Taming the pound

Quite reasonably, people have pointed out that Boris Johnson has got it wrong  

That’s a good article, although it isn’t as funny as Jeremy Hardy’s brilliant comment on The News Quiz, that formed the title of this piece.

It’s interesting  because Boris is apparently very clever.  Apparently he talks five languages fluently, including Russian, English and nonsense.  So how can he be quite so ignorant?

For one thing, he talks about IQ as if it is an accurate measure of income, the higher one is, the higher the other.  There is a correlation, but it’s not that great. Intelligence (or whatever it is that IQ and similar tests measure, if you aren’t too sure they’re actually doing what they say on the tin) is the best single predictor of managerial success.  But that doesn’t necessarily correlate to income.  There are plenty of poor, unemployed high-IQ former professors etc. and I’m not sure that Premier league footballers, among the highest paid in the land, would win prizes for intellect.  

Boris is, as is normal in politicians of all parties, and all levels of intelligence, confusing what he thinks ought to be true, with what is true.  Like everybody (politician or decent human being) he believes himself to be a “good guy”.  Since he’s wealthy, that can’t be (he believes) because he is lucky (the most probably explanation), a money-grabbing opportunist or any description his enemies might use.  He believes he’s wealthy because he is like he is, a good guy, an intelligent guy and more worthy of money than others who are not like him.  

He’s wrong.  He probably is smarter than most people.  But on it’s own, that isn’t reliably going to make him more money.  Nor is he necessarily a harder worker than others, that doesn’t guarantee wealth either.  Or more deserving, or nicer or anything much else.  He’s most likely to be wealthy because lots of things came together for him (the fun way to find this out is to read [amazon-product text=”Outliers” type=”text”]0141036257[/amazon-product] by Malcolm Gladwell, or [amazon-product text=”Bounce” type=”text”]0007350546[/amazon-product] by Matthew Syed).

So he’s got that wrong.

He’s also got the “big picture” wrong.  Greed drives people to want material things, to “keep up with the Jones’s” to be jealous. So yes, that does drive the economy, right enough.  But what country (or world) do we want?  One that is all about having more “stuff” than other people, or one where we’re happy? There’s plenty of evidence that materialistic values lead to unhappiness.  So Boris is saying that he thinks everybody in the UK should pursue misery, but he thinks that’s OK because some (what he regards as the deserving ones, like him) will be happy.

Sadly, he’s wrong again.  The limited numbers of rich will be wealthy right enough, but unhappy because they don’t have as much as somebody who is slightly richer.  The person who can have a personal jet and a yacht is miserable because they can’t afford their own island as well, the person with the island can’t afford a huge art collection as well, the person with the art collection (apart from being miserable because their personal life is in the toilet) can’t afford their own planet.  The moderately rich desperately want the stuff the very rich have, and the poor would just like to have something to eat, because all their money has gone on having things that the moderately rich have.  Nobody is happy because all they think about is what they want.

Remember, want means not just “I’d like”, but “I’m in want of” = I don’t have.  So you can be in want of food, shelter, friendship, things that are really important. Being in want of a home cinema system or a new BMW is really not up there in the top ten in the “I want” stakes when you look at happiness.

And Cameron, whom I understand Boris wants to supplant, did start the promotion of “happiness” (by reinventing the wheel, ignoring all the research and appointing his own pet economist who knew nothing about it to measure the concept).  Of course, Cameron (who had the same sort of education as Boris, and who has had the same sort of opportunities to get rich – see Outliers) has messed that up by ignoring the start that he made as well as all the research that’s out there.  So obviously Boris isn’t alone in being a very limited thinker, despite having the best education that money can buy.

But if Boris were to have a think about it he might (if he really is smart) realise that happiness isn’t actually linked to material wealth.  And he wouldn’t even have to think too hard, just read [amazon-product text=”Stumbling on Happiness” type=”text”]0007183135[/amazon-product] by Dan Gilbert.  That gives a very nice explanation of how we keep that drive to compete going, the drive that makes us all tense, unhappy and obsessed with material goods.  But, as Dan Gilbert says (and Boris could learn, if he’d just shut up long enough), keeping on firing up the economy by encouraging greed, materialism etc. is fine if the only thing you want is a thriving capitalist economy. In fact, it’s essential. If people, in sufficient numbers, start thinking “hang on, I don’t want to do this, I’d rather enjoy my life and be happy, who cares if somebody else has a new car and I don’t, good luck to them”, the economy tends to stumble.  The people get happier, but if they are happy and content they aren’t obsessed with buying things.  And that slows the economy.

