Shouldn't everyone who hasn't a clue receive 6 - 9% tax free on their investments ?

Tammer

It would be helpful if we stopped referring to bank accounts as "risk free" and to savings not being investments....

jimjames

Tammer wrote: »

It would be helpful if we stopped referring to bank accounts as "risk free" and to savings not being investments....

Why's that then? It's confusing enough when people say they want to invest but mean savings.

bowlhead99

The act of saving your money somewhere in order to have that same sum of money available to you at some other time (meanwhile, receiving some amount of interest from the person who is using it), is quite different from the act of investing your money in some venture, scheme or endeavour with the goal of profiting from the opportunity, which may fail.

The financial regulators also make a helpful distinction between a depositary account (where you deposit your money into a bucket and aim to come back to collect it later, perhaps with interest) and an investment (where you give your money to someone for them to turn it into something else, such as ownership in a company,or a property, or a loan to a business or to a government, or a commodity, or some financial instrument which is a derivative of the above - with the goal of generation of growth in capital value of the sum invested, or production of an income from the activity, where you are given the right to participate in the returns generated.

Consequently we should keep making a distinction between saving and investment because they have different purposes, different risks and rewards.

Bank accounts are, within certain limits, "risk free" because other than a risk of delay of getting your funds back, the actual balance is covered by a government mandated, industry supported, compensation scheme which enables you to avoid the risk of a counterparty going bust or the risk of investment failure.

While bank accounts are free of investment risk they are of course not free of the risk that the value of the deposit is eroded by inflation, or that the variable return from the capital falls short of your objectives.

However, I would be happy that an amount deposited in a bank account up to the FSCS limit be considered "risk free", because the returns from it are the man on the street's real-world equivalent of the "risk free" return in the world of investment theory that one can get by making a loan to a stable government. You will get your money back. Just like in the world of investment, the money returned to you may not be worth as much in real terms as it was when you first put it in, but by depositing or saving you cannot suffer a negative 'investment performance' which leaves you with less actual pounds than you started with.

This is why saving and depositing with bank accounts or current accounts or NS&I granny bonds should be kept distinct and separated in people's minds from investing in stocks, shares, bonds, funds, properties, commodities, p2p loans, etc etc. The latter can offer a variety of potential investment returns across a very wide range of investment risks, but they will have a non-zero investment risk, while cash savings have zero investment risk.

brasso

agarnett wrote: »

.....why can't all such customers achieve these types of yield ?

The answer is that 'such customers' absolutely can achieve that yield and, indeed, far higher yields.

As others have said, your relatives' "ISAs or summat" attitude has prevented them from impatient over-trading which is the curse of the amateur investor class, of which I am a rueful member. Doing nothing is an underestimated option in many areas of life, and investment is undoubtedly one.

agarnett

This thread seems to have raised a fundamental question about the difference between "savings" and "investments" for ordinary customers who haven't a clue (the majority). On one side we have the posters who urge that it is the difference that is fundamental, not the question.

I throw in some other words for consideration:

"life savings" [SIZE=-2](this is a word which has often been seen in newspaper articles about ordinary customers who have found themselves in an adverse situation having lost the lot or a substantial part. It carries with it the implication that the customer worked hard and sensibly over a lifetime to create and safeguard an amount of money that might take another lifetime to replace if lost, and that naturally, if persuaded to hand it into the trust of another, it goes without saying that it should be equally well husbanded for the future).[/SIZE]

"nest egg" [SIZE=-2](this is a word which may refer to the same funds as "life savings" but has positive forward-looking connotations - good things hatch from eggs which are kept safe in nests).[/SIZE]

"gambling" [SIZE=-2](this is a word which for ordinary customers used to be associated with either a little harmless fluttering e.g. on the Grand National or the Derby, or else it was used much in the same derogatory terms as those used to describe regular drinking in bars where the landlords were invariably richer than their customers). Like drinking, gambling has always been an acceptable pastime in the UK and both are taxed. However, few ordinary customers would ever admit to deliberately risking their livelihoods or their life savings or nest eggs or even a portion of these things on risky drinking habits or gambling habits.[/SIZE]

"casino" [SIZE=-2]This is the name given to a serious gambling establishment where people with money to burn visit to get a thrill out of risking the money constantly in the flame, and even watching it burn in palatable lumps whilst simultaneously anticipating the thrill of turning one or more lumps of it into a massive profit in a very short time. I suggest that a small minority of the population are familiar with the inside of a betting shop. An even smaller minority are familiar with the inside of a casino. A bigger minority will at some time have paid to spend an afternoon or evening at a horse-racing or greyhound stadium.[/SIZE]

Newer minorities gamble online.

