The 10 most hated financial products

The number of bad products out there is frightening but, if you are careful, you can steer clear of this minefield.

There are loads of terrible financial products out there.

So many, in fact, that the Financial Ombudsman Service has just reported receiving a record number of complaints over the past year, with complaints about payment protection insurance complaints up 58% on the previous year.

In total, the Ombudman resolved 166,321 disputes between financial firms and their customers, with half of all complaints involving four of the UK's largest financial services groups. Compensation was awarded to consumers in 50% of cases - so clearly, it's well worth complaining if you have a problem with a financial services provider.

Why have there been so many complaints? The problem customers face is that, if a product is very profitable it'll often be sold aggressively, and not just to the tiny handful of people who might actually benefit from it. That's why lovemoney.com has put together a list of our most hated financial products, so you'll know to avoid them - and won't need to complain later!

1. Payment protection insurance

We've been banging on about payment protection insurance (PPI) for years so, if this is the first you've heard of it, where have you been?

PPI protects your loan, mortgage or credit-card repayments against sickness, injury or unemployment. It sounds good in theory, but these policies are so littered with exclusions as to make them worthless to many people. Plus, if you buy your insurance from your lender, it's vastly over-priced.

Bearing this in mind, perhaps it's not surprising that three out of every 10 new cases referred to the Ombudsman related to PPI, or that 95% of people who complained to the Ombudsman about this product said they had been mis-sold.

If you think you may have been mis-sold PPI, find out how to get your share of £200m compensation.

> Read more about the future for PPI

2. 'Guaranteed' Equity Bonds

I could have chosen a few different types of bonds to criticise, but Guaranteed Equity Bonds (GEBs) make the most frequent annoying appearances in my email inbox.

The idea is that your investment is tied to the performance of the stock market. After a fixed period, usually five years, you get your money back plus any increase in the market. Sometimes they'll even offer, say, an extra 10% of the increase. If the stock market has fallen at the end of the period, you still get all your initial investment back. That's the guarantee.

On the surface this sounds great, but in reality it's pretty shabby. Firstly, with GEBs you get any capital gains from the market and sometimes even more, but you don't get the dividend income. Each year, many listed companies pay out a dividend, which can be reinvested. Compounded over five years this could quite easily mean a gain of 20% or more. With Guaranteed Equity Bonds, you get none of this.

Secondly, your money is locked in for the whole period, so you don't have the flexibility you get with other investments.

Thirdly, guaranteeing that you get your money back is not much of a protection. Over the five years your money will have been eroded significantly by inflation, meaning, in real terms, you will get less money back than you put in. If you need a real guarantee, you should put some or all of your money in a decent savings account instead, which should keep you ahead of inflation and keep your money flexible.

Fourthly, negative five-year returns are relatively infrequent. So why not stick with a simple, tax-efficient shares ISA?

• Watch our video: Stop paying tax on your savings!

3. Store cards

We hate store cards here at lovemoney.com because, if used badly, can land you in heaps of expensive debt. It's all very well if you sign up to get the initial discount, but consider why retailers offer this to you? It's because they know that many shoppers will leave the balance on there for more than a month, so they can charge interest at incredibly high rates, often around 25%. If you get a store card for the introductory discount, pay it off straight away and never use it again.

• Watch our video: The worst store card in Britain
• Read Why the worst credit cards just got worse

4. ID theft protection

There’s no doubt that ID theft is a growing concern for many people in this age when companies and government agencies carry laptops with thousands of pieces of data about us on trains and send non-encrypted disks in the post. In exchange for £60 to £80 of your hard-earned cash, ID theft insurance appears to offer peace of mind, claiming it will cover ‘the cost of restoring your identity’.

However, this doesn’t cover you against any financial loss you might suffer as a result of ID theft. This is because any money you lose as a result of fraudulent activity should be reimbursed by your bank or credit card provider, regardless of whether you have ID theft insurance or not. Fraud is a crime and unless the bank can prove you acted negligently, you should be protected from loss as a matter of course by your bank – effectively, this is free protection banks are obliged to offer you when you place your money in trust with them.

So what does ID theft insurance actually insure you against? Not much. You can use the cover to pay legal fees, lost salary if you have taken time off work, compensation if you have a rejected loan application – but you may not suffer any of these costs, even if someone does try to steal your identity. Read Avoid this expensive rip-off to find more.

