Beware of 'best buys'

Big institutions are making dubious claims for Tessa Twos. Jean Eaglesham reports
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A CONSUMER spending boom? A wholesale transformation of British savers into stock market investors? One certainty from the multi-billion pound bonanza of maturing tax-free Tessa money is a boom in financial advertising. But as savers contemplate the avalanche of adverts and mailshots for new Tessas, they should remember that there is often little, if any, correlation between the amount spent on advertising a product and its inherent quality.

It is particularly worth noting that the high-street banks and building societies, which are leading the marketing drive, have generally paid lower returns on now-maturing Tessas than the small regional societies. Savers should watch out for the following classic marketing ploys:

The creative use of past performance figures

"Best" and "top" are both relative terms. For example, based on the following statements from adverts and marketing information, which of the following first-generation Tessas paid the most interest?

q "TSB has come top of a Tessa performance table of high street banks."

q "Halifax's Tessa has given the best return of any top 10 financial institution."

q "Cheshire Tessa emerges as the best."

q "Guess whose Tessa came out tops? Bradford & Bingley."

q "The Ipswich Tessa is the seventh best performer throughout the whole country, and the top performer of anyone operating in Suffolk."

Students of financial advertising may guess that none of these Tessas produced the best return on the market. The best of the bunch above is the Ipswich Tessa, which was seventh best in a table of the maturity values of 85 variable-rate Tessas (but which excludes better-performing fixed- rate deals). Despite its apparently unimpressive "top performer in Suffolk" tag, anyone who put the maximum pounds 9,000 into this Tessa as soon as the rules allowed has now earned pounds 3,200 in interest.

This is pounds 280 more than would have been earned from the TSB Tessa. The reason this Tessa is "top of the high-street banks" is simply that the performance of the other banks was so poor - the Tessas from Barclays, Midland, Lloyds and First Direct, for example, account for four of the six worst performers.

Including trigger words

These are words or phrases that will sell products. In financial services the word of the moment, as throughout 1995, is "guaranteed". Not surprisingly, it is being deployed to sell Tessa Twos. NatWest, for example, says in the advert for its fixed-rate Tessa: "Invest pounds 9,000 now and receive pounds 12,660 in five years. Guaranteed."

This approach is going down well with savers. According to NatWest, eight out of 10 of its Tessa savers who are reinvesting in a NatWest Tessa Two are going for the fixed-rate option. But what NatWest is actually guaranteeing is that savers get a relatively poor return. Northern Rock building society is currently paying a fixed rate of 7.64 per cent, compared to NatWest's 7.05 per cent, guaranteeing a return of pounds 13,005 on a pounds 9,000 investment. Most other fixed-rate Tessas also guarantee rates above 7.05 per cent.

Many experts also believe that savers might be better off this time around avoiding fixed rates, as interest rates generally could rise over the five-year term of the new Tessas. Graham Hooper, investment manager at independent adviser Chase de Vere, says: "I'm not convinced that fixed- rate Tessas are the best option, bearing in mind that there's an election coming up [and rates could well rise under a Labour government]."

Stressing the maximum available interest rate

These headline rates are often available only to savers who put in the maximum pounds 9,000 allowed under the Tessa Two rules, with lower rates for savers putting in less. Alliance & Leicester, for example, advertises "a Tessa that's already highly rated. Up to 7.25 per cent tax free" (although as of last week it is available only to existing A&L savers). But the rates start at just 6.1 per cent for investments of less than pounds 3,000. Alistair Altham, marketing man- ager at independent adviser Johnson Fry, warns: "Don't be enticed by the big headline rates if you're investing less than pounds 9,000."

Hiding product drawbacks

Expect the negative points of financial products to be buried in the small print - if they are included at all. In the case of Tessa Twos, the main one to watch for is the penalty if you decide to switch your Tessa to another bank or building society. Penalties of up to 180 days' interest can mean that, in effect, you are going to be stuck with your provider even if it drops the interest rate to uncompetitive rates.

Setting unnecessary deadlines

Setting early deadlines - in the case of Tessa Twos, towards the end of last year, before any of the first Tessas matured - means that savers can be forced to make a choice on a product before having the chance to compare it with others. Leeds & Holbeck building society, for example, wrote to existing Tessa savers saying that they had only until 16 December 1995 to respond if they wanted to roll over money into the society's fixed rate Tessa Two (which pays a fairly uncom- petitive 7 per cent).

David Pickering, marketing manager at Leeds & Holbeck, said: "I can understand how it looks but it certainly wasn't any kind of cynical marketing ploy. We just wanted to be able to guarantee a rate for our investors and this was the deadline we were given when we booked the tranche of fixed-rate money that we used."

Jean Eaglesham works for 'Investors Chronicle'.