Everyday financial risks to watch out for
AUGUST 20TH, 2010 By ADAM
After a week off on holiday, without a finance journal or newspaper in sight I picked up the Sunday papers with my goal to find something to write this blog about. I was not particularly surprised that I was spoilt for choice.
It seems that every newspaper these days has a finance section that offers tips and advice. Although these sections are helpful, it pays to know about your subject as the journalists are often more interested in a story than displaying the facts.
I thought I would therefore become a journalist for an afternoon and after a fair bit of research, I have written my own list of common financial hazards to watch out for:
• Free Banking is never free. Free banking is a gimmick used by banks to market their services. Every banking customer pays for banking whether it is through low interest rates, overdraft charges, monthly fees or even investments that you have to buy to receive a free banking account, there is always a price to pay. Obviously some are more competitive than others so make sure you shop around.
• Watch out for underlying charges on funds. The AMC (annual management charge) is often the published figure for a fund, however this only represents the charge for managing the investments. This charge often does not include the charges for the underlying holdings and dealing fees and details of these can be found in the TER (Total Expense Ratio) which represents the true cost of holding a fund.
• Where is your investment based and who is it regulated by? This is vitally important as there seem to be more and more funds that are based offshore these days, however this has serious implications on investor protection and tax treatment.
• The “vogue” investment at the moment is an ETF (Exchange Traded fund). Primarily based offshore, watch out for the distributor status of these funds as if they are non-distributor funds then any gains could be taxed as income possibly up to 50% dependent on your tax situation. Blackrock recently published research suggesting that up to 25% of ETF’s could be non distributor status.
• Watch out for structured products marketed as fixed term deposit accounts. The banks will often market attractive headline rates (e.g. 8%pa) that are really stock market linked products. The word “guaranteed” and “capital protected” will often be used but structured products carry significantly more risk than a deposit account therefore make sure you check exactly what your investing in.
• Headline rates offered by banks on fixed term deposits will often be rolled over into poor rates. It is important to continually shop around for the best deals for your cash and avoid the poor rates on offer in the majority of deposit accounts.
These are just some of the more common problems that I have come across recently. Of course I could be much more detailed than this, but I didn’t want to get too technical in this article. I would, however, be delighted to answer any questions you may have if you want to email me or leave a comment.
Posted in: General Information