5. Not-so-secure loans

Every time I've looked at a case to see whether someone should get a secured loan, I have always found a cheaper, better alternative. You have to ask yourself if borrowing that money will really make you happier. Often the answer will be no.

That's why many people say that these loans are more suitable for poorer or more indebted people, as it can be seen as a way to consolidate debts. However, our research has found that, five times out of six, people taking out these loans go on to rack up more debt.

Keith Tondeur, national director of the money education charity Credit Action, said that for the people who contact them with serious debt problems, secured loans are suitable only 3% of the time. We're not talking about 3% of the population here, we're talking about just 3% of people on the edge of insolvency. That's no more than 60,000 people.

• Read our blog: Insolvency may be the best option

6. Extended robberies

Extended warranties are a form of insurance that enables you to return goods that develop flaws within a fixed period, often three years. However, you usually get a free manufacturer's guarantee that lasts a year. Secondly, under the Sale of Goods Act you have some protection if there are problems with design, quality or reliability. Thirdly, you may be covered for accidental damage under your home contents insurance. Finally, the cost of the warranty can add well over 25% to the total cost!

If you save all the money you would have spent on warranties for your various products, you should have more than enough left over if the manufacturer's guarantee expires and you have to repair something or buy it again.

You may find expensive appliances – such as your cooker or your fridge – are protected under your home insurance policy anyway.

Finally, if you do want to buy an extended warranty for a new product, you’ll probably find that a ‘stand-alone’ deal offers much better value than one sold at the same time as the original item. For example, a stand-alone provider like Warranty Direct can cover three items for £10 a month, and using promotional code RAOX108 will get you a 10% discount.

> Read When Electrical Goods Go Wrong.

7. Invest with lots of stupid humans!

We often talk about Stupid Humans versus The Computer when we compare the performance of 'managed funds' (which have fund managers choosing shares to invest your money in) with 'index trackers' (which automatically buy all the shares in an index, such as the FTSE 100 or FTSE All Share).

Managed funds were lucky to escape this list. Index trackers kick their butt most of the time, largely because they are so much cheaper.

But there are funds out there which I think are worse than conventional managed funds. These are ‘fund of funds’, where a highly paid fund manager takes your money and invests in a selection of managed funds. The result will often be a pretty diversified investment, so you might as well as have just tracked the market, or tracked some overseas market via ETFs.

Instead, you have effectively tracked the market, but paid a lot more in management fees to various stupid humans, so your performance suffers significantly.

• Read The four biggest index tracker mistakes

8. Crusty old current accounts

Complaints to the Ombudsman about banking and credit cards  rose 30% this year. This is not surprising, given the fact that the Office of Fair Trading lost its battle to reduce unauthorised overdraft charges.

But still, you have no excuse for putting up with a rubbish account. Most poor financial products are complex, but current accounts are as simple as it gets. If you haven't switched in the past few years you're probably getting a shockingly bad rate of interest on your credit balances. You may be getting just 0.1% interest per year when you could be getting as much as 5%. So stop dawdling and switch to one of these best buy accounts:

> Compare current accounts at lovemoney.com.

9. Any product that is advertised on TV!

There are so many financial products that fit into this category that I think it's more helpful to write a general warning. The cynical truth is that any product that is heavily advertised usually makes a lot of money for the advertiser. If it's making the advertiser more money, it means that it is taking more money from you.

You have to ask yourself why the product has such a big advertising budget. There are 'loss leaders' of course, where a minor product is offered to hook you in, but the best financial products are almost never advertised. This is firstly because these products sell themselves (e.g. the best current accounts) and secondly because companies don't want you to buy the cheaper products, because it usually means more money for you and less for them. That's why you never see index trackers advertised all over the place!

10. Another general warning

The main rule is that if you don't understand a product, don't buy it. When I say understand the product, you should not only understand its benefits and be able to compare them with other sorts of products, but you should also understand how the seller makes its money from it.

Everything about it should be simple to understand. If it isn't, it's probably because clever mathematicians have devised it to make companies a fat pile of cash.

Just look at what happened to the savers who invested in a supposed 100% secure scheme.... which, unbeknownst to them, was backed by Lehman Brothers!

Tell us what you think

Is there anything that’s not on our list of the worst financial product that you think should be there? Tell us your thoughts using the comments box below!

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