It’s tough out there for the banks and the building societies, not that I have a lot of sympathy for their self inflicted troubles, and there are increasing signs that they are resorting to underhand measures to shore up their balance sheets. In the last few days I have been called by several people concerned about changes being made by a number of banks and building societies to their savings accounts. In effect each has received a letter from their bank or building society telling them that the interest rate on their account is being reduced, and in some cases reduced by more than 80%.
The wording used by these institutions is somewhat interesting, take the following from Birmingham Midshires: Regardless of the balance in your account your rate will be fixed at 1.00% gross per annum, so no matter what happens to the bank of England base rate in the future your rate will remain the same. It then goes on to show that the last base rate move was down, from 5.25% to 5.00% per annum.
They write as though they are doing their savers a favour, reducing the interest rate from 3.66% to 1.00% - only now it is fixed in case the Bank of England base rate plummets from 5.00% to under 1%.
And the Nationwide are no better, closing certain accounts and reducing the interest rate to a paltry 0.3% (according to the letter received by one of our clients). This is from the building society that has based an entire advertising campaign on treating its customers fairly, no big hook rates to lure in new savers whilst excluding existing savers. In Nationwide’s case they simply reduce the interest rates for all savers, new and old.
So why are they doing this? Inertia perhaps? If there is a large slug of money that will not move from the old account to a better paying account, then the bank or building society suddenly finds itself sat on several millions where it only need pay a very low rate of interest, thus helping to boost profits. If it can do this enough times to enough accounts who knows exactly how much money will be stuck in accounts that pay a minimal amount of interest.
If you want to get an idea of just how frequently banks and building societies change accounts, take a look at their websites and look for closed accounts. This appears to be a business within a business, and must be quite lucrative overall otherwise why would they do it?
I was having a chat with one of our professional advisers earlier this week, and we talked about why we charged our clients fees instead of relying on commission as a means of payment. What I said was a revelation to him, commission (he thought) was simply a case of the product provider paying the fee rather than him dipping into his own pocket. He isn’t so niaive as to believe that he wasn’t really paying for it, but the amount of money involved was a real eye-opener.
In the same week as we introduce a new fee structure that relates solely to our advice and service proposition, I am starting a discussion on my personal blog around the whole subject of fees and commission. If you want to read it please go to my own blog Random Thoughts from a Financial Planner.
Dennis Hall is mentioned in the Independent on Saturday in the Invest & Save section providing a wealth check to Lucy Minshall from London.
[She] may have left university far behind her, but the debts she racked up there still haunt her. “I’ve been working for two years, but I’m still trying to get over my student loan and overdraft,” she says “I just about survive on my salary but have nothing left to save for a rainy day. I can’t even begin to think about getting on the property ladder, and I had hoped to stop working when I have children.”
You can read the full article on The Independent website.
The hullabaloo about Mervyn’s letter and we are talking about an inflation rate of 3.3%!
I heard an interesting comment from an economist on the radio the gist being the reason we feel inflation is a lot higher than Government figures is because the goods we buy regularly are going up in price dramatically. With my gas guzzling car I do seem to fill up every week and notice the price of petrol! Prices of irregular purchases such as clothes are supposedly dropping.
For a dose of reality, or if you’re like me and aren’t going to be buying any new clothes for a while (I have a closet full of things that I’m not planning on growing out of) you may want to look-up your personal inflation rate on the National Statistics website. Their neat calculator will give you a monthly estimate of your inflation rate based on the goods and services you buy. Turns out my inflation rate went up to over 20% annually in October 2007 but is now back to around 3%.
We have also been using this to analyse some of our clients spending before using the personal inflation figures in their financial plans. It makes for more accurate planning and can be quite revealing.
There’s nothing like a spot on national radio to help focus on the issues of the day.
Yesterday the inflation figures were announced alongside Mervyn King’s open letter to the Chancellor about why inflation has moved to 3.3% year on year in May, and what he proposed to do about it. My job was to put all this into words that the regular listener to any of the GCAP Media radio stations (Capital 95.8, Classic FM etc) would understand.
That’s not an easy task when talking in sound bite sized chunks. Added to which this isn’t inflation driven by exuberant consumerism, so the traditional cure of raising interest rates isn’t going to work that well. Looking through the numbers, the largest contributors to the increased inflation figure comes from rising prices for food and energy, which includes motoring costs. The prices of these are outside the control of the Bank of England, and raising interest rates is merely going to add to the worries of ordinary consumers who are beginning to buckle in larger numbers - I read also that the number of repossessions has risen significantly this year compared to last.
