Nine areas I look at when assessing financial products
Understanding financial products can seem overwhelming. There’s so much jargon and the numbers can make your head spin if you don’t know what they mean. Contract documents are lengthy. Even “key features” can run to several pages. There might be an adviser to hand you can ask for help, but what do you ask about?
The more you build your knowledge about products, the more you start to have a mental checklist of features you watch out for in the documents.
Here are a few key areas I suggest you make a habit of finding and understanding. Not every question applies to every product, but they are as broad as possible.
What do you know about the provider? Are they properly regulated? What’s their customer service like? If you have a complaint and they don’t resolve it properly for you, who can you take that up with? What compensation covers you if something goes wrong?
Interest rates (you want these high for saving and low for borrowing) - are they ‘fixed’ so they’ll stay the same for a set period of time, or ‘variable’ so they could change? What would you prefer in this situation?
Fees and charges - are they a flat cost or a percentage? Are they standard for everyone or are they affected by your actions? How low can you go?
Dates/time periods - do these match up with your current lifestyle and future goals?
How much do you pay? How do you pay? How often do you pay?
How do you get money back? Do you have to give notice to get it? How much? Do you have to claim it? How? Is there any reason you won’t get anything back?
How is the product affected by the rising cost of living (inflation)? Some products have ‘index-linked’ features which means they track the cost of living (for example a life insurance policy with a slightly bigger potential pay out each year to keep pace with rising prices). Index-linking often means you may pay a bit more but, for products you will keep for a long time, it can be worth it.
Is there investment risk involved? How much? Do you understand it fully? Are you comfortable with it, given any other risk you may be taking?
Are there any conditions you must keep or else you’ll have to pay a charge, or lose all or some of your money? Is there anything you could do that would completely invalidate the product and make it worthless?
These are only the starting points, but they will give you a good steer.
The essential questions are:
who pays how much to whom?
when and under what circumstances do they pay it?
and is there anything that might prevent them?
what would happen then?
I’d love to hear what you look for when choosing financial products.
Did you find this useful? Check out my book on personal finance for freelancers.