Personally, I’d rather people were happy, and the economy didn’t grow as fast (or at all).  And everybody I’ve ever met feels the same.  But Boris is promoting a growing economy, although that also means he’s promoting a miserable country.

So again, his ignorance means that what he’s saying is handy for promoting a point of view, but that point of view isn’t as self-evidently right as he thinks, and it’s actually wrong in the opinion of most people.

And the big impact of Boris’s mistaken understanding is on the individual.

A week after we had headlines about pervasive and serious debt and we’ve got record debt levels, we have headlines about Christmas shopping breaking records

Nobody seems to have tied these together 

But if people are already in debt and are spending money at record levels, what do you think is going to happen to debt?  Will it go:  

a) up,

b) down,

c) stay the same,

d) don’t know as I’m the average politician and I have no idea about finance or anything else,

e)  don’t care as I’m Boris.

So my advice to you, whether you’re in debt or not, is don’t spend at record levels.  Ignore Boris.  Work out whether you actually care whether somebody else has something you don’t really want anyway, can’t afford and that will cause you sleepless nights worrying about how you’ll pay for.

Get your own money under control by working out what really matters to you.  Then perhaps campaign for a few politicians to start talking sense and taking an interest in the Nation’s well-being and happiness, rather than only in its economy.

And if you speak to Boris, tell him to stick to zip wires if he wants to pull a publicity stunt, that way, when it backfires (as everything he does appears to) it will only be him who gets hurt, not everybody else.

There’s lots of furore about payday loans.  They’re being blamed for causing debt and depression, being denounced in the House of Commons, the companies offering them are vilified in the newspapers.  

Now they are a really bad thing for just about everybody (except the companies offering them, who are becoming nearly as rich as bankers).  But honestly, are we making the right assumptions and asking the right questions?

The current thinking seems to be that nearly everybody (70% of the population who have massive debts, according to some screaming headlines, and barking politicians) is an idiot led astray by plausible crooks into taking on loans that they can’t handle.

Is it reasonable that the majority really don’t understand that when they borrow, they have to pay back? Is it reasonable that the offers (that have been shown to have an APR of, for example 4,000%) are really so alluring?  Is it reasonable that people don’t have any idea that with base rates of 0.5%, a borrowing rate of over 60% (let alone several thousand) is probably a really bad idea?

And shouldn’t we be asking why people keep doing this, when it is obviously daft, and why the loan companies can continue to make so much money with what is obviously a bad deal.

I got asked for a comment by the BPS, which they put up on site.

But for space reasons they had to edit the logic down.  So have a think about the points below, in the light of all the “we must cap rates”, “these companies are ruining lives” etc. headlines.  

I read a headline in the Metro the other day, “Families dragged into red by £140-a-month mobiles”.

It’s a reasonable article, about how the number of households falling behind on contract payments has trebled since the iPhone was launched six years ago.  Of course, that pretty much coincided with the economic crisis, but it’s probably true that the problem arises mainly from people buying contracts that they can’t afford.

The issue I have is that this is a symptom, not a disease.

I’ve been involved in a couple of discussions related to this recently.  

One was on a TV programme (it should air in December) about Christmas spending.  The point everybody wants to make is that, as the Archbishop of Canterbury recently said on TV, people “shouldn’t” be obsessed with having “things”.  But the fact is, they often are. 

The other was at a meeting for “Take Charge”, which is a consortium looking at financial education.  At the meeting, people didn’t only talk about products and skills in finance, they talked about “wants” and “needs”.  So they seem to have begun to understand that it isn’t just how that matters, it’s why and that the why is probably more important.

But the consensus still seems to be that the reason that people make bad financial decisions is that they don’t know, for example, that borrowing money at high interest rates is a bad idea.  I’m not convinced that most people are particularly brilliant, but I’m fairly sure that very few people are as stupid as the educators or the Archbishop think they are.  Most people know they “ought” to make sensible financial decisions, they know that spending more than they earn is daft and that they don’t really “need” lots of “things” – it’s just that converting the knowledge into action is difficult.

