The Worst Ten Financial Products Part 2

In a recent post we discussed the first 5 (we know there's more than 10 but had to stop somewhere) of this article by Neil Faulkner of The Motley Fool.

Last week's post:

http://www.medicaldentalfs.com/174/the-worst-ten-financial-products-part-1

Here's 6 to 10…

6. Extended Warranties

Extended warranties are a form of insurance that enables you to return goods that develop flaws within a fixed period, often three years. However, you usually get a free manufacturer's guarantee that lasts a year. Secondly, under the Sale of Goods Act you have some protection if there are problems with design, quality or reliability. Thirdly, you may be covered for accidental damage under your home contents insurance. Finally, the cost of the warranty can add well over 25% to the total cost!

If you save all the money you would have spent on warranties for your various products, you should have more than enough left over if the manufacturer's guarantee expires and you have to repair something or buy it again.

7. Invest With Lots of Humans!

We often talk about Humans versus The Computer when we compare the performance of 'managed funds' (which have fund managers choosing shares to invest your money in) with 'index trackers' (which automatically buy all the shares in an index, such as the FTSE100 or FTSE All Share).

Managed funds were lucky to escape this list. Index trackers perform better most of the time, largely because they are so much cheaper.

But there are funds out there which I think are worse than conventional managed funds. These are 'fund of funds', where a highly paid fund manager takes your money and invests in a selection of managed funds. The result will often be a pretty diversified investment, so you might as well as have just tracked the market, or tracked some overseas market via Exchange Traded Funds.

8. Crusty Old Current Accounts

Most poor financial products are complex, but current accounts are as simple as it gets.

Even so, much like mortgages, if you haven't switched in the past few years you're probably getting a shockingly bad rate of interest on your credit balances. You may be getting just 0.1% interest per year when you could be getting more than 6%. So stop dawdling and switch to a decent account.

9. Any Product That is Advertised on TV!

There are so many financial products that fit into this category that I think it's more helpful to write a general warning. The cynical truth is that any product that is heavily advertised usually makes a lot of money for the advertiser. If it's making the advertiser more money, it means that it is taking more money from you.

You have to ask yourself why the product has such a big advertising budget. There are 'loss leaders' of course, where a minor product is offered to hook you in, but the best financial products are almost never advertised.

This is firstly because these products sell themselves (e.g. the best current accounts) and secondly because companies don't want you to buy the cheaper products, because it usually means more money for you and less for them. That's why you never see index trackers advertised all over the place!

10. Another General Warning

The main rule is that if you don't understand a product, don't buy it. When I say understand the product, you should not only understand its benefits and be able to compare them with other sorts of products, but you should also understand how the seller makes its money from it.

Everything about it should be simple to understand. If it isn't, it's probably because clever mathematicians have devised it to make companies a fat pile of cash.

The number of bad products out there is frightening so, as the Romans said, 'caveat fooli': 'let fools beware'!

Based on an article By Neil Faulkner | 17 April 2007 www.fool.co.uk/news/your-money/manage-your-finances/2007/04/17/worst-ten-financial-products.aspx

The Key Considerations

- do you really need that extended warranty?
- index and passive class funds may be a better solution for your investment needs
- consider a new current account, especially if you usually have a healthy credit balance
- any good product (and there are many) should not require 'freebies' to sell it
- know what you are buying before you commit to any purchase

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ACTION POINT
 
No doubt you're busy and have a 'to do' list that never seems to get done.

If you can't find the time to ensure you have the right financial products and policies in your portfolio then why not pay an
expert to do the work for you?

Failing to do so could mean you're wasting money every month through pure ignorance.

As Neil says, 'let Fools beware'!