What The Bonfire of the Vanities teaches you about fees

The financial-services industry is very good at tacking on fees as Tom Wolfe's satirical novel shows.

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The Bonfire of the Vanities is a satirical novel by Tom Wolfe (pictured), originally serialised in Rolling Stone magazine and then published in revised form in 1987. While out driving with his mistress Maria Ruskin, bond trader Sherman McCoy gets lost in the Bronx, and accidentally knocks down a young man, whom they perceive to be attempting to mug them.

Although Maria was behind the wheel, the manipulations of a corrupt community activist and the press means that McCoy ends up being charged. The subsequent legal fees and lawsuits leave him penniless, while his wife leaves him, taking his daughter.

The key moment

Near the start of his book, McCoy's daughter asks him to explain what he does for a living. After he tries and fails, his wife Judy steps in, comparing bond underwriting to slicing up a cake that someone else has baked "but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb and you can keep that".

While these crumbs may not seem a lot, "if you pass around enough slices of a cake", she tells the daughter, "then pretty soon you have enough crumbs to make a gigantic cake".

Lessons for investors

From investment banks to your pension fund, the financial-services industry is very good at tacking on fees to every transaction, even if the service adds little or no value. An example is those pension companies that charge large sums for a ten-minute consultation to set up a pension.

While some of these fees are disclosed upfront, others are hidden in the small print (for example, large bank charges for going over your overdraft limit). Some fees aren't disclosed at all, but are implicit like the low interest rates on current accounts that enable banks to make money from "free" banking.

Other financial wisdom

The financial-services industry gets away with excessive fees through ignorance and apathy. Research has revealed that a significant number of people aren't even aware that investment platforms charge for their services.

Customer inertia means firms have little incentive to give their existing customers the best terms, and loyal customers can frequently find themselves on worse terms than newcomers. It's therefore a good idea to check the terms and conditions of any product, shop around, and switch if you can get a better deal elsewhere.

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