Good reads from around the Web.

I seem to have spent years arguing – online and off – with men (invariably men) who are 10-30 years older than me – about exactly the wrong problems.

There’s a certain type of clever man who tends to fret about:

• Peak oil
• The rise of China, especially in the context of outsourcing
• The lack of UK manufacturing and engineering
• The lack of future jobs in the West

Yet not one of these bothers me much at all. (Of course there have and will be switching costs to resolving any issues that do arise).

Peak oil was always a bogus threat, at least in our lifetimes and those of our kids. I didn’t foresee the fracking bonanza that’s handed me a win here quite so quickly, but I knew we’d find plenty more hydrocarbons. The world is still stuffed with them. Our problem is we’re burning them.

Also, alternative energy progresses rapidly. The sort of man I’m thinking of tends to hate alternatives – I think they’re all children of the 1950s at heart, and love to see billowing smokestacks overseen by a man from the Ministry – but they tend to respect mathematics. Eventually alternatives will win on all fronts.

The rise of China may present geopolitical tensions, but like most global trade it’s a big win for us. We get an enormous range of things far made more cheaply than we otherwise would, and we often retain the bulk of the profits generated, too. (See Apple’s margins for more).

UK manufacturing? These laments are a manifestation of the sweatshop fetish of most of the public, but particularly men of a certain age.

Most manufacturing is low-end and makes little money. We’re pretty good at the rest, and we retain a significant manufacturing base, albeit a shrinking one in relative terms because we’re so much better at services.

As for the lack of jobs in the future, that’s just a lack of imagination. Sadly, humanity shows few signs of swapping tat and titillation for more quality time, and I’m sure we’ll find new ways to keep the proles and their bosses busy for decades to come.

Like what? Like 1,000 things I could list and 10,000 we can’t imagine yet.

Just one example – for years I’ve suggested that in the future everyone might want their own custom house, designed and built to their specs by a personal architect, and fitted with bespoke furniture and designs.

That’s a lot of new skilled jobs, compared to fields of Barratt boxes.

Ten-years ago my suggestion was deliberately fanciful, but recent advances in 3D printing have led some to speculate that we might one day build houses an atom layer at a time, from the ground up. (It’s already being pioneered in Amsterdam and elsewhere).

Combine that with the computer-backed architecture that already gives us apparently impossible floating roofs and bending walls, and Acacia Avenue need never be the same again.

What really worries me

I haven’t even mentioned fears of (or relish for?) the end of capitalism and the consequent gold bug mania.

To be honest I suspect this is a temporary concern of people who’ve never read any financial history seeing banks going bust on the news. Capitalism goes through periodic waves of crisis. Always has, always will.

So am I a deranged optimist? Do I have any worries?

Absolutely I do – plenty.

Here are just a few of the things I think are really worth fretting about:

• Environmental collapse and climate change
• The coming uselessness of antibiotics
• The end of all privacy and absolute (if consensual) State control
• Biologically engineered terrorism

On the first of these, I’m indebted to reader Andrew who reminded me that Jeremy Grantham’s latest quarterly letter [PDF] was out. I usually agree with most of what Grantham writes, and this time he tackles ecological collapse and the increasing viability of alternative energy in one coherent message.

I particularly like how he calls out another bugbear promoted by the greybeard doom mongers – that the pension crisis should be solved by stuffing more kids into the bottom of the pyramid – as he like me sees population growth as a top three problem needing fixing.

Grantham writes:

The return on helping encourage a lower population everywhere is incredibly high. Yet little is done at an international level and indeed the issue is treated like a hot potato even by usually well-meaning NGOs.

But we can do it, and my guess is that we will indeed succeed on this front. In the meantime it would be encouraging if economists, The Economist (not to pick on them but I tend to hold them to higher standards than others), and economic discussions in general would look out a few more years and stop discussing lower population growth as if it were a dire economic threat rather than our last best hope.

Of course, as growth rates drop rapidly and populations quickly age, there is an added burden to workers of carrying more non-workers for one generation as the changes flow through the system. Then things stabilize again.

