial product and stick with it forever. That's because financial companies rarely appreciate customer loyalty. In fact, the reverse is true: people who shop around for the best deals get rewarded handsomely, while faithful customers get stitched up!

So, if you've held any financial product for more than about two years, it's time to test it out against the competition. I'll (almost) guarantee you that better products await you, thanks to the wonder of product evolution!

4. You can win, if you try!

I sympathise with the typical British consumer, because the odds are massively stacked against him/her. There are tens of thousands of financial products out there, sold by hundreds of thousands of employees. Furthermore, there are tens of thousands of wily advertising, sales and marketing types all dreaming up more ways to suck the money from our pockets!

The financial world is complex and confusing (perhaps deliberately so), which means that it's almost impossible for us to work out what's best for us. Note the use of 'almost', because it can be done if you know where to look. You simply need to get into the habit of shopping around for every product you buy, and be prepared to switch to better deals when the time is right.

Finally, remember that there is a huge amount of help available online, especially at these sites. Also, if you've not discovered our discussion boards yet, why not ask for advice online? Thousands of knowledgeable people visit our site every day, so there's sure to be someone who can help you!

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