As you’ll know from other posts I’ve been pushing at the subject of financial education for a while. Things are looking up, since I have made contact with the PFEG through the medium of Take Charge and got a meeting booked with the MAS (which has already been postponed twice), but it’s progress! 

And it looks as if people (even those on TV) are beginning to understand that why is actually more important than how and that people need to distinguish between wants and needs.  

What they don’t seem to have realised is that simply telling people that they “ought to” distinguish between them doesn’t work.  Similarly, if you tell people that buying “things” that they want (like a super mobile phone) can lead to them not having the money for things they need (like food or mortgage payments) you aren’t revealing divine truth (sorry Archbishop, it’s really not in the “road to Damascus” class).  They know they should make the distinction, they just don’t know how to do it, or have the will to do it.

My idea is to help people to understand why it’s hard to do (because we didn’t evolve to make “logical” decisions like that), how to do it (you have to work out what you individually really value first, before you start deciding what is a want and what is a need) and how to generate the will (by knowing your values and hence having a good emotional reason to distinguish between wants and needs).

And I’d like to make sure children in schools get taught it too, because not too many of us will grow up to be able to buy everything we want, so sooner or later we all have to set priorities and decide what we really value.

That’s what the book is about. And it got some nice reviews recently as well (Association of Business Psychologists, Forum for Business & Consumer Psychology).

It isn’t rocket science. I’ve had clients who had financial issues and thought that they were really careful with money.  And many were paying for massive Sky TV packages, gym memberships, club subscriptions and, yes, phone deals, who told me they budgeted for these things because they were “needs”.  And for some clients, some items really were needs.  But only some things were needs, and only for some clients, nobody needed all of the things they were paying for.  For the majority, the majority of those expenses were not in the “top 50” of things that they really valued or needed when we did some work on it.  And while something might satisfy a vital need and a real value for one client, it would do nothing at all for another client, but often a client who didn’t value it paid more for it than one who did.  People aren’t rational and having standard lists of what is a want and a need doesn’t work.

It would be great if people would start to pick up on the importance of values, of knowing why priorities are vital, of the relevance of knowing techniques for distinguishing between wants and needs, rather than assuming that simply knowing not to buy “things” or buying only “wants” (without a definition) is adequate.

And it would be great if lessons were given in this, both in schools and for adults (particularly if the Government and other bodies wanted to pay me to teach people how to run them, and use Taming the Pound as a textbook!)

But we’re getting there, slowly!

There were some figures in a report  (by insurer L & G) recently that make quite scary reading.

Essentially, the average household in the UK is 18 days away from poverty.

So if the main breadwinner unexpectedly died or was off work due to a long-term sickness or injury, the family would have just over two weeks until the money ran out.

Obviously, that’s an average, so it probably doesn’t apply to you; in the same way that the “average” family with 2.4 children doesn’t apply to you – unless you have exactly 0.4 of a child, of course!

But it does mean that if some people are far better off than that, some are worse off and are, presumably, less than a week from being unable to pay the rent, mortgage, food bills etc. In fact, the survey indicates that 37% are in that position, they have no savings and could be in trouble tomorrow, unless they’ve got some sort of insurance.

Similarly, the findings indicate average savings of £660, and that the “18 day” figure is more than three times lower than households estimate their savings would last.

What to do?

Read chapter 10 of Taming the Pound!  I explain in there how you can work out for yourself what you need – and then you can get help to arrange cover, change your spending and savings patterns etc.  I also explain how to make those changes.

Interestingly, in the blurb from the L & G (sent to financial advisers) they say, “We also found only 31% of UK households are protected by life insurance or critical illness cover.”

That’s a fair point, but the thing many people need (also explained in Taming the Pound) is “permanent” protection, something that pays and goes on paying if you are ill or injured and can’t work.  It’s not like critical illness cover that gives you a one off payment and then leaves you to get on with it, however long you can’t work (or doesn’t pay you at all if you have an injury or illness that isn’t defined as “critical”). 