"shares" - [SIZE=-2]Is this a gambling term? For good gambling or harmless gambling? As a government promoted generational thing that started three decades ago substantial minority of ordinary customers will own or have owned equities in their employer or in privatised national utilities or mutuals. Most of them will not have a clue about shares (or "equities"!) as "investments". I suggest that most ordinary customers will still be more familiar with shares as "windfalls". And many have never touched them since the day they received them or were persuaded by Sid, or someone at work.[/SIZE]

"Housing market" - [SIZE=-2]Are homes investments ? Most would say yes without for one moment thinking a home was a container for savings. Right-to-buy is, and always was in any of its forms, a government promotion. Yes it carries untold risks which ordinary homeowners do not understand at all. However, negative equity soon became a term that most ordinary customers learned quite well from shared family experiences, and no doubt will again, so perhaps that one particular gambling risk has become formally embedded into our lives as a risk we are all expected to live with and deal with if we have made a laudable personal choice which society does not criticise. No-one daily criticises their fellow citizens for purchasing a home in Hastings as opposed to Hornchurch, Hertford, Hereford, High Wycombe, Huddersfield or Harrogate, do they?[/SIZE]

"ISAs" - [SIZE=-2]Interesting one because the term includes Stocks and Shares based accounts - they're all "Individual Savings Accounts". Yet purchase from the wrong bank or provider, or choose to move money from one type of pension or investment fund into another, then the MSE forum posters will be all over your choices like a rash![/SIZE]

So it seems that for many, who visit these forums at least, ordinary customers are assumed to be solely responsible for the downsides of the latter "choices" as well as the former, even though most ordinary customers never understood and never will understand the choices they have had, those unilaterally made for them in the past, or that they now have.

Society does however still criticise most regular gamblers - even those who play the National Lottery. Don't they know that the odds are stacked against them ?

Vince Cable has famously warned of "casino banks" and "spivs and gamblers" as a generalisation of all those operating in the City.

How do we think they are making their profits and bonuses from the money we entrust them with, if the City is not loaded against the customer ?

2.25% pa is of course not a "cracking rate". A base rate of ½% is actually a meaningless number to ordinary people who would not know where to start to use it to even begin to estimate its affect on their own lives. They would probably start by saying that it means their savings rates are too low because of it, and their mortgage rates are happily low because of it. The latter is probably the more true because so many mortgages are trackers, but the former is a myth.

Ordinary people are told the low bank base rate affects their lives in very definite ways and they are told that is a big reason why 2.25% is a cracking rate, but ordinary people have no idea how it really affects the price of eggs.

Very few bonus-rewarded persons in the City would touch an instant access 2.25% Cash ISA with a bargepole, surely, other than as a short term home for some cash released from "investments" to pay for the missus' new motor with all the extras when it gets delivered sometime around the next new number plate prefix date? They can't crack anything let alone a bottle of champagne on that sort of return.

Why would they even try? They know where the bigger fish fry.

So who is benefiting by the suggestion of many in these forums that "savings" and "investments" are two fundamentally different things?

Might it be those who have become used to making their living out of taking risks with other people's money ?

Might it be those who do not understand the minds of ordinary customers and don't much care because they are somewhat self-centred upon their own skill or good luck?

Might it be those who genuinely believe that Cash ISAs are for less clever people who don't know how to gamble in investments using skill, and therefore should just stay away from big-boys games ?

I was struck by what I saw as a bit of a clash of two assertions by Eco Miser:

Actually, they will have been taking risks, without realising it, and it seems the bank's FAs did their job properly.

I think this returns to the heart of the question for dealings with ordinary customers - and the real question is one of trust. Despite everything, older ordinary customers in particular still do tend to trust their bank to steer them though matters that may be for the customer's good, but which the customer will never understand.

Should that not be the start point for Treating (Ordinary) Customers Fairly ?

