27.7.06

consider yourself warned

Is it just me, or do advertisements and blurbs become more and more irritating as one gets older?

When you’re young, the concept of consumerism seems like a wholly theoretical construct (if you had even heard of it). It appears alarmist, the kind of thing only a paranoid schizophrenic concerns himself with. Of course, you’re soon disillusioned as you start to realize that everywhere around you are people and businesses that would do anything to make a quick buck off of you.

False advertising.

In my opinion the rules in South Africa are not anywhere near strict enough. For example, there is an ad on TV by an investment manager (I think Sanlam Investment Managers, but I might be wrong) that proudly says something to the effect: “So you’ll know EXACTLY what you’ll have when you retire.”

This is bullshit. There is no investment product out there that can tell you exactly how much you’ll have. I know this only because I work in the industry, but the average person will assume this is true and run off to the nearest Sanlam broker.

Then there’s the new JSE ad: “There’s nothing scary about investments”. I’m an investment analyst, and trust me, it’s scary. There are few things that scare me more than the equity markets. They are brutal. Ask those who invested everything in Di Data (there were many, and this kind of behaviour is encouraged by ads like these) and lost 25% in 2 months, 88% in one year, and 97% in 2 ½ years. It is irresponsible for the JSE to advertise to the average South African, plain and simple.

It’s easy to dismiss this as a boring and irrelevant issue, but do that at your own peril. One day, whether you like it or not, you’ll be 60, and you’ll want to retire. If your financial planner was incompetent (or shady enough to sell products that maximise his commission), it could mean that you will have to work until the day you die. It won’t seem as mundane an issue then.

I have spoken to many highly intelligent people who do not have the foggiest clue where their pension is being invested. Sometimes you’ll get a confident “Coronation”. So what? Coronation (or any other asset manager) provides 100’s of products, each appropriate for a different group of people. Not knowing where your pension is invested is like living in Johannesburg and sleeping with the front door wide open.

You do get guaranteed products. They generally guarantee you won’t lose money over a period of 5 years or longer. What they don’t tell you is that they guarantee your money back, not because they are so skilful, but because they invest a large portion in a government guaranteed zero-coupon bond. The rest is invested in growth investments, like equity. A sufficient proportion is allocated in the bond so that when the bond matures in 5 years, they could pay you back your money with the redemption amount, even of they completely lost the other proportion invested in the equity markets. This takes NO skill whatsoever. Not only do you pay an unnecessary fee for them to have no skill, you lose a lot of the upside potential you would have had had you been fully invested in the equity markets.

Now for the clincher: what they don’t tell you is that it is nearly impossible to lose money on the equity market if you keep your money invested in an index-tracking equity fund for a period of 5 years or longer. The All Share Index has backtracked over a 5-year period maybe once or twice in 80 years, and even when it happens, it’s unlikely that you’ll lose more than a few percent (i.e. more than the cost of the guaranteed product). If you get sucked into this product at the age of 25, by the time you’re 65, you could easily have a third of the pension you should have had if you were invested in the appropriate product. Easily.

So to recap on guaranteed funds: you incur costs and lose upside potential, for something you don’t need, and takes no skill whatsoever: Use THAT as blurb.

Another example: Outsurance and their “outbonus”. The outbonus isn’t some altruistic miracle. You don’t get an outbonus because they’re nice people. It’s simply priced into your premium. Simple as that. You pay them, they pay you back. But only if you’re good.

Then there are these ridiculous products sold as “life insurance that pays out something while you’re alive”. There is currently some TV infomercial that rants on about it, but I can’t remember what company it is. Again, this is included in you premium. You are paying for two products, you just don’t know it. They aren’t nice people, they’re insidious tricksters. You end up investing a portion of that premium in an investment that could be completely inappropriate, and losing a portion of that to unnecessary fees. All the average person thinks is "waita minute, I actually get money back? Jeez, that's much better than only getting money when I die, heck, count me in".

An inappropriate investment can easily mean that your retirement is deferred from 50 to 70. Think about that. Absorb it fully.

12 comments:

hein said...

There are a number of such examples. A group of these that I find especially vile are the Dettol and Protex commercials where germs are visualized as red spots or green monsters that attack your children as soon as they leave their plastic bubble. The fact is that children need to be exposed to germs in order to build up an immune system against them, which happens mainly during childhood. So if these kids are 'protected' against germs, their bodies will never be able to handle germs on their own.

These commercials play on the emotions of parents, pretty much saying ‘if you do not use our product, you are a bad parent', when the truth is that by having children use these product you are doing them a great disservice. You are compromising their future health.

And I am sure these big pharmaceutical companies know this. Yet they keep on churning it out: Fear more, buy more.

