Diana Clement: Secrets that can cost you dear

Anyone who doesn't want to die poor needs the financial services industry. It provides us with bank accounts to keep our cash safe, mortgages to buy our homes, managed funds and superannuation to save for our retirement, and life insurance to protect our loved ones.

But it's an industry with more than a few shonky practices ranging from hidden commissions to high-pressure selling tactics.

We've found five things that financial providers don't want you to know. But armed with some knowledge, you should be able to find a better deal.

Policies don't pay insured amount

It's a common fallacy that insurance companies pay out the insured value of your car or house contents when you claim. But the reality is that the vast majority of vehicle policies and many contents policies cover you for "indemnity" value - which means the market value of the car or household items at the time of the claim.

In the case of household contents insurance, says Insurance Council chief executive Chris Ryan, the sum insured on your policy is usually automatically increased each year on renewal and the premium likewise.

However, most cars depreciate in value each year, but the sum insured stays the same - meaning that you're paying for cover you won't get if the car is written off.

Insurance Ombudsman Karen Stevens says house and car owners ought to review their sum insured each year to ensure they're only paying for cover equivalent to the payment they'll get in the event of a claim. Just this week, Stevens shaved $100 off her own personal motor vehicle premium when she reduced the cover from the original purchase price of $49,000 to $35,000, which represented more realistically what it is worth four years later.

Stevens says her office gets a steady flow of complaints from people who thought they would be paid market value for goods they had claimed on, not indemnity value, and from those who did not agree with their insurance company's "pre-accident valuation", which was often based on the price a dealer would buy a similar car for, not the price it would sell at.

Interest free deals that sock you

Interest-free hire purchase or credit sales deals can be appealing. Keep the money in the bank earning interest and pay for the item later. But the fine print on these deals can bite hard if you're not on your toes. If you fail to pay off an "interest free" deal on your new sofa or TV you might find that interest is backdated to day one of the contract, not the day after the "interest free" period, according to the Ministry of Consumer Affairs.

Federation of Family Budgeting Services chief executive Raewyn Fox says consumers should be aware that if they pay cash they can often negotiate a lower price.

But retailers who offer two official prices, one for an "interest free" credit deal and another cash price, are breaking the Fair Trading Act.

It always pays to shop around, read the fine print - also known as a "disclosure statement" - and note any dates for payment. Otherwise it could cost you dearly.

What they don't want you to know

Most people accept that they pay for an accountant's or lawyer's services. But when it comes to financial products they expect a service for free.

The reality is that there are hidden commissions in financial products such as managed funds and mortgages. When it comes to life insurance, that commission can amount to as much as 120 per cent or more of your first year's premium and then an on-going renewal or "trail" commission paid for a long as you keep your life insurance going.

Insurance companies give the brokers incentives to sell more of their products and, unbeknown to consumers, brokers are paid additional commissions or bonuses or even "soft" commissions such as free sports event tickets if they reach a certain volume of sales, enticing them to place more business with that company.

What's more, brokers at the unscrupulous end of the industry are known to "churn" customers after 18 months or so, offering them a "better" policy. This doesn't always work in your favour if your health has changed for the worse in the meantime and you may have new exclusions imposed.

Some policies, says financial planner Robert Oddy of International Financial Planners, have low initial premiums which ramp up later.

The Financial Planners and Insurance Advisers Association argued to the Government's Task Force on the Regulation of Financial Intermediaries this year that it wasn't in individuals' interest to know how much commission they were paying because it might stop them buying life insurance.

But College of Insurance Advisers chairman Garth Clarricoats says advisers accept that the Government is likely to make it compulsory for brokers to reveal their commissions to consumers as their counterparts have had to do in other countries such as Australia and Britain.

Bank staff earn bonuses

Once upon a time, your bank teller was paid a fixed salary. But today complex bonus and incentive schemes require most bank staff ranging from tellers to credit card call centre staff to meet sales targets for insurance, managed funds, certain types of mortgages and so on.

The Consumers' Institute says the practice creates a conflict of interest. Staff, knowing that bonuses or pay rises are based on what they sell, have an incentive to recommend products based on their targets, not those that best fit your investment needs.

Many of the products on offer, such as managed funds, can have a significant impact on your long-term financial health, says Oddy.

Hence, they should be sold by specialists with proper financial planning training.

Finsec, the finance and information union, says the targets are based on what is most profitable for the bank at the time. Some banks, such as ANZ/National, put less pressure on staff to sell whereas Westpac and BNZ have sales targets tied directly to salary increases that could mean thousands of dollars a year to an employee who meets targets, says Karen Skinner, campaigns director of Finsec.

Fantastic yields a thing of the past

"Secure your future with high-yielding investment property," goes the advert. The reality is that even the most sophisticated investors are struggling to find investment properties to buy that are profitable - thanks to several years of capital gains at the same time as rents are dropping. City apartment realtor Martin Dunn, of City Sales, believes "thousands" of investors have been sucked into buying grossly overvalued apartments off the plans.

The market for "shoe-box" apartments, as the smaller ones are known, is already starting to crumble, yet valuations being shown to new investors are based on old sales or even prices paid by investors after attending investment seminars, says Dunn.

"I had a financier call me this week who was being asked to loan $110, 000 on an apartment that was worth no more than $115,000. The owner was holding a valuation from May 2005 for $228,000."

Sophisticated investors have their hands in their pockets, Dunn says. Those who are selling apartments now are often faced with a capital loss.