The Private Investor: 'It's not very friendly to take such big payments up front'

I have had recently a very pleasant chat with David White, the chief executive of the Children's Mutual (formerly the Tunbridge Wells Equitable Friendly Society). They're concentrating their efforts on providing savings plans for children (ie parents) and are keen to highlight how important it is to save to provide better life chances for your kids.

Even the £250 or £500 value of the Government's planned Child Trust Funds could, on maturity, yield enough to say pay for driving lessons for an 18-year-old. That could make the difference as to whether he or she gets a job. Paying for university costs is, of course, a still bigger challenge. So getting parents to invest that fund fruitfully, and if possible add to it, is a very laudable aim.

I was worried, though, about the fact that so few people save at all, partly down to the poor image of the financial services industry.

Mr White tried very hard to explain to me the reason financial organisations sometimes "front-end load" their charges in some way. I don't mean that he wasn't eloquent, for he was. Very. It's just that I am a very hostile audience, and I have been highly critical of the way some friendly societies operate.

I know that many of you have also had bad experiences with some of them, and, judging from my mailbag, particularly in the case of the Family Assurance Society and the Homeowners Friendly Society. I should mention I am a member of the Children's Mutual. On their with-profits fund they will levy the charges you would have paid over the life of the scheme if you cash in early. The case goes that front-end loading, or something like it, is the fairest method because of the cost profile of a savings policy.

You see, so the industry argues, you pay the costs in the early years of the scheme because most of the costs involved in setting up the policy are incurred at its inception.

An additional argument is that if the costs were not front-end loaded, but distributed evenly through the life of the policy, that would be unfair on those who persist with their policies through to maturity.

This is because there is no way a friendly society (or any other financial institution) can recoup its costs if people cash in their polices, say, in the first two years. So if lots of people suffered no penalty for doing so, the (higher) costs would have to be redistributed throughout the rest of the society.

There are a couple of points about this. First, as ever, those who cash in early might well be those who really have to, perhaps because they have lost their job or through some other misfortune. In the spirit of the old friendly societies' ideals of mutual help it might be appropriate for members to share that burden. On the other hand, people might cash in early because they want to stick the cash on Danny Boy at the 2.30 at Cheltenham.

The second point is that what really matters is what the members think. So perhaps the whole issue of charging should be put to the membership as a whole.

In any case, it is still true that the longer your money is invested the longer it has to grow, through the magic of compounding. If all your first two years' worth of contributions disappear in charges then they'll have no chance to grow and the longest period any of your money will be invested on a 10-year plan would be just eight years.

I also take the view that the choice of investment managers should be put to the members. After all, it is their money, and they ought to have a say in who is managing it. No friendly society has done this in living memory. Neither do they vote on the remuneration of their directors, although they do of course have to stand for election and re-election. They should be at least as accountable as the board of a plc.

Most of all though, the friendlies and other institutions must be open about charges. If the industry doesn't get its act together then all the Children's Mutual's attempts to get parents to think about their offsprings' future and all the other efforts of the industry to get us to save will be in vain.

s.ogrady@independent.co.uk