For proof, see the following links:
http://www.anapsid.org/tooclean.html
http://www.livescience.com/humanbiology/060328_bad_bacterial.html
http://www.exn.ca/Stories/2000/07/20/54.asp

arcadia said...

i always knew dettol was inherently evil.

iv said...
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iv said...
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Adriaan said...

thanx 4 the warning

iv said...
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Anonymous said...

b,

Another great posting, this time on a topic very close to my own heart (namely truth in financial advertising).

Here in NZ we perhaps have a more regulatory environment than in SA, yet there is still a fair amount of misleading advertising regarding financial products. In particular, advertisements concerning residential real estate are a shocker. (I consider residential real estate an investment class alongside cash, shares and bonds, although I don't consider one's own residence to constitute an investment.)

The problem, as I see it, is twofold. Firstly, there is the problem identified by b, namely misleading or outright false claims on the part of financial services providers.

However, I believe that the greater problem is consumer ignorance (call it stupidity if you like). Basically, there is a woeful lack of financial literacy in NZ and, I suspect, in SA. Why else would people fall for outrageous claims such as "you'll know EXACTLY what you have when you retire" or, even worse, for lottery or Nigerian scams?

Predictably, solutions to this problem follow political divisions. Those on the left will blame the evil businesses, and demand a greater role for government in the marketplace. Those on the right will place the blame squarely at the feet of individual consumers, who are to be held personally responsible for their lack of financial literacy. I see the solution as lying somehwere between these two extremes.

I think that the government does have a role, but the role is not primarily that of an enforcer in the marketplace (although it should have this role). Rather, the government's role ought to be to ensure that the citizenry have an adequate level of financial literacy, such that individuals will not fall for outrageous claims concerning financial products.

I could go on about this topic all night - I won't. I'll finish with question, and my attempt at an answer. Q: Why should we care whether others make good financial choices? A: Because, one way or another, we will end up paying for their poor choices.

Paul.

b said...

Hi Paul

Thanks for your comment. Just incidentally, the investment company I work for also considers property an investment class, but we only invest in listed property due to liquidity requirements.

I agree completely with your comment, including your Q&A.

I just want to add to it a little.

Working in the investment industry has been quite an eye-opener. I must say, before I go on, that I think the company I work for without a doubt serves its clients very well, and you could do much worse.
But the industry in general leans a bit towards the farcical side. The amount of brainwashing, of not only clients, but employees is astonishing. People are just generally so gullible: employees on the sell side truly believe after a few months that their company’s way of doing things is simply better than any other. This obviously makes them better sellers. You can’t look like you’re talking shit if you don’t even realize that you’re talking shit. Of course, the company philosophy evolves over time so that any client question has a perfect answer. The company’s procedures stay the same, but the philosophy changes in such a way as to answer any question that they have received up until that point, which is pretty much any conceivable question (if the company has existed for 5 or more years). It’s a lot like the “living” Bible: the Bible stays the same, but the answers to sticky questions are always mutating, improving, changing with the times.

But what I really wanted to say is that it’s often not in the best interest of asset managers and financial planners to educate their clients. The most obvious example is the commission structure of products. Only as recently as a year or two ago was legislation put in place to make it more difficult for ruthless financial planners and brokers to screw clients over by simply selling them the product that has the highest commission. But there are other examples, some interestingly enough, for the good of the client. For example, clients in the investments industry get scared easily, and when they get scared they do stupid things, like put their money under the mattress. So sometimes withholding certain facts or truths can be for their own benefit. This is where the ethics get very tricky.

But I’m going to stop here in the middle of nowhere before I put our little circle of bloggers to sleep.

iv said...
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dcm said...

I agree that the most valuable role government can play lies not with direct regulatory control, but rather to educate people for them to make more informed choices. It is amazing how many times I’ve heard people making generalised statements in colloquial conversation that is utter bullshit. They will, without even realising the lie, say things like avo is pure fat or that enjoying a beer is the same as eating six slices of bread. Come on! Bread doesn’t even make me dizzy. I’ve even caught myself pronouncing some scary stuff. I lay the blame firmly at door of the educational methodologies in the crucial learning years of my youth. The content was simply not relevant to the ever changing world we’re living in.

There are millions of children attending, or should I rather say sleeping through, math classes and hating it. I loved maths, but after completing an engineering degree, I still can’t see the relevance to so many people for whom it’s mandatory. Take language as another example… why? I’m definitely not proposing a radical change in curriculum’s areas of interest, but rather a critical look at the content’s applicability. I propose a decision making course with practical exercises and, of course, a strong practical application of simple statistics and decision making logic. I can’t fathom why not. We are educating people and sending them out into this world equipped with the worst possible skills. This can be seen in the appalling use of the word average, assumptions with regards to media statements or even becoming emotionally influenced when you’re offered an “Out bonus” from your insurance broker. All this frightens me. People should really have the skills to know what the say when they say it.

