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The price we pay...

Some things are very easy to put a value on such as a loaf of bread or a pint of milk. Services are harder to value and prices can vary wildly especially in different geographies. How much should we pay for financial services?

I am lucky enough to live in the UK where free retail banking is de rigueur. For the most part, unless you want to dip into the red or unless you sign up to one of the premium accounts which offer you all sorts of add-ons for a monthly fee, you can get away without paying a penny for normal day to day banking services.

The banks have to make their money somewhere, so they tend to make it back on fierce overdraft fees or when they sell you additional products such as loans, insurance or investments.

This system suits me, but not my less profligate brother who spends much of his life on the wrong side of the balance sheet. Things are clearer when you borrow money. Most people accept that everyone has a right to make a living so it's OK for banks to lend you money at a higher rate and make money on the margin.

Insurance is priced based on perceived risk which is understandable, but the one area where pricing baffles me is investments. Like most people I have a pension and some unit trusts. The fund managers charge me when I put money in and there is an annual fee.

I understand you have to pay when you put money in. After all, they have to buy shares on whichever stock market you are investing in. I can also see why there is an annual fee. They have to pay fund managers and pay to maintain the systems that crank out statements every so often.

What I don't get is why it is based on a percentage of assets.

When you only have £5,000 in your fund, a 1% annual fee is a reasonable £50. Assuming you put away money for a number of years and build up your fund to £50,000, you will be paying £500 a year for pretty much the same service. The amount of money I pay each year on my pension makes me weep.

No-one minds paying for services if the price they pay is perceived as reasonable and transparent. According to the CAP Gemini World Banking report, only 15% of people have trust and confidence in the banking industry and pricing is one of the reasons why.


Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 31 July, 2012, 12:02Be the first to give this comment the thumbs up 0 likes

Mutual funds pay brokerage to stockbrokers when they buy shares on your behalf. Traditional stockbrokers charge brokerage on an ad valorem basis. Hence, it should follow that the entry load charged by your mutual fund when you put money in should be a percentage of the asset value. If and when "flat fee" stockbrokers enter the mainstream and overtake traditional brokers, your wish for fixed entry load should be fulfilled.

Martin Bailey

Martin Bailey

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