Maybe that is what some posters are saying anyway - it now is the start point, and as such, "ordinary customers", who by definition are ignorant of financial risk, can no longer be advised to buy products which involve risk, because that's gambling.

So how is it fair

1. that an entire industry should even exist, with the sole purpose of creaming off massive profit from skilled gambling with other people's money i.e. with all those life savings and nest eggs which ordinary customers themselves are in no position to gamble because they have no desire to gamble?
2. that the industry should get away with underpaying ordinary customers an equitable reward for allowing the industry to use their life savings and nest eggs in that way?

verybigchris

There's a lot of misunderstanding about what a risk-free approach to investing looks like, e.g. "I don't want too much risk, so I'll just put everything in a FTSE tracker".

eskbanker

Difficult to know where to start on the long essay above but here goes....

agarnett wrote: »

This thread seems to have raised a fundamental question about the difference between "savings" and "investments" for ordinary customers who haven't a clue (the majority).

On what basis do you contend that the majority of your 'ordinary customers' don't have a clue?

agarnett wrote: »

"ISAs" - [SIZE=-2]Interesting one because the term includes Stocks and Shares based accounts - they're all "Individual Savings Accounts". Yet purchase from the wrong bank or provider, or choose to move money from one type of pension or investment fund into another, then the MSE forum posters will be all over your choices like a rash![/SIZE]

So it seems that for many, who visit these forums at least, ordinary customers are assumed to be solely responsible for the downsides of the latter "choices" as well as the former, even though most ordinary customers never understood and never will understand the choices they have had, those unilaterally made for them in the past, or that they now have.

Again, you're making huge assumptions about what 'most ordinary customers' do and don't understand, but ignorance is no defence for lack of personal responsibility.

agarnett wrote: »

So who is benefiting by the suggestion of many in these forums that "savings" and "investments" are two fundamentally different things?

Might it be those who have become used to making their living out of taking risks with other people's money ?

Might it be those who do not understand the minds of ordinary customers and don't much care because they are somewhat self-centred upon their own skill or good luck?

Might it be those who genuinely believe that Cash ISAs are for less clever people who don't know how to gamble in investments using skill, and therefore should just stay away from big-boys games ?

It's not a suggestion that saving and investing are fundamentally different things, it's a fact! If you're suggesting that it's not helpful to observe this difference, who do you think would benefit from that? When those who know what they're talking about and are able and willing to share this knowledge (e.g. bowlhead99's post further up) then it's up to individual readers to decide if it benefits them or not, rather than any self-proclaimed spokesperson for ordinary customers....

agarnett wrote: »

I was struck by what I saw as a bit of a clash of two assertions by Eco Miser:I think this returns to the heart of the question for dealings with ordinary customers - and the real question is one of trust. Despite everything, older ordinary customers in particular still do tend to trust their bank to steer them though matters that may be for the customer's good, but which the customer will never understand.

Using that argument banks can never win - it's hardly the responsibility of bank staff to provide financial education, but you may have spotted that there are now independent financial advisers for those not confident enough to make their own financial decisions, not to mention a wealth of reading material available on some pretty informative websites with popular forums....

agarnett wrote: »

Maybe that is what some posters are saying anyway - it now is the start point, and as such, "ordinary customers", who by definition are ignorant of financial risk, can no longer be advised to buy products which involve risk, because that's gambling.

Again a sweeping generalisation that ordinary customers are somehow defined by ignorance of financial risk! However, anyone can be advised to buy products with risk, but only a finite number of regulated advisers are able to do so (as opposed to the much larger number of internet posters who can offer unregulated opinions).

Going back to your opening post about the ordinary working class family with a £150K investment pot, are you seriously trying to suggest that this is representative of 'the majority of ordinary customers' who feature so prominently throughout your piece?!

On your final point about banks gambling with customers' savings, they are also now recognising the distinction between savings and investments by ring-fencing their retail and investment arms as separate entities....

Porcupine

eskbanker wrote: »

It's not a suggestion that saving and investing are fundamentally different things, it's a fact! If you're suggesting that it's not helpful to observe this difference, who do you think would benefit from that? When those who know what they're talking about and are able and willing to share this knowledge (e.g. bowlhead99's post further up) then it's up to individual readers to decide if it benefits them or not, rather than any self-proclaimed spokesperson for ordinary customers....