The trouble is, critical illness cover  is easier to understand and (most important) sell than permanent protection.  I said in Taming the Pound that ongoing protection is undersold, because of the fact that it’s hard for salesmen to understand and even harder for them to explain.  The figures bear that out, as they have for decades.

So the report is a great wake-up call to look at your finances and your lifestyle.  But it’s a lousy suggestion of what to do about it.

Ignore what people want to sell you.  

Work out what you want to buy and how you want to change, and do that.  You’re an individual, you are complex.  Nobody can tell you exactly what you “ought” to do, or what you “ought” to buy.  You can work it out, then you can decide what you actually need and what is worth doing and paying for.

You are the important bit not the money.  And you are the complicated bit, not the insurance policies.

There were a couple of articles in the free London papers on Friday that suggest that the powers that be still don’t understand human behaviour.   It would be funny, except for the fact that they show that the public are still going to pay more than they need, because the powers that be are part of the problem, not the solution.

One, the front page in the Metro, was about how advisers to Government use their knowledge to help their rich clients dodge tax laws.

Twenty five years ago, I used to point out to clients that I couldn’t afford myself.  I advised wealthy people how to make the best use of their money, tax relief etc.  If they could afford me (or more correctly, us, as I didn’t do it all solo), they could benefit. Such as the couple who were, if I recall, an accountant and a solicitor with two children.  They sued one another for divorce and maintenance of one child each, but still lived together. That and various other dodges meant that they paid about £1,000 tax on a combined income of about £85,000 (which was quite a bit then).  They could have eliminated the £1,000 if they could have been bothered.  

There’s always been a three tier system, the very poor don’t pay much tax because they don’t have much money anyway and you can’t get blood from a stone.  The middle income (most of us), get screwed into the ground because we get taxed but can’t afford the thousands we need to get the fancy advice to get out of the tax net (it’s like the law, if you’re not wealthy, you can’t really afford defamation actions etc.)  And the very rich can pay somebody to save them a lot more tax than they pay in fees.

And being an adviser and using the “inside track” isn’t new.  When Cameron was talking about parenting lessons, one of the providers who was going to be able to get Government supplied vouchers from parents was “Parentgym, the company run by Mr Cameron’s friend and former adviser, Octavius Black.” 

I did point out at the time that it looked as if Mr. Black had advised Mr. Cameron to adopt a policy, and then set up a company to benefit from that policy.  Maybe that wasn’t how it happened, I don’t know, but while, a year or so later, the Metro thinks it’s front page news that people take advantage of links or that big firms with big connections can benefit from policy and help the wealthy avoid tax, well, sorry, but it’s not “man bites dog”, it’s “dog bites man”; it isn’t news.

The other article was in the Evening Standard, under the headline, “Bankers face jail under regulation rethink”.  We have, apparently, disagreement over how to achieve a “robust set of rules”.  This is to try to punish “bad behaviour” and “behaving recklessly”.  

Wow, the “members of the cross party group of MPs and Peers” are against sin – fantastic!

I have said before what needs to happen in practice, rather than in theory.  I’ve described a way to think about regulating personal financial services, what we could do about the Retail Distribution Review (RDR) and how people pay for advice and how the regulations need to deal with the reality of behaviour and stop playing the blame game 

These articles also, like this one, have a lot of links to other useful items.

I also wrote an article on the subject of “honest bankers” and how the “we’re all against sin” might work in practice.  Sadly, Mindful Money, the site I wrote it for doesn’t carry my blog now, and they seem to have taken down that post (or maybe I just can’t find it).  So I’ve put it on this site, here.

It would be nice if the regulators, Government and the media would read some or all of the posts – I really think we could make things better in a practical way.

This article was written for Mindful Money in January 2012.  They seem to have taken it off their site, but I think it is still relevant.  I wrote it for them rather than putting it here originally because it’s more about “National” than personal finance. However in terms of regulation of what is sold to people, and how bankers are remunerated (from our money), it applies to the Taming the Pound idea of helping people help themselves to control their money.

There was an interesting piece of rhetoric from Martin Wheatley, the head of the new Financial Conduct Authority (FCA).  He was speaking to the British Bankers Association (http://m.ifaonline.co.uk/ifaonline/news/2141304/fca-chief-banks-advice-sales-targets).  He set out his wishes for a (utopian) situation where the banks would be the customers’ friend and not sell them inappropriate products. 

