Inurance Bond -- Good or Bad?????

cheerfulcat

jem16 wrote:

I can't see why it would not be considered a charge

If I take a risk I get 7.5%.
If I let the bank take the risk for me I get 4.5% - in effect I have been "charged" 3% for this security.

It may not be a charge in name but it's a charge by nature.

No, the bank is not taking the risk for you.You have agreed to accept a certain rate of interest for your deposit. Based on that deposit, the bank lends money to a borrower. There is a risk in this which the bank is taking for itself. That's why it gets to keep the risk premium. How is that a charge? The interest the bank pays you and the interest the bank receives are two different transactions.

dunstonh wrote:

A tin of beans doesnt give Tesco a lifetime of liability or have ongoing servicing requirements. They are not required to keep all paperwork for life and deal with ongoing valuation request, statements and monitoring and visits. The FSAs TCF rules basically give you a potentially uncapped liability on workload for unspecified events in the future. These are all ongoing costs.

That's perhaps because Tesco hasn't got a history of selling poisonous beans :A ( sorry, I really really couldn't resist ). In any case they certainly do have an ongoing liability - they can't wash their hands of you as soon as you leave the shop.

The charging structures exist that allow you to cut out the adviser if you want you. However, you have to remember that in many cases, if you do cut out the adviser and go direct you make no savings in doing so. They only way to make savings are to use adviser firms that offer the products on a discount basis.

Or not buy financial products...

jem16

cheerfulcat wrote:

No, the bank is not taking the risk for you.

You basically said that it did;

cheerfulcat wrote:

So take a 4.5% risk free rate, add a risk premium of 3% for a total of 7.5% return. The bank gives you 4.5% and keeps the extra 3% because it took the risk, not you.

You have agreed to accept a certain rate of interest for your deposit. Based on that deposit, the bank lends money to a borrower. There is a risk in this which the bank is taking for itself. That's why it gets to keep the risk premium. How is that a charge? The interest the bank pays you and the interest the bank receives are two different transactions.

Simply because if the bank uses my money to make 7.5% interest and I only get 4.5% of it back, it has charged me for using its services. The two transactions are connected - without one the other doesn't happen either.

EdInvestor

You have agreed to accept a certain rate of interest for your deposit. Based on that deposit, the bank lends money to a borrower. There is a risk in this which the bank is taking for itself. That's why it gets to keep the risk premium.

The "spread" between the lending and deposit rate these days is pretty small - as anyone who has an offset mortgage can see immediately.

The risk premium required for any investment involving real market risk assets such as equities, bonds or property should be considerably larger.

This is why it is often better to cash in an old-fashioned endowment. These endowments have very high charges and thus will often only give you less return than a risk free 4% savings deposit, and much less than a risk free and tax relieved return from early repayment of the mortgage loan.

In no way can it compete with a genuine risk-related investment in shares.

cheerfulcat

jem16 wrote:

You basically said that it did;

A slight misunderstanding perhaps? What I said is " The bank gives you 4.5% and keeps the extra 3% because it took the risk, not you. ", meaning " it took a risk, and you didn't " rather than " it took a risk on your behalf "

Simply because if the bank uses my money to make 7.5% interest and I only get 4.5% of it back, it has charged me for using its services. The two transactions are connected - without one the other doesn't happen either.

So - if I say " jem, old mate, lend me a tenner - I'll give it back to you next week and pay a fiver in interest ", and you say " OK , here you are ", and I go off to Kempton and put that tenner on a 25/1 outsider and it wins, and I give you your tenner back plus the five pounds interest I promised; do you really think that I have charged you £250? I was the one who took the risk ( if the horse had lost I would have been down £15 ) - you had a guaranteed return. This is all massively simplified of course; in actual fact it is not your money which is lent but that gets too complicated.

Edit: And the bank hasn't charged you for using its services; it is not lending money on your behalf.

Edinvestor wrote:

The "spread" between the lending and deposit rate these days is pretty small - as anyone who has an offset mortgage can see immediately.

Quite. I was trying to keep the example simple but of course banks can and do invest in equities as well.

jem16

cheerfulcat wrote:

A slight misunderstanding perhaps? What I said is " The bank gives you 4.5% and keeps the extra 3% because it took the risk, not you. ", meaning " it took a risk, and you didn't " rather than " it took a risk on your behalf "

But it the bank didn't take that risk it wouldn't be able to pay me my interest so it is done on my behalf in the long run.

So - if I say " jem, old mate, lend me a tenner - I'll give it back to you next week and pay a fiver in interest ", and you say " OK , here you are ", and I go off to Kempton and put that tenner on a 25/1 outsider and it wins, and I give you your tenner back plus the five pounds interest I promised; do you really think that I have charged you £250? I was the one who took the risk ( if the horse had lost I would have been down £15 ) - you had a guaranteed return. This is all massively simplified of course; in actual fact it is not your money which is lent but that gets too complicated.

But that's my point. If I chose to accept the risk myself, I could have gone off to the races myself, made a lucky guess and won the £250. However I'm not the gambling type, so I give some money to my gambling "mate". You're prepared to take the risk, you land lucky and get £250(minus the £15 you have to give me back) whilst I only get £15. So basically I've lost £235 from being risk averse. That's the chance I take.

Then again I could go to my local IHA (Independent Horse Adviser) and pay for advice.;) I'm sure I'd still be better off than lending it to my "mate".

To sum up;

DIY = £250 or £0
Lend it to "mate" = £15
Seek advice from professional = £250 minus 1.5% of initial investment


A bit simplistic yes.

The bank is providing a service which you do pay for in one way or another.

I think we might have to agree to disagree on this one Cheerfulcat - we might be going around in circles all night.

cheerfulcat

I think we might have to agree to disagree on this one Cheerfulcat - we might be going around in circles all night.

OK, fair enough.

Thanks for the laugh btw ( the IHA ) :rotfl:

jem16

cheerfulcat wrote:

OK, fair enough.

Thanks for the laugh btw ( the IHA ) :rotfl:

You're Welcome.