Is it the G word that’s the problem?

Guarantee - a formal assurance (typically in writing) that certain conditions will be fulfilled, especially that a product will be repaired or replaced if not of a specified quality.

If there is one word that can be said to be the root of many problems in the FS industry – it’s this one. For consumers it implies that what they are buying will be fit for purpose and if it doesn’t work as described they will be recompensed. For those providing a product or service, it’s a calculated risk – that the additional sales generated by its application will offset the additional cost of providing it.

As Equitable Life showed (for those younger readers here’s a link to the whole sorry saga) getting it wrong can have disastrous consequences. But its appeal is undeniable. I can’t count the number of times I’ve heard in research groups that a saver has nearly all their money in savings accounts, because they are guaranteed, “unlike the stock market” they nearly always add. Although of course, they are not. At least not by the bank or building society, but by the FSCS. And only up to a fixed amount.

And unlike other sectors – where guarantees can be hedged with phrases like ‘fair wear and tear’ – in FS it’s always about the actual number.

No matter that savings of £100 would be worth a mere £36 in real terms in 20 years if inflation was at 5%, or £82 at a level of just 1%. And that the NS&I Direct ISA offers just 0.90%. A rate of 0.90% guaranteed to many seems better than the 2.86% average annual return of the FTSE 100 total return index over the past 20 years to 22.3.20.

But to my mind it’s not the G word that’s the issue – it’s that so few people in the UK have any real financial resilience. As my colleague Emily pointed out recently, those who can afford financial advice tend to be more sanguine about stock market volatility. But then they can afford to be, right? The money in their SIPP or ISA is not the only savings they have. If all you have is a few hundred quid, then any kind of volatility is simply unacceptable. If there’s one thing that Covid-19 has shown us, it’s that the vast majority of UK citizens are cruelly short of any kind of buffer. Why don’t we sort this out, before we start to worry about people being too cautious, eh?