It's a pity that nobody told institutions that:

Please remember that once you invest in a Cash ISA, your ISA investment options will be restricted for the remainder of the tax year. By opening a Cash ISA you may not invest in another Cash ISA in the same tax year (the period from 6 April to 5 April the following year). You will also be limiting the amount of tax free savings in equities you can make, if you do not already have a Stocks and Shares ISA.

(from Cumberland Building Society)

is a particularly special example, but such confusion is common. For example this webpage:
https://www.harpendenbs.co.uk/savings.asp
has 'savings' in the link but talks about 'investment rates' and all the accounts are savings accounts.

And let's not get started on building societies offering 'bonds'. And then people getting confused when Tesco also issues 'bonds', or their favourite football team.

bowlhead99

agarnett wrote: »

So how is it fair

1. that an entire industry should even exist, with the sole purpose of creaming off massive profit from skilled gambling with other people's money i.e. with all those life savings and nest eggs which ordinary customers themselves are in no position to gamble because they have no desire to gamble?
2. that the industry should get away with underpaying ordinary customers an equitable reward for allowing the industry to use their life savings and nest eggs in that way?

a) while it is not black and white: at some level, you either believe that private individuals and entities should be able to have free will and freedom to own, control and benefit from resources, businesses, "the means of production" etc (capitalism) ; or you would prefer that government or "the state" should own and control the means of production and share out the spoils in some way amongst the people who participate in an economy(communism).

There are pros and cons of both, but while some countries are more socialist and others more right wing, most of the world has settled on allowing capitalism and entrepreneurship, with some modicum of control or intervention to create public "good"s, address "bad"s and provide some level of welfare system.

If you accept the logic that someone should be able to privately participate in the growth of a business - by taking an ownership slice or agreeing terms on which they will lend their skills (gainful employment) or other resources (e.g. providing debt finance) for a return... then you have to wonder how that could work in practice without the state parcelling up opportunities in everything and dividing them amongst everyone using a ration book system.

Large financial institutions, very "high net worth" individuals and wealthy family offices can access such "opportunities" because they have the financial clout to get noticed and participate in opportunities without making it hugely inefficient - a company would rather have 20 large corporate owners investing a billion each, than 20 million individual investors each holding £100 to £10000 worth of votes each. However to enable participation by the likes of you and me, "retail" investment management exists, so that individual "investment customers" with a lower level of investment nous can get involved in the wealth creation cycle and share in the returns.

Institutions and individual retail customers alike can benefit from investment management, arrangement and administration, as well as products such as retail banking, investment banking and insurance. So, the financial services sector exists. It pays for itself out of the money flowing through the system, though the money distributed to financial services businesses and individual workers will continue to get spent and invested around the economy, so is not necessarily "lost". However, a gap will widen between those that are participating in investments and those who aren't.

This "whole industry that exists to cream off profits" performs a function because it allows the wheels to turn, companies to be supported by capital markets and other such stuff which can drive growth in capitalist economies.

I'm not sure quite what your question is, but if it's "why should these people be allowed to make money for those who can afford to use them", I don't see a massive problem if we accept capitalism can exist. The idea that the average people can not afford to participate in investments iis in some way a nonsense, because tens of millions of people prepare for old age by putting away a small slice of their salaries for 40 years in a pension with the aim of it growing into a rather larger percentage of their average salary for the next 40 without a job.

These pensions are managed funds, managed by the investment industry. Whether the person picks investments or their employer "forces" them into a scheme, they need to use investments in some way - otherwise they will have to put away masses more money every month for when the economy grows without them. Perhaps therefore, they have no choice but to participate in the "gamble", knowing it or not - but this is not a bad thing once you realise that the generally long term positive result of such "gambling" is necessary to fund one's old age.

b) it is difficult to define an equitable reward. Are you saying the people who only get the 2% because they want to save their money in a rainy day fund and know it'll be there tomorrow, should get the same reward as those who get the 8% as a result of being willing to have their money be risked and "invested" and utilised around the economy? I am not sure that would be particularly fair or equitable.

Those people who do not have much to spare for investment pursuits are inevitably not going to become as wealthy in the long term as those who do.This is unfortunate for those with less. A solution would be to just have the government run the economy and share everything equally between everyone, which is a solution I don't favour, but I am biased because I have a higher than average salary.

