Why Low-Cost or No-Fee Products May Not Be Such A Good Deal

This is a guest post by Mr. Credit Card from www.askmrcreditcard.com.   Today, Mr Credit Card is going to talk about how getting into the cheap, lowest cost mentality may not be the best thing for every purchase that we make.   This is a slight departure from his usual credit card subject although he uses a couple of such examples below.   If you are looking for a credit card, check out his best credit cards recommendation section.     Thanks, Mr. Credit Card for filling in for me today!

Firstly, I would like to thank Len for letting me guest post on this blog. I’ve been blogging since 2006 and I have noticed that personal finance bloggers mostly preach frugality.   You can see that in the number of coupon blogs that are written by moms and pf bloggers who recommend every thing that is “low cost.”

But I want to stress that “low cost” mentality can be taken too far and sometimes, that route may not be the best.   Today, I would like to highlight some instances where “low cost” may not necessarily be the best option for us individuals and in certain cases for society as a whole.

Low Cost Online Brokers – There are many pf bloggers that recommend or review “discount brokers.”   Because of the competitive nature of the industry, fees keep dropping.

But are low-cost online brokers the best thing to happen? While low fees are great for the retail investor, what is probably lacking today is top-notch research. Yes, Wall Street messed up by not calling the market right in 2000. Yes, investment bankers paid the bills for the major brokerage. But since Elliot Spitzer prohibited investment bankers to pay for equity research, Wall Street has found no incentive to provide the great research. In fact, these days, Wall Street provides their best stock trading research to their own proprietary trading desk. The very best research analysts have gone to work for hedge funds.

Where does that leave the so-called “retail investors” like us which the new rule was supposed to protect? Are we really getting the best deal from this arrangement? I’m not so sure. Well, we all do not want to be paying $75 for stock trades, but I’m not convinced paying just $4 per trade is the way to go either. What’s the point of having low transaction fees when you cannot get access to the best research? You will then be confined to the garbage that CNBC throws at you!

Low cost computers – Michael Dell did a great service by introducing low cost computers (at least on a relative basis). Computers have steadily declined in prices. But in my opinion it is so competitive that computer companies are cutting corners in certain areas. For example, most firms now outsource customer support to India because of lower costs.   I have absolutely nothing against customer service reps from India if they are cheaper, but the problem arises when computer customers here cannot understand folks from another country!

If you buy any branded computers, you also do not have to pay the full price for Microsoft’s Windows operating system. But along with that comes lots of pre-installed software that you do not need. This causes system bloat and slows down your computer. In addition, to get these programs removed, a retail store like Best Buy actually charges you money to get rid of these programs!

These out of the box computers are mostly not upgradable. Hence, most folks change them after just three years because the costs of upgrading the operating system, memory and hard disk simply go up and your computer slows down! Perhaps if you are thinking of getting a new computer, a custom made computer like Puget Systems with its excellent customer service might be the better way to go even though it may cost slightly more.

High Yield Savings Account – Lots of bloggers talk about high yield savings accounts. Due to the rise of the internet as a medium, many banks have been able to offer consumers high yield savings accounts, or at least rates “slightly higher” than banks with brick-and-mortar branches. Is that necessarily a good thing? Good for some folks. But bear in mind that if all we care about are good rates, we may be neglecting to consider other factors such as having a bank teller behind the desk that actually knows you in case you have any trouble with the account.   Or check transfers to foreign banks – an online bank may require you to go through an identification process, and if you fail it, things could get nasty!

Are high rates and deals the only consideration? I think not. I prefer having a bricks-and-mortar branch rather than an online bank.

Cheap Digital Cameras – From my experience, saving on digital cameras can be a huge mistake. Before I got my $700+ Canon Digital SLR, I had one of those sleek, pocket-sized $300+ digital cameras.   The problem with them was they took a long time to capture the screen shot (about a couple of seconds). Three years ago, Mrs. Credit Card put our three kids together for a camera shot to use for our Christmas card. Being kids, they just couldn’t keep still. But what compounded the problem was that the camera took ages to capture the shot after you pressed the “shoot button.”   So when the shot was perfect, two seconds later, it was not.   Mrs. Credit Card got really angry with the kids for not keeping still.   But what did she expect?   They were kids after all!

