Women's Finance

[ June 14, 2000 ]

Working With the Wise

By Sarah Wilson (cercefool)

In previous Women's Finance articles we've looked at how women need the biggest retirement stash they can possibly muster, and history suggests that the best way to pile up your wonga is in the stock market. Unfortunately, women generally earn less than men, and initially seem more reluctant to chuck their hard-earned cash over the side into the Sea of Shares. On the upside, we seen that this is really just a state of mind -- risk is what you make it, or at least, your attitude to risk is entirely in your hands.

Preaching to the Unconvertible

If you do decide to consult The Wise Ones, you'll have to make sure they realise that you do not intend to marry your pension, and you'd like to pursue a reasonably aggressive investment plan to get that villa in Spain you'd like to retire to. Hopefully, your IFA will nod in agreement and come up with some sensible suggestions.

But what if he throws his hands up in horror, and vows to protect poor little missy from the horrors of shares with his lovely bunch of endowments. What do you do then?

Well, you could walk out/show him the door. After all, you are the customer and are under no obligation to sign or agree to anything. The telephone book is full of Wisdom and many high-street banks and building societies offer "financial advice" in-branch (but watch out for Tied Advisers: they can only sell you their own company's products. They should make this clear to you).

Dinner with the Executioner

Your other alternative is to contact a member of the legions of evil, sorry, financial services industry, on an execution only basis. This is a specific form of selling, where you can buy a financial product or service that is normally covered by Financial Services Authority (FSA) regulations without any advice or recommendations.

This type of work tends to make the Wise extremely nervous. You will have to convince them that you really understand what you are doing. You may have to sign in blood a document stating something along the lines of:

"The client fully understands what he/she is doing and realises that on his/her own head be it. The company bears absolutely no responsibility whatsoever, no matter how horribly wrong this investment turns out to be. The client completely understands this and swears on his/her mother's deathbed not to hold the company to account in any way, even if he/she is forced to eat his/her own offspring such becomes the nature of their grinding poverty..."

So, you drink the poisoned chalice or go it alone and suffer the consequences.

But you are not alone. The Fool exists in both electronic and printed form to lead you gently by the hand into the murky world of finance, which isn't that murky at all when you get down to it. Even if you do not feel ready or are not able to invest directly in shares yourself at the present time, if you go to the Wise forearmed with all the facts, you are more likely to get the products you want rather than the products they want to sell.

The Wise can be a little vague about the nature of risk in their products. Risk as defined in financial services usually refers to the chances of sustaining a monetary loss on your investment. It is not the same as volatility. Many of the Wise confuse the two. Share prices do go up and down on a daily basis -- but as you should be looking at investing in the long term (i.e. up to several decades), these oscillations are no more than blips in a fairly smooth, upwards long-term trend.

Do-it-yourself

Bear in mind that as we've already seen, there is no incentive for the Wise to tell you about the possibilities of "do-it-yourself" investments, and most will heavily dissuade you from taking that route. But by investing directly yourself, you can save a bundle on charges, have far more control over the companies and areas you choose to invest in, and with a little effort may actually do better than many so-called professionals. And it doesn't cost as much as you may think.

If you decide to go down the "execution only" route, you can often bypass commission-based salespersons all together and go direct to buy your shares/unit trusts/investment trusts. These telephone (and increasingly Internet) based investment "supermarkets" will not give you any advice or help at all -- no more than the lady on the counter at Sainsburys would feel qualified to suggest what your mother-in-law might like for dinner next Sunday. Thousands of Fools use these services to invest their own savings and retirement funds directly in the stock market without paying extra commission to the Wise.

And while we're on the subject...

The Wise can sell practically any sort of financial product, from pensions to mortgages to insurance. The finance industry's sales force will be looking for opportunities to sell you all these products and more.

Remortgaging to a cheaper lender or shopping around for cheaper home insurance obviously makes sense. A pound saved is, for a higher-rate taxpayer, £1.66 earned, after all (1). You can do this without help from the Wise. Pop along to www.moneynet.co.uk and punch your current mortgage details into the calculator to see if there's a better deal available.

Don't be taken for a sucker

In recent years, the financial services industry has concocted a whole new area of products designed to enhance their profits, oops, I mean protect you against life's mishaps. Some of these products have apparently been tailored to meet the needs of women, such as insurance for female-specific health problems.

But do you actually need any of these insurance products. Do you really need life assurance if you have no partner or dependants? How much would this income-replacement insurance actually pay out should you be unable to work? How long for? Could you underwrite the risk yourself through your own savings? What do these "specialist" products offer that standard life assurance doesn't?

In all cases, check the exclusions. If you have recently changed jobs, you may not be able to claim under most unemployment-insurance products for some time. If you are self-employed or work on short-term contracts, you may not be able to claim at all. Certain long-term or recurring health problems (physical and mental) or "self-inflicted" conditions (like pregnancy!) are specifically excluded. If you accept voluntary redundancy, your unemployment insurance will probably be invalid.

Whenever you deal with one of the Wise, make sure you know what's in it for them. They should present you with a written recommendation that will include details of any commission that they will receive and how it is to be paid. This may be hidden in smallish print. If you can't find the commission details or they are not clear, ask for clarification. The Wise have a statutory duty to make absolutely clear to you the size of the bung they get for selling you this product. And given that commission comes out of either your initial investment or the growth in your portfolio, it's your money they're getting. Make sure they've earned it.

(1) Above £32,785, the marginal income tax rate is 40%. Thus 1/60% = £1.66

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• Women's Finance discussion board
• The 10 Steps to Foolish Investing
• Why buy shares?
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Reproduced with permission. © Copyright 2000, Aldur Systems, Ltd. All rights reserved.

Women's Finance is published every Wednesday.