27.7.06

consider yourself warned

Is it just me, or do advertisements and blurbs become more and more irritating as one gets older?

When you’re young, the concept of consumerism seems like a wholly theoretical construct (if you had even heard of it). It appears alarmist, the kind of thing only a paranoid schizophrenic concerns himself with. Of course, you’re soon disillusioned as you start to realize that everywhere around you are people and businesses that would do anything to make a quick buck off of you.

False advertising.

In my opinion the rules in South Africa are not anywhere near strict enough. For example, there is an ad on TV by an investment manager (I think Sanlam Investment Managers, but I might be wrong) that proudly says something to the effect: “So you’ll know EXACTLY what you’ll have when you retire.”

This is bullshit. There is no investment product out there that can tell you exactly how much you’ll have. I know this only because I work in the industry, but the average person will assume this is true and run off to the nearest Sanlam broker.

Then there’s the new JSE ad: “There’s nothing scary about investments”. I’m an investment analyst, and trust me, it’s scary. There are few things that scare me more than the equity markets. They are brutal. Ask those who invested everything in Di Data (there were many, and this kind of behaviour is encouraged by ads like these) and lost 25% in 2 months, 88% in one year, and 97% in 2 ½ years. It is irresponsible for the JSE to advertise to the average South African, plain and simple.

It’s easy to dismiss this as a boring and irrelevant issue, but do that at your own peril. One day, whether you like it or not, you’ll be 60, and you’ll want to retire. If your financial planner was incompetent (or shady enough to sell products that maximise his commission), it could mean that you will have to work until the day you die. It won’t seem as mundane an issue then.

I have spoken to many highly intelligent people who do not have the foggiest clue where their pension is being invested. Sometimes you’ll get a confident “Coronation”. So what? Coronation (or any other asset manager) provides 100’s of products, each appropriate for a different group of people. Not knowing where your pension is invested is like living in Johannesburg and sleeping with the front door wide open.

You do get guaranteed products. They generally guarantee you won’t lose money over a period of 5 years or longer. What they don’t tell you is that they guarantee your money back, not because they are so skilful, but because they invest a large portion in a government guaranteed zero-coupon bond. The rest is invested in growth investments, like equity. A sufficient proportion is allocated in the bond so that when the bond matures in 5 years, they could pay you back your money with the redemption amount, even of they completely lost the other proportion invested in the equity markets. This takes NO skill whatsoever. Not only do you pay an unnecessary fee for them to have no skill, you lose a lot of the upside potential you would have had had you been fully invested in the equity markets.

Now for the clincher: what they don’t tell you is that it is nearly impossible to lose money on the equity market if you keep your money invested in an index-tracking equity fund for a period of 5 years or longer. The All Share Index has backtracked over a 5-year period maybe once or twice in 80 years, and even when it happens, it’s unlikely that you’ll lose more than a few percent (i.e. more than the cost of the guaranteed product). If you get sucked into this product at the age of 25, by the time you’re 65, you could easily have a third of the pension you should have had if you were invested in the appropriate product. Easily.

So to recap on guaranteed funds: you incur costs and lose upside potential, for something you don’t need, and takes no skill whatsoever: Use THAT as blurb.

Another example: Outsurance and their “outbonus”. The outbonus isn’t some altruistic miracle. You don’t get an outbonus because they’re nice people. It’s simply priced into your premium. Simple as that. You pay them, they pay you back. But only if you’re good.

Then there are these ridiculous products sold as “life insurance that pays out something while you’re alive”. There is currently some TV infomercial that rants on about it, but I can’t remember what company it is. Again, this is included in you premium. You are paying for two products, you just don’t know it. They aren’t nice people, they’re insidious tricksters. You end up investing a portion of that premium in an investment that could be completely inappropriate, and losing a portion of that to unnecessary fees. All the average person thinks is "waita minute, I actually get money back? Jeez, that's much better than only getting money when I die, heck, count me in".

An inappropriate investment can easily mean that your retirement is deferred from 50 to 70. Think about that. Absorb it fully.

4 comments:

arcadia said...

i always knew dettol was inherently evil.

Anonymous said...

thanx 4 the warning

Anonymous said...

b,

Another great posting, this time on a topic very close to my own heart (namely truth in financial advertising).

Here in NZ we perhaps have a more regulatory environment than in SA, yet there is still a fair amount of misleading advertising regarding financial products. In particular, advertisements concerning residential real estate are a shocker. (I consider residential real estate an investment class alongside cash, shares and bonds, although I don't consider one's own residence to constitute an investment.)

The problem, as I see it, is twofold. Firstly, there is the problem identified by b, namely misleading or outright false claims on the part of financial services providers.

However, I believe that the greater problem is consumer ignorance (call it stupidity if you like). Basically, there is a woeful lack of financial literacy in NZ and, I suspect, in SA. Why else would people fall for outrageous claims such as "you'll know EXACTLY what you have when you retire" or, even worse, for lottery or Nigerian scams?

Predictably, solutions to this problem follow political divisions. Those on the left will blame the evil businesses, and demand a greater role for government in the marketplace. Those on the right will place the blame squarely at the feet of individual consumers, who are to be held personally responsible for their lack of financial literacy. I see the solution as lying somehwere between these two extremes.

I think that the government does have a role, but the role is not primarily that of an enforcer in the marketplace (although it should have this role). Rather, the government's role ought to be to ensure that the citizenry have an adequate level of financial literacy, such that individuals will not fall for outrageous claims concerning financial products.

I could go on about this topic all night - I won't. I'll finish with question, and my attempt at an answer. Q: Why should we care whether others make good financial choices? A: Because, one way or another, we will end up paying for their poor choices.

Paul.

Anonymous said...

You should all read Plato's Republic. Of course in an ideal world the education system would produce well-informed critical thinkers, who will make decisions based on reason rather than emotion or appetite. In such a world the only role of govt. would be to make sure we get the right kind of education.

But come on, be real. The first problem we have to deal with in the real world is the sheer quantity of information. Is it possible for one person to have sufficient knowledge to make intelligent decisions about their finances, diet, health, children's education, etc. etc.? I strongly doubt it.

Secondly, even if we had the right information, in the real world there is the phenomenon called weakness-of-the-will. Ons can know everything about health and nutrition and still not be able to resist consuming sweets/cigarettes/alcohol/whatever and still not be able to have enough money left at the end of the day to invest in a superannuation scheme. (Ask B what he invests his money in.)

Advertisers know this. Benevolent advertisers package their information in ways to appeal to the emotions and desires of their various target audiences, with the ultimate goal of benefiting them. Information alone simply will not do it. The rational way must be depicted as desirable.

Non-benevolent advertisers do the same thing, but with the aim of benefitting themselves. One in particular that pisses me off tells parents that Coco-Pops contain all sorts or vitamins and minerals. Possible true, but they neglect to mention that it also contains 50% sugar.

And this is why I think we need more input from government and other non-profit organisations, in the form of benevolent advertising and control of non-benevolent advertising. And, of course, we need the help and advice of benevolent friends and family who are experts in their particular fields. So keep it coming, B.

Thanks also for the advice on anti-bacterial soaps. I've always believed in the building up immunity theory, though I'm in no position to know whether it is true or not.

Liezl