"Experts say…………"

All media relies on a network of sources. This is particularly true of a technical subject such as ‘business’ or ‘money’. The deal is simple. You give us copy and we'll give you exposure.

Once you start to look critically at articles in the investment sections of the press you will notice how many are not news at all. They are confections cobbled together from a single idea (or quote) and puffed out with a number of phone calls to friends and a quick trawl round the Web. This may be efficient journalism, but it's rubbish as investment advice.

Watch out for:

• Unsupported assertions in the passive tense: ("Investors are being urged to……blah blah"). This translates as "here is a contentious remark to build some copy around".

• "Experts say…". This translates as "the guy we found who was willing to talk to us said….".

• "Experts recommend….". This translates as: "these are the things being pushed by the guys to whom we owe favours".

• "Some experts recommend…..". This translates as "we could find very few people to agree with this" or "we really should have checked this with a number of people but could only find one".

Fund Recommendations

Notice how many media contributions are made by people with a commercial interest in shifting product. They won't do anything as crass as recommend their own funds, but will be subtle with their slants.

Notice also how 'hot topic' articles are thrown together. The hot topic may , for example, be ethical funds. The article would not be complete without a short list of ethical funds. Their very mention is a promotion, and may be the result of one phone-call by a time-pressed journalist.

Guaranteed?

Every used car you ever bought has been guaranteed. So.........

A guarantee is just another word for a promise. A promise comprises two things: the nature of the promise and the name of the person/entity doing the promising. Unless those two things are spelt out you do not have a guarantee (or a promise). You just have an expression of hope.

You know what 'Guaranteed Used Car' means. Approach financial guarantees and promises accordingly.

By whom?

If a financial product is guaranteed by an entity in Liechtenstein you should ask whether the financial institution selling you the product stands behind this guarantee. Get it in writing. From the institution, not your financial adviser.

Almost guaranteed?

What do words like 'secure' and 'safe' mean in the context of a financial product? Something like 'almost guaranteed' maybe? 'Almost guaranteed' is like being 'almost pregnant'. You either are or you aren't.

If the income is "guaranteed", what about the capital?

How is the return of capital determined? It is easy to guarantee income for a limited period by dipping into capital.

We are happy to guarantee you an income of 20% per annum for 4 years if you'll invest in our four-year Greedy Bonds, repayment terms unclear. We'll put your money under the mattress, take 10% for ourselves, pay you 20% each year for four years and give you back 10% at the end.

Tax Free?

As a word couplet with saver sex appeal, 'Tax Free' has no equal. But it often presages titillation, not satisfaction.

Here are six tax traps:

1) It's the whole tax take that counts

The tax position of the particular product or wrapper you are buying is irrelevant on its own. What matters is the total tax paid as cash flows back from the underlying investment into your hands.

For example.....

OEICs are untaxed. But insurance funds are taxed on income and capital gains at the basic rate (22%). So, to level the playing field , income and capital gains derived from OEICs are fully taxed in the hands of a private investor. But he pays only higher rate tax on distributions from insurance funds.

The general effect is that all income and capital gains on both these types of fund are fully and equally taxed at some point on their path into the hands of the private investor. But your adviser, in his enthusiasm to make a sale, may sometimes imply that an insurance fund has a tax advantage ("you pay no more tax" or "you only pay higher rate tax").

2) Mixing apples and oranges

If you buy a washing machine you pay VAT at 20%. If you buy a dog you don't. The fund industry would say something like this: "Dogs are warmer and more affectionate than washing machines, and they hurt less when you walk into them. They don't wash very well, but they have the advantage of being exempt from VAT.

It's rubbish isn't? But you will see stuff like this over and over again in promotional literature. It's exploiting the sex appeal of 'Tax Free'. Sex sells.

3) Absence of tax is not automatically clever

When your car travels its first 1,000 miles without breaking down you may feel some slight relief, but it's no more than you expect. So why should the absence of tax on fundamentally non-taxable transactions be a selling point?

For example.....

Some insurance bonds allow you to withdraw 5% of your money each year for 20 years 'tax free'. You might question why getting your own money back untaxed is so special. And of course it is not. You get the same effect by putting your money under the mattress and taking out 5% each year.

Students of hyperbole may admire the following from an IFA's magazine (referring to your choice not to withdraw your annual 5%); "If you defer taking your income, your unused tax-free allowances from earlier years can be carried forward for up to 20 years".

4) Sometimes advisers just get it wrong

Tax is complicated.

5) Regulations are not forever

The Chancellor proved this in 1997 when he annexed 20% of the value of all equity income in pension funds (and PEPs and ISAs) by removing the refund of dividend tax credits.

So any tax plan requiring a continuing status quo requires, at the least, a certain scepticism.

6) Sometimes promotions just get it wrong

The regulator, and indeed the public, will tend to skate over the tax statements. So more inaccurate stuff gets through, particularly when it's camouflaged with hyperbole.

For example.....

Here's something a long time ago (2003) from a popular fund group we won't name.

"With a fixed interest element which must never fall below 60%, under current regulations, the Inland Revenue treats the income paid by the Fund as interest rather than dividend income. As a result the Fund does not attract advanced corporation tax (ACT)."

There are two comments on this:

1. So what? There are lots of other taxes it does not 'attract' either

2. ACT ended in April 1999

The Smoothing Illusion

Smoothed investment products (such as with-profits insurance) do not smooth. At best, they give you back what was yours in the first place (less fees). At worst, they level down.

This subject is difficult. Refer to Deeper