So I took the plunge and got the digital SLR; I have absolutely no regrets.   Now, any family shot takes a few minutes. I can capture my kids sports in multi shot sports mode and I now get much higher quality pictures that will last me a lifetime.

So I would advice anyone with a family to get a good digital SLR.   It costs more for sure.   But the benefits you get will outweigh the higher cost compared to cheap digital cameras.

No annual fee credit cards – There’s tons of debate about whether credit cards are good or evil. But everyone seems to agree that if you do get a credit card, it should be one with no annual fee. In fact, I’ve never seen a blog post recommending a card that charges an annual fee (perhaps with the exception of mine!!).   If not that, they would recommend getting cash rewards credit cards (with no annual fee off course) or do some balance transfer arbitrage where you get 0% financing from credit card companies and take the proceeds into a high yield savings accounts.

I took a different path.   I use a charge card instead (although I do have other no-fee cards). Yes, I have to pay an annual fee (although I get rewards), and I have to pay in full every month (which everyone should do anyway). But more importantly, I have no preset spending limit and hence have not suffered any of the credit limit cuts that many folks have faced.

While credit card companies have been cutting credit lines, raising interest rates, introducing annual fees and reducing the attractiveness of 0% teaser deals, they have not done much to folks who have charge cards and pay their bills in full (unless off course they have been late or something).

Folks who have airline miles credit cards pay an annual fee. But because miles they earned are transferred to their frequent flier program, they will never risk losing the miles that they have earned if their credit card gets canceled by the issuer for any reason. And that is another downside to getting a “no annual fee” rewards card. If the credit card company decides to cancel your account, you can lose all the miles that you have earned!

How to avoid the cheap-at-all-cost mentality

One of the things that struck me when I read The Millionaire Next Door is that even though millionaires are frugal, they do not just buy “cheap stuff”. One of the examples used is that they buy antique furniture that holds their value rather than cheap Ikea stuff! I think there is a lesson to be learned from them. Buying the cheapest stuff isn’t always the way to go.   Here is a checklist to see if the cheapest or highest rate offers have a catch in them:

Are the products skimping on customer service? – Well, you know the customer service of the big computer makers. Are you willing to compromise that for a lower price? If not, perhaps a custom made computer or an Apple Computer may be a better purchase even though it costs more.

Are the products durable? – Many cheaper products simply do not last long.   I have bought many do-it-yourself Ikea products made of chipboard and they never lasted more than 18 months!

Do cheaper products really serve your purpose? – The example of my digital camera experience should be an eye opener. We bought our first camera because we set a budget, but we did not do any research to see if we would be happy with it or not.   It wasn’t that we could not afford a more expensive one.   It was just that we came up an arbitrary number like “we won’t spend more than $350 on our camera.”   We did not realize that the cheaper camera would not suit us at all.

I could go on and on but, for every purchase that you make, price is obviously an important factor.   You also have to consider the value you get for the price that you are paying as well.   Otherwise, you could waste more money and/or end up not being satisfied with the product that you got.

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    But they were never meant for the retail investors. In the early days, these research was meant for “institutional investors” and they knew the biases. But they did their own research and just used the street’s research to gather different points of views and insights.

    But we tried to be smart and “protect the small investors”, who (mostly, but not everyone) tend not to do their own fundamental research (as in really breakdown a balance sheet from the annual report or really understand the product.

    Look at it this way, if you are a mom and pop and you tried to sell your product to Walmart, you will never get prime time shelf space. Only if you were someone big like Procter and Gamble would you be able to force Walmart to place your products on “prime shelf space”. That is the way it is in business.

    So the question is should it be different in the investment research business? More importantly, even in the absence of so called “biased research”, most analyst and investors (for that matter) did not foresee the severity of the crisis..But the point I was trying to make is that when a business gets too competitive and everyone competes on price (in the case of stock trading or broking or market making – whatever you want to call it), I’m not too sure if the consumers always win.

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    I believe the reason Investment banks were prohibited from paying for research was because their research was found to be biased. In other words, you were never going to see a “Sell” recommendation for the stock of one of their underwriting customers.

    Biased research is unfair to investors and I’m glad it is now prohibited.

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