This cycle can be ameliorated enormously by having older people extend their contributions and by facilitating the full participation of women in all countries.

The ruinous alternative is to have an ever-growing population run off the cliff collectively.

There’s also stacks of interesting stuff about alternative energy – enough to encourage me to finally pull my finger out and write the post I’ve been promising some of my friendly opponents for years – and a second article warning on how high profit margins could herald a coming dark age of super-inequality.

Oh yeah, I believe rising inequality is a real existential threat for the West, too. Even for billionaires, although I suppose few of them would agree.

[continue reading…]

I see the peer-to-peer pioneer Zopa has evolved again, with the company introducing “Safeguard”, a new and arguably safer way to lend money.

Hitherto Zopa has worked by matching individual lenders and borrowers in a marketplace. You set the interest rate you’ll accept on your loans, and Zopa pairs your savings up with borrowers (or vice versa).

The main benefit of lending via Zopa has been higher rates than you’d get with a bank. Some people also liked the idea of lending direct to individuals, and cutting out those “greedy” financial institutions.

The downside of Zopa was if a loan soured and your smiling borrower turned into a feckless defaulter, then you lost most or all of the money that you’d lent them.

The default option

Your main protection against default has hitherto been Zopa’s usually excellent credit checking, which has kept bad debt well below the predicted levels (though I suffered when it seemingly went on the blink for a month a few years ago).

In addition, you can spread your money between very many borrowers – perhaps lending as little as £10 to any one individual – in order to reduce the impact of any single borrower doing a runner to Gibraltar.

With a fairly large pot of money and typical luck, you could enjoy a healthy average annual return, after deducting fees and bad debts.

Money lent with Zopa is not guaranteed by the Financial Services Compensation Scheme (FSCS) however, and defaults can and do happen, with cash-sapping results. And just to add insult to injury, the way that Zopa interest is taxed, you’re unable to set these bad loans off against your taxable interest income.

So bad debts didn’t even give you the small mercy of a slightly lower tax bill for your troubles.

Bailing out your DIY bank

Zopa’s new ‘Safeguard’ option radically changes this traditional Zopa model, if we can use the word traditional about a seven-year old service!

First and foremost, Zopa claims you will be reimbursed if any of your loans go sour. This will be done via a special fund held in trust for the sole purpose of returning money owed to savers if their borrowers default.

At a stroke, the bad debt problem largely goes away (at least so long as the compensation fund isn’t overwhelmed by bad loans due to some sort of unlikely systemic failure).

The second big change with Safeguard is that if you lend money via the new system, you no longer set a rate you’ll accept for your money.

Instead, all the money goes into the one Safeguard pot that Zopa bundles up to create loans for new borrowers. For some reason this Safeguard money has been prioritised by Zopa for lending, too, so you should see it lent out very quickly.

The interest rate you get for each microloan via Safeguard is determined by a changing tracker rate.

Zopa says it will adjust this rate by looking at:

• The rates being set in its own market

• The rates competitors charge for loans

• Average savings rates

You’ll likely get different rates across the micro-loans you parcel out via Safeguard. Overall though, your average rate should be in line with what Zopa is predicting – which as I type is 5.1% for shorter term loans. ¹

The advantage should be that Zopa will be able to fulfil loans more quickly, especially larger loans. This may enable Zopa to feature more prominently on financial comparison tables for a wider range of loan bands, and so drive more borrowers to the Zopa site.

Currently Zopa has a problem where it seems to have a lot of savers but perhaps too few borrowers, considering how competitive it should be given the cheaper loans it usually offers.

You don’t get something for nothing

The immediate disadvantage of using Safeguard is you no longer have any control over the rate you get.

Also, as I see it the rates on offer via Safeguard will likely be lower than might have been available in the usual Zopa market for two reasons:

• Firstly, some of your return goes to fund Safeguard’s reimbursement war chest

• Secondly, bank interest rates are lower than you’ve been able to get via Zopa, and the Safeguard tracker rate will follow them down

I think there are likely to be long-term consequences from this shift in the peer-to-peer model, too.

