Buy cheap, buy twice
You get what you pay for’
What’s the catch?
Our language is full of little homilies that guide us to the basic truth. TINSTAAFL
Even children understand this. We are rightly cynical about any form of ‘Free’ goods.
So what is missing in the education of journalists that they don’t get that everything – and I mean EVERYTHING in life has a charge, cost, price or fee?
And that is a good thing. It’s how the economy works – Adam Smiths ‘Dead Hand’. Free creates nothing.
Henry Ford understood it in the 1920’s when he encouraged other business owners to pay their workers more so they could more easily afford his cars. It’s why capitalism works, and utopia’s do not.
But Journalists don’t seem to get it. They seem to think that no one else should get paid – except them, of course.
What is all this about?
Two things really.
The first issue, that of charges, is well illustrated in the current fuss about Annuities. Now, there are more expert heads around on the underlying issues here than me, so I will not deal with any of the technical points, but my concern is that at least some parts of the press have essentially set out a case that says:
Annuities are bad because they pay out what we think is a ‘low’ income. They have charges on them. So they must be bad BECAUSE of the charges. So remove the charges and everyone will get more Pension income. Job done.
Ignoring for now that they confuse Execution Only / Self Directed websites with IFA’s, and attribute ALL the costs to us, can anyone else see the flaws here. Yes, I thought you could. Something to do with increasing longevity and low interest rates, right? In fact, charges have little impact on annuity rates compared with getting the right impaired life rate, for example, is that correct?
Why is that so hard for some journalists to understand?
Next, let’s take the misinformation about fund charges, especially in Pension Plans. Here we have a subtle sleight of hand going on.
They work on two scenarios and mix them up.
First they apply a charge – call it 1% pa – to a really large fund. Say £500,000. Then they say that the ‘Cost’ of that fund, assuming 5% gross return over 20 years is say £124,000. Terrible! A rip off! How can it be justified?
They then relate this to the average £20,000 pension pot and effectively scare people out of investing because it will cost them all their money. If all you have is £20,000, then that £124,000 looks like a really BIG number! But, for the journalists out there, 1% pa of £20,000 is £200 pa. £17 per month. A back street garage may give you 2 ½ hours labour in a year for that. A solicitor perhaps an hour. It really does not pay for the full annual reviews that myths tell us everyone must have.
They then pretend that ALL the ‘cost’ over 20 years or more is taken on Day One. So this then morphs to become “25% of the fund is taken in charges!”
So a creative use of Apples and Pears. No account of the time value of money at all. And no recognition that, actually, there are costs involved in the process.
This then leads on to the second part of the problem. This focus on charges then helps create an expectation that somewhere out there is a fund with no charges. A ‘Free’ fund. It’s as if they say that milk should be free as Farmers and Supermarkets should not charge.
But hang on, they say. There is indeed a ‘Free’ option. It’s called Cash! Its great – there are no charges – it’s all provided by magic.
One then tries to sit down and explain that actually, how it works is the bank lends to people, perhaps via mortgages, at say 5%. Then pays the saver 1% or so and keeps the rest. So, in effect, a 70% or 80% ‘Performance charge’.
“NO NO NO” comes the reply. “You’re wrong. It’s free. Look, no explicit charges. And you can’t lose money. It’s great!”
Deep sigh. ‘Yes, cash can be great. A very useful part of the portfolio. Short term needs. I get that. Pretty much guaranteed (up to a limit). But all that good stuff comes at a cost.’
“No, you don’t understand” they say. “I realise you have been in the business for 30+ years, have more degrees than a thermometer, and I was covering Church Fetes for the paper only last year, but let me tell you, cash is free, FREE I tell you”.
At which point one usually gives up, accepts you were born at least 2 drinks behind these people and return to Planet Earth. Or tries to sell them a With Profit Fund, which charges in much the same way….?
But I wonder – should we be running ‘Investment 101’ workshops for these people? After all, the damage these half baked ideas do must be enormous. I wonder why people are saving less now, even though the cost of investing has actually fallen? Could it be that the myth that ‘Pensions are a rip off’ has been planted so deep, that consumers are now so put off saving that they will be an even greater burden on the state in future? What are the social implications of that?
In all seriousness, I would love to hear from a Financial Journalist about this. Specifically:
Why the assumption that zero charges on a fund or product is possible or desirable?
Why you think the highest charging asset class, which is Cash, which has the poorest record against inflation, is the best asset class for people who need to build up long term savings or protect wealth?
I look forward to hearing from you.
TINSTAAFL = There Is No Such Thing As A Free Lunch