Another solution would be to regulate financial services more stringently, although arguably UK regulates better than many places out there, though I know you will disagree. Another solution would be to invest more in educating people how and why to invest their nest eggs to help them hatch and what to avoid or seek while doing that.

Many wouldn't listen, because they don't like to be told what to do, or don't comprehend certain types of issues, or are disinterested in learning.

agarnett

Thanks bowlhead99.

I enjoyed reading your thought-provoking response.

eskbanker, my generalisations on the deliberately labelled majority group "ordinary people" or "ordinary customers" are admittedly very subjective, but they are made upon a sufficiently long and varied career (now over!) in and around financial services, involving one to one contact with individual customers of all walks of life, talking about their money, budgets and livelihoods, and that includes a few City workers too!

It is too easy to assert using tick-box compliance or even by writing notes on some kind of fact find document that because someone at the point of purchase appears to confirm they understand a financial product, that they do actually understand it. I know that is complete rubbish in almost every case.

With purchases of abstract products which cannot be touched or taken away and enjoyed at home, customers always rely upon trusting the seller and/or the selling institution.

It actually is the same thing with some non-abstract material things which can actually be taken home and enjoyed e.g. jewellery. When Gerald Ratner made the mistake of calling his jewellery crap, even the ability of the customer to make their own rational judgement whilst holding the item wasn't enough to save Rattner's business from collapse through loss of trust.

The recent market attempts to make contrived distinction between guidance and advice are playing with lies and avoidance of acknowledging the truth. Obviously no abstract product can ever be sold without the seller giving advice on what it is that is for sale. To suggest otherwise is to propound a lie.

"Execution only" or "non-advised sales" are in my opinion dissembling and socially useless concepts designed solely to avoid responsibility for accountable and fair dealing.

My main question in starting this thread was how ordinary bank customers could without consciously taking any risks have achieved an average of 6 to 9% pa growth in their capital over 9 or 10 years?

Since I started the thread, a number of posters have asserted that these ordinary customers either chose to take risks or took risks without realising it.

I assert that if real risk exists (and yes 2008 -2010 was very bumpy) all ordinary customers take risks when they buy products put under their noses without realising what those risks are exactly or even at all.

A few customers who use ordinary bank branches as opposed to special branches for HNW customers will of course understand the risks better - especially if they work in the City or are interested in investment markets as a hobby or perhaps through having exposed themselves to a SIPP product or S&S ISA which encourages self-investing. But despite what many posters in this forum assert may be the general case, I do not believe for one moment that self investing is yet a common pastime, even amongst those who have bought SIPPs!

So yes, I am indeed suggesting that since the ordinary customer is regularly conned into unwittingly accepting risk, then the correct reward structure is not one that favours the litigious complainant, but one that treats ordinary customers with more respect and gives them a larger share of the skilled casino banking spoils if it is to continue in the interests of our national economy.

This might mean that 9% might be a little high for a fair return on retail investment products, but 6% might not, and if we might agree on that, then the suggestion that 2.25% is cracking rate should quickly be banished from MSE'ers minds!

An artificial distinction has been made between what might be a fair return on rainy day funds that will be there tomorrow, as opposed to conscious investments in products which more obviously are employed turning the wheels of the economy. We are of course just talking in both cases of grist to the same mill, and I contend that for the most part, in both cases we have at least historically speaking been talking of no conscious exposure by the customer to any properly understood risk, if indeed any risk at all is appreciated. So why such a large difference in the offered returns ?

I think part of the problem of trying to argue this one way or the other at this point, is that the heists have already been taking place for decades, in a climate of relatively poorly regulation, but we have indeed perhaps reached a point where due to newer regulation, a current day situation exists where it is more difficult for a seller to tick box comply in selling a product containing risk to ordinary customers.

Is that a good enough reason to deny ordinary customers such a large part of the spoils, however ? I am not advocating state control of investments, but the financial services industry is surely sufficiently developed in the UK for most of the risks which are never going to be understood by ordinary customers to be hedged out by fund managers in return for a modest reduction in returns to the customers e.g from 9% to 6% ?

By the way, I notice no-one yet has picked up that S&S ISAs are still officially termed "Individual Savings Accounts" as opposed to "Individual Investment Accounts" !