Experimenting with Safeguard

On the face of it, the introduction of Safeguard is good news from Zopa.

It’s always annoying when disproportionate bad luck means an overall poor result, so spreading bad debt across an entire constituency of savers – just as you do when you put money into a normal bank – will be welcomed by all but the most masochistic.

However as my last sentence implies, this move also makes Zopa more like a standard bank in my opinion – only without the nailed-on guarantee on your savings from the FSCS (Cyprus-style deposit raids notwithstanding!)

Safeguard represents more of a fire-and-forget approach to lending money. If it becomes the usual way to lend with Zopa, then this will hit those who’ve enjoyed ‘gaming’ Zopa for an extra 1-2% in interest. I suspect it will also reduce the community feel over time, too.

As an experiment I’ve shifted some of my Zopa savings to a Safeguard offer to target shorter-term loans, and the money is being lent out very rapidly. A third of it has been lent out in barely two hours!

Lending via Safeguard is trivially easy:

Against my expectations, the rate I’m receiving today for most of the latest micro-loans I’m making via Safeguard is actually higher than I was getting yesterday in the normal Zopa marketplace

I wonder though if this is just because the pool of money sitting in the Safeguard pot is still relatively small.

Safety first at Zopa?

It’s anyone’s guess, but I expect Safeguard to eventually become the main method of lending money via Zopa.

Having any bad debts repaid will be just too attractive for most people to resist, even if theoretically they might have done slightly better taking the odd hit but getting higher rates to compensate.

Zopa has been getting simpler and simpler (dare I say dumbing down?) for years. It scrapped its high-risk “C” marketplace and its “Y market” that provided loans to young people, for instance, and it reduced the term options for lenders to “shorter” and “longer”, in place of specific terms measured in years.

I didn’t find those changes detrimental, personally, but the result was undeniably a simpler product.

Some changes have been wholly for the good, especially the “Rapid Return” facility that now enables you to get much of your savings money out at short notice if needed, albeit for a charge. Rapid Return partially addressed the imbalance whereby borrowers could repay early, but lenders had to remain locked into their loans.

I think the new Safeguard product will also prove popular with all but the hardcore, but I wonder where it will end.

It will likely suck more savings into the system, and it will likely bring down rates for those borrowers who find their way to Zopa, too.

But arguably Zopa’s problem is one of insufficient scale, which means any emerging imbalances have tended to be addressed by shifts in its operating model.

In theory, its original market-driven rate-setting system should have produced the perfect equilibrium between risk and reward.

But with Safeguard’s tracker rates partly set by competitors and Safeguard savers having to take what they’re given by way of return, the lofty ideals of the early peer-to-peer enthusiasts seem to be further away than ever.

• For all the ins-and-outs about Safeguard, visit the Zopa website.

1. Note though that as an early adopter I am only paying a 0.5% lending fee. New lenders will pay a 1% fee, which will reduce this predicted rate by another 0.5%.[↩]

Looks like it’s game over for cash rebates and the last surviving refuges where small passive investors are spared the pain of significant platform charges.

Within a year, we’re going to be choosing from clean class funds with slimmed down OCFs ¹ (Hooray!) while paying beefed-up fees for our platform / fund supermarket / execution-only brokers (Hiss!).

New rules from The Financial Conduct Authority (FCA) will abolish commission-based payments for DIY platforms, bringing them into line with the RDR revolution that hit financial advisors on the eve of 2013.

It’s a massive shake-up for the industry that will force many investors to rethink their choice of funds and brokers.

We’re in for a prolonged buffeting from the bow waves of change as a result, so here’s Monevator’s navigational guidance:

The headlines

• Cash rebates are banned from April 6, 2014 ².

• Platform services must be paid for by a platform charge that the investor explicitly agrees to.

• Unit rebates are allowed. In other words, platforms may negotiate special offers with fund managers that are passed on to investors as extra shares.

• Critically, the unit bonus must be passed on in full rather than siphoned off in part by the platform.

