Our friend Moshe is a money man. Finances, that is. He holds a BA in economics and an MBA, majoring in financing. He's been dealing with money for 15 years now, mainly in investments.
But he shuns shares. It's a matter of character. And Moshe always considered the rules of the game on the Tel Aviv Stock Exchange to be not particularly fair. It was easy to see how interested parties grew wealthy, but hard to see how anybody else did. Anyway, Moshe puts money into savings accounts and into index-linked bonds.
There are also long-term savings, of course. Moshe and his employers set aside 18 percent each month for compensation and severance, and another 10 percent is withheld for an "advanced training fund." Now, these vehicles indulge in a component of riskier investments. Anywhere from 10 to 20 percent of the portfolios run by the training fund and managerial insurance policies are invested in shares.
Training funds are a highly attractive savings instrument. Deposits turn liquid after six years, gains are tax-exempt and so is the principal when withdrawn. For Moshe, and lots of other salaried employees, training funds are a key component of their savings.
Like many salaried employees, Moshe has deposited money with Kahal, a training fund management company jointly run by Bank Leumi and Israel Discount Bank. Kahal is Israel's biggest training fund, with assets exceeding NIS 8 billion. It has ties with a great many employers.
Yet Moshe was never satisfied with Kahal. His employer had chosen it, but his suspicions were never laid to rest. Yet Kahal was so big, so bankish, so distinguished, that he let it go and continued to deposit his hard-earned money.
Seven years ago, Israel's provident funds and training funds sector was opened to private players as well. About 10 privately held companies popped up and began offering long-term money management services. Moshe liked the idea, but preferred to wait.
Calling into the void
A year passed, and then another year. Moshe noticed that most of the training funds he tracked performed better than Kahal. But, you know, Kahal is big, bank-affiliated, and distinguished, so he let it go and didn't rush to withdraw his money.
The years passed, while every time Moshe gets a report from Kahal his thinning hair stands on end. Again and again he sees its performance is moderate to substandard, while the smaller privately-run training funds are averaging much higher yields.
But you know the force of habit, the difficulty of making changes. Most of us Israelis are affected with a kind of financial sluggishness, not to mention the comfortable-old-shoe assumption that investments are carried out via the banks.
A year ago, Moshe finally had it. He, a financial wizard, shouldn't be paying management fees to Kahal, he figured, when its performance was weaker than that of upstart rivals. He decided to withdraw his money. He called. The phone was answered by a recording, which led to a recording, but finally a real live person got on the line. Who? A clerk of Leumi Direct, that's who.
(What the devil does Leumi Direct have to do with his training fund, Moshe wondered. Leumi, which controls Kahal, evidently called that shot).
Anyway, the Leumi Direct clerk explained that the officer responsible for training funds was out. He suggested Moshe call again later.
And so it went on for a week: recording, recording, person, recording, absentee. Moshe finally gave up and left his money at Kahal.
A month ago Moshe read in the papers that Analyst's training fund had generated 20 percent yield in 2003. How much did I make at Kahal, he wondered. For some reason, no paper had reported its yield, he found. They evidently forgot to send out a press release, he assumed.
No they hadn't.
He checked, and this is what he found. From the start of 2003 Kahal had generated 12 percent yield, or 8 percent less than Analyst. But that was just the beginning. This time Moshe checked Kahal's yields from 1997, when he first wanted to jump ship, to today. And this is what he found:
Kahal achieved a net real yield of 38 percent, while Analyst achieved 87 percent. That is a difference of almost 50 percent. That can mean tens of thousands of shekels for people earning the average wage, and hundreds of thousands for high earners. Moshe did his own math and found that his financial apathy had cost him NIS 150,000. Tax free.
That NIS 150,000 that Moshe lost through his indolence is the story of how Israel's banks control the capital market. Some clients don't leave because they lack information. Others simply can't, and others are infected with that Israeli disease of financial sloth.
The story of Kahal and Analyst isn't unique. Most of Israel's privately run training funds, such as DS, Capital, Helman-Aldubi and Dor-Berger achieved higher yields than Kahal did. You could tell much the same story of the provident funds sector, of mutual funds and of course of life insurance policies. The marketing forces, the ongoing relations with clients and of course sometimes the ignorance of the clientele allow the big boys to continue providing bad service over time, without fear of losing their customers.
Last week Moshe extracted his money from Bank Leumi and transferred the lot to a private training fund.
But until there is genuine reform in the banking, pensions and insurance system, most savers will continue to deposit their hard-earned money with the big boys, most savers will continue to receive poor service, and most savers will continue to fork over high commissions, to rage from time to time, and let it go.
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