Financial Ingredient Labels

I often compare financial issues to food, mainly because personal finance is loaded with jargon that only furthers a person’s confusion. I will compare using riskier investments to having a tolerance for hot peppers. Or, a budget (spending plan) is often compared to a diet (nutrition plan). Or asset allocation just means recipe.

I clearly would’ve been a nutritionist had I not chosen to become a financial planner.

I’ve recently written about the volume and complexity of financial disclosure forms. I’m being a little contradictory now, in that I want you to be able to understand what you’re getting into; I’m actually encouraging you to consider what goes into your portfolio just like I’d encourage you to consider what goes into your body.

When you go to the grocery store, you can purchase an apple without any packaging and without any ingredient label. It is one of the most healthful things you can eat, it’s simple, and inexpensive. Plus, you know what you’re getting.

As soon as you cross into processed food, you immediately venture into the unknown. You must pick up the package, and, if you’re at all concerned about what goes into your body, read the ingredients. But you have to know what you’re reading. If there are things you can’t identify as food, you may be safer to steer clear of it. The same is true of financial products; the simpler they are to understand, the more likely they are transparent and that you’ll know what you’re getting.

A few years ago I attended a seminar for a newly approved life insurance product. It had some impressive bells and whistles. Now, I’m optimistic by nature but skeptical by training, so I read over the fine print only to be more than a little disturbed about some of the potential tax consequences. When I asked the wholesaler about them, he kind of fluffed it off, like, “It’s unlikely that’ll ever happen.” Well, what if it did? I didn’t want to be the person who recommended something that caused someone MORE problems. I’ve steered clear of it ever since.

It is work to understand what you’re doing with your money, and it does take time. But isn’t your financial situation worth the time and effort? Read prospectuses, if you choose to invest, learn the verbage, ask questions, make your advisor explain things to you. YOU DON’T HAVE TO FEEL EMBARRASSED THAT YOU DON’T KNOW THESE THINGS!

It is my hope that you can educate yourself enough so that you feel confident and less vulnerable in the world of personal finance. Until that point, get the help and guidance you need from a trusted professional.

Why It Is Important to Be Financially Literate

The main selling point of any financial products is their potential gain. Most people only see one side of the coin; they don’t realize that higher potential return equates to higher risk.

Statistically speaking, we almost always end up buying financial products and solutions from someone we like or trust in person. This is not wrong but it just isn’t right if we base our decision solely on this factor.

Financial agents are divided into 3 types:

  1. Tied financial agents are agents attached to a financial institution agency force. For example, insurance personnel, unit trust consultant, bank’s personal financial advisor. They are product focused and normally compensated by commission.
  2. Independent financial advisers(IFA) are personnel providing comprehensive financial solutions. This includes value-added advisory service (investment needs analysis, tailored financial plan, wills writing, retirement planning) and financial products (insurance, investment ). They are compensated by advisory fees and product sale commission.
  3. Financial coaches are personnel providing high degree of personal interaction to assist a client in financial awareness and profiling in order to achieve financial independence. They are usually compensated by advisory fees only.

Financial agents will take a comprehensive evaluation on your financial position and goals. Then, they will identify the gaps and subsequently propose one or more financial solutions to help you achieve your goals. They emphasize on long term engagement with the client.

The paradox of “having your best financial interest in mind”

No one will ever have your best financial interest in mind better than yourself.

If you walk into a bank, and ask the financial advisor to recommend you the investment product with the highest potential return, who is to blame if you realize you are being charged a 10% fees over your 6% investment return?

Answer: Your own ignorance

Can you guarantee your agent is going to serve you diligently after the sales even if you don’t buy additional products?

Answer: No

Then why pay 6% upfront commission while you just need to pay 2% commission via a DIY online investing platform to invest in the same unit trust?

Answer: Because either you don’t know how, don’t know what you want, don’t have time, don’t care or don’t want to ask.

I am 200 percent sure this is not the attitude you adopt in your professional career. Therefore, do not be so ignorant when it comes to managing your own money.

Let me reiterate this that financial agents are trained extensively on the art of sale, not on having your best financial interest in mind.

But our own ignorance is certainly not bliss here.

So what can you do?

Everyone should get educated on personal financial concepts. You must have the very basic financial literacy so that you can evaluate your financial needs and gaps. Then only you engage your financial agent and tell him or her what you need. Let them earn their commission, but always strive to minimize your investment cost before we even talk about earning a return. Always read the fine prints of any financial products Believe me, whichever type of financial agents you choose to engage in the future, he or she would definitely have more respect for you.

Top Financial Products Available Today

Cash ISAs

One of the most tax efficient ways to invest your money, as the interest you accrue on your savings is safe from the tax man. The catch, you can only invest up to £3,600 in the 12 months to 5th April 2010, rising to £5,100 thereafter.

Cashback Credit Cards

These give you cashback just for using your credit card to make purchases, and as long as you repay the balance in full each month before the due date, then there is no interest to pay. In addition, the use of a credit card to make purchases gives added protection, which is particularly useful when making purchases online.

Interest Free Credit Cards

A number of credit cards also offer interest free balance transfers and purchases for an initial period. For those with maxed out credit cards, interest free balance transfers can save £100’s in interest costs.

Current Account Mortgages and Offset Mortgages

These types of mortgages allow you to combine your current account with your mortgage, in such a way that you can save a significant amount of interest over the mortgage term, and ultimately clear your mortgage more quickly.

High Interest Current Accounts and Savings Accounts

For those with relatively high balances in their current account, it is worthwhile looking for current accounts which give a competitive interest rate on the balance, or an instant access savings account, where you can transfer the excess balance to earn a high rate of interest, safe in the knowledge that the money is instantly available when required.

Interest Free Overdrafts

For those living in, or close to, their overdraft, then it is worthwhile looking for a current account which offers an interest free overdraft.