• 6 April 2016 – the date ‘legacy’ funds bought before April 6 2014 will have to cease their surreptitious commission paying. All funds will be converted to clean class by then.

Why it’s good

Platforms will no longer be allowed to present themselves as ‘free’, while actually carving out a living from the inflated annual management charges (AMCs) that most investors think go to fund managers.

The idea is that investors will know exactly what they’re paying in fees and that will incentivise platforms to become more competitive.

Fund groups like Vanguard, that refused to pay commission, will become more widely available and put greater cost pressure on the rest of the fund industry.

Fund groups won’t be able to use fat fees to push for undue prominence on platforms, supposedly. They’ll probably buy adverts instead.

The FCA has warned the platforms and the fund groups that it’s got its beady eye on them and won’t put up with any naughties.

Why it’s bad

The financial industry is abuzz with theories on how platforms might circumvent the rules. No-one really believes this is ‘over’.

Small passive investors will pay more for platform services. The old regime took 0.1% in platform charges from an HSBC retail index fund. Now the cheapest clean class platform fee is 0.25%.

Unit rebates (along with cash rebates) are now subject to income tax (outside of an ISA or SIPP). They are on the way out like a football manager after a bad run, which is likely to lead to…

Super clean share classes – Certain platforms are already browbeating fund managers to offer them cheaper versions of clean funds.

In other words, Platform A stocks Fund X with an OCF of 0.75%, but Platform B uses its market muscle to get the same fund for 0.65%.

If you’ve ever stared at MorningStar late at night trying to work out the difference between the F, R and I versions of a fund (what, just me?) then you may well fear supping from the alphabet soup that many in the industry are predicting.

On the other hand, if platforms are able to force down fund prices then investors benefit. I have a feeling that they won’t be scrapping over the lean index fund pickings, anyway.

Now what?

You have just under a year to choose your new investment home – unless you’re lucky enough to be with a super-competitive broker already.

We’ll keep our broker comparison table updated to help you make an informed choice in the months ahead.

Right now, the market approach to platform fees for clean class funds is split in two:

Percentage based fees – The best approach for small investors. Charles Stanley Direct and TD Direct charge along these lines.

Flat-rate fees – Fixed charges (say £60) that put a sizable dent in a small portfolio will barely scratch larger pots. You’ll normally pay an annual fee and then extra to trade on top. See Alliance Trust, Sippdeal, Interactive Investor, Best Invest, and The Share Centre. ³

To calculate whether you’re best off with flat rate or percentage-based fees:

Estimate the best annual flat-rate platform charge you can get including trading fees. Divide that number by the best rival percentage charge.

For example:

£60 / 0.0025 (or 0.25%) = £24,000

That number is the breakeven point. At that point, a portfolio worth £24,000 will pay the same platform fee (£60) regardless of whether your broker charges a flat rate or a percentage.

If you’re well under that figure and will remain so for years then go for the percentage based platform.

The example assumes you can buy an identical portfolio of funds at either broker. If not, then our article on clean class funds will help you factor in fund OCF differences.

Do nothing

Most brokers have yet to wean themselves off the commission sugar. There will be a flurry of activity in the next six months as they work out a platform charge fit for the new paradigm.

I believe the majority of investors will be better off sitting tight and waiting for the shake down. Moving your portfolio can be a costly business, so it’s best to do it only the once.

Until April 2016, if you’re sitting on a heap of old-style funds then you will only incur a platform charge on the portion of funds that are sold or ‘changed’ after April 6 2014.

Change does not include:

• Reinvesting dividends.
• Automatic rebalancing.
• Regular contributions set up before 6 April 2014.

Change does include:

• Increasing your regular contribution.
• Switching funds in a SIPP.
• Re-registration.

By 6 April 2016 all funds will be converted into clean class anyway, and commission payments will cease. Not long now.

Take it steady,

The Accumulator

1. Ongoing charge figures.[↩]
2. Bar leeway of £1 a month per fund so platforms can run promotions and the like.[↩]
3. From end of May. Full details of charges are yet to be finalised.[↩]