It’s nice in a way that he’s trying to do this.  It fits in with the desire for honesty etc. 

But is it realistic, does it address any real problems and does it recognise that he and his organisation (and the predecessor, the FSA) are a large part of the problem? (http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)

Realism

If we’re going to have talks about banks going back to the “bank manager in the cupboard”, the small businessman’s friend etc., lovely.  How exactly is that going to happen?  What is the reward system for banks? 

It’s based on making money – that’s what businesses are supposed to do.  If banks give “free” advice (like they used to) it isn’t free, it comes out of the bank charges for cheque books etc.  If you have free cheque books etc. the bank has to get its money from somewhere, and it can’t give “free” advice.

When we went over to the concept of the bank branch as a “sales unit” (and the model became one of paying for buying products and services, rather than everybody effectively paying a fee to have an account that got them “free” services that they could use), the set up changed.

I was actually working for the independent finance arm of a major bank in the late 1980’s.  Part of my job was training the bank staff about what was possible to do beyond the products the bank wanted to sell.  They got double commission on selling the in-house products – to encourage staff to sell the bank stuff rather than pass it to us to broker it for the best deal in the market.

Still, the bank staff wanted to call us in, because they saw their role as being to help the customer.  They didn’t really know insurance and investment etc. they knew banking.  They wanted to open accounts, do what they were good at, and then pass the other stuff on to somebody who was trained to do it.  They saw themselves as good at customer service and were leaving in droves because “I joined the bank to help customers not to be a salesman”

The model is now to sell things, not provide a “free” service (for which they charge in regular fees).

How do the banks go back to being something they haven’t been for thirty years or more?  Mr. Wheatley doesn’t say.

Real problems

The response from Independent Financial Advisors (as you can see from comments on some of the links, and I get first hand from friends still in that field) is that, naturally, the banks won’t give decent quality advice anyway (that’s also picked up in the Telegraph article http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)

I’ve got a certain sympathy with that – after all, I did the IFA job for about 14 years.

The level of technical competence that IFAs have to have from this year, I got in 1992/3 (when the qualification came out).  The banks’ staff don’t even have to have that, from what I can make of the regulations.

It was the case in the 80’s through to today that you can have “specialists” who only learn one product, or family of products.  They can sell one company’s policies, meaning that it is OK if the policy is absolute rubbish as long as it is the best the company does.

It used to go even further towards lunacy, maybe it still does, and one could learn just mortgages, or just investment-linked life policies or something. 

If you target people to sell specific products, people react as they usually do.  If the only tool you have is a hammer, all problems begin to look like a nail.

So you always got people (particularly the most limited, poorly trained people) selling rubbish.

Mr. Wheatley doesn’t want people to do that.

Might it therefore be a good idea for him to stop the limited and specialist idea, and make all people qualified and responsible for selling the best product in the market?

Appealing to bankers’ better nature is OK, but as they will lose their jobs if they give in to their better nature, don’t sell as much and don’t make any money, does Mr. Wheatley think that it is going to happen? 

Part of the problem

Apart from the obsession with products and the – let’s say it, naiveté – of appealing to the bankers’ better nature, the FSA have set up another problem.

Successive heads of the FSA have been previously employed in banking (such as Lord Turner).  Given that such a person is part of the “tribe” and probably has on speed dial the number of the person who is currently playing golf with at least one Director of any bank in question, according to small group theory – what is going to happen?

If you find somebody in your social group in an ethically questionable situation, do you immediately call the police and read your former best man’s good friend his Miranda rights?  Or do you give them a bit of leeway, because you’re sure they wouldn’t be doing anything they shouldn’t?

Successive regulators seem to have been reluctant to be tough on banks, whether it is because of the “six degrees of separation” factor, fear of banks’ financial clout, the consideration that a remunerative non-executive director role will be lost if you drop them in it – I don’t know.

But I’m fairly sure that, for the reasons above, among others, giving lectures on morals to the banks is not terribly helpful.  I would think it will be as practically useful as giving lectures on the moral imperative for hygiene and customer service to an NHS practice run by Dr. Shipman.