When I was in New York last September I had occasion to go diamond-shopping with a friend. He reckoned the best deals in the city could be found in a particular street (it might have been 47th, I don’t remember). Anyway, we went to this street with dozens and dozens of diamond shops each selling thousands of the things. Where to begin?
We went into one shop that didn’t look too dodgy and a chap with a kippah and a white shirt introduced himself as Ruben and pointed to his brother Saul behind the counter. He waved his hand over the displays containing a few hundred diamonds and brought some out for us to look at. He assured us these were the very best diamonds at the very best price, but they could have been fragments of a Corona bottle for all I knew. We thanked him and moved to another place where an almost identical chap with an identical brother greeted us and showed us yet more diamonds. After the third or fourth time it was clear that we knew nothing whatsoever about diamonds, the blokes in the shop could tell this as soon as we walked in the door, and we stood a good chance of being fleeced. I have no doubt this street was the best place in New York city to buy diamonds, but you had to know what you were doing and we didn’t.
The solution was to go to Tiffany’s on 5th Avenue and buy the diamonds there. Sure, they’d be a lot more expensive and the same money could probably get you bigger diamonds and better elsewhere, but at least at Tiffany’s you could absolutely guarantee that the diamonds you were buying were legitimate.
I was reminded of this the other day when I met with a financial adviser. Years ago I set up a pension scheme with Friends Provident and it’s still running. The financial adviser took a look and told me it was expensive, the fees were high, and the savings vehicle was not the most flexible and efficient of all those out there. He showed me one that was cheaper, run by an outfit neither you or I have ever heard of.
There was a reason why I’d picked Friends Provident all those years ago: they were a household name. If a pension company has been around 100+ years you can be fairly sure they’re not some fly-by-night outfit. More importantly, a company of that size ought to have enough liquidity behind them to rescue themselves should they screw up somewhere. But most importantly of all, if they are about to go bankrupt they are big enough that the story will be splashed across all the newspapers and enough people will be affected that the government will come under considerable pressure to intervene, either with a bailout or by arranging a takeover. We saw this with the banks: they were well known and too big to fail, so the ones we’d all heard of got rescued. Had a startup internet bank been clobbered by the global financial crisis, it would have gone to the wall and nobody would have noticed – except the handful of unfortunate depositors. Similarly, if a pension vehicle set up by three city whizz kids in 2012 goes tits-up, nobody will care. If Friend’s Provident starts wobbling, people will.
Like buying diamonds from Tiffany’s instead of Ruben, you might not be getting the best deal with a Friend’s Provident pension, but there’s often a good reason why you pay a premium.