The cost of uninformed decisions can be reduced significantly with proper skills. Skills that should be developed at a young age.

Anonymous said...

You should all read Plato's Republic. Of course in an ideal world the education system would produce well-informed critical thinkers, who will make decisions based on reason rather than emotion or appetite. In such a world the only role of govt. would be to make sure we get the right kind of education.

But come on, be real. The first problem we have to deal with in the real world is the sheer quantity of information. Is it possible for one person to have sufficient knowledge to make intelligent decisions about their finances, diet, health, children's education, etc. etc.? I strongly doubt it.

Secondly, even if we had the right information, in the real world there is the phenomenon called weakness-of-the-will. Ons can know everything about health and nutrition and still not be able to resist consuming sweets/cigarettes/alcohol/whatever and still not be able to have enough money left at the end of the day to invest in a superannuation scheme. (Ask B what he invests his money in.)

Advertisers know this. Benevolent advertisers package their information in ways to appeal to the emotions and desires of their various target audiences, with the ultimate goal of benefiting them. Information alone simply will not do it. The rational way must be depicted as desirable.

Non-benevolent advertisers do the same thing, but with the aim of benefitting themselves. One in particular that pisses me off tells parents that Coco-Pops contain all sorts or vitamins and minerals. Possible true, but they neglect to mention that it also contains 50% sugar.

And this is why I think we need more input from government and other non-profit organisations, in the form of benevolent advertising and control of non-benevolent advertising. And, of course, we need the help and advice of benevolent friends and family who are experts in their particular fields. So keep it coming, B.

Thanks also for the advice on anti-bacterial soaps. I've always believed in the building up immunity theory, though I'm in no position to know whether it is true or not.

Liezl

iv said...

My problem with over-usage of antiseptics by over-protective parents in this manner is more due to the world-wide problem with antibiotic and antiseptic resistance.

Due to mutations of bacterial DNA, these microorganisms will eventually develop immunity to all the bactericidal agents patented thus far.

Nosocomial Infection breakouts of Super bugs like Golden Staph and VRSA and vile Pseudomonas and Streptococci are rampant around the world. It's a ticking time-bomb. How long will it take until we run out of ammunition?

Hospitals do have guidelines, but those still unaware of Darwin's theory disregard these controls and are jeopardizing our health by reckless prescribing of the last line of drugs.

It is true that some over-protective parents could over-react to these adverts.

Kids do need to develop immunity by being exposed to microorganisms as infants are born with relatively weak immune responses, but they have, however, a natural "passive" immunity; they are protected in the first months of life by means of antibodies they receive from their mothers.

Moreover, these days there are such a lot of passive immunity agents i.e. conveyed by antibody-containing serum obtained from individuals who are immune to a specific infectious agent already or from animals with this acquired immunity.

Therefore, it is not necessary to rely purely on active immunity i.e. triggered by both infection and vaccination. (Vaccines contain microorganisms that have been altered so they will produce an immune response but will not be able to induce full-blown disease.)

So, effectively, kids don't need to develop it over time. A vaccine could introduce the inactivated protein and this will initiate the minor immune reaction required to induce immunity (building antibodies) or a simple serum could give you the ready-made antibodies (from an immune individual) as protection. No lag-time required.

I could not possibly overstress the importance of antiseptics in Africa to avoid eye-infections such as Trachoma caused by the Chlamydia trachomatis bacteria in poor communities with little running water and poor hygiene. Transmission takes place when the bacteria move from the eyes of young children to the eyes of an uninfected person through several different ways such as: eye-seeking flies, touching eyes, bed sheets, pillows, and towels.

These communities need to be educated about the benefits of personal hygiene and the risks associated with neglecting it.

Television is a powerful medium and these simple visual messages of red spots and green monsters effectively convince the illiterate and uninformed poor.

The advertising agencies could rationalize this Dettol(r) campaign purely by its role in reducing the incidence of Trachoma in poor rural communities.
Trachoma remains the most common cause of preventable blindness in SA.

If I think back to my own childhood, I always think of my sister and brother biting the dog's ears as a sign of affection and biting their nails non-stop after playing with the new puppies. I am hygiene obsessed, but they STILL practice this bizarre habit. If these are the habits of an upper-class South African child, then I am confident of every African child's ability to acquire this 'bare minimum immunity'. I would rather aim to prevent unnecessary immune reactions.

But, yes, responsibility in advertising is crucial. If you claim to be number one, you have to be able to prove it with sales figures and confirmed efficacy and companies should be held responsible for their advertising campaigns' effect on society.

Thanks for the financial advice b.