Bonds May Be Bought on Instalment Plan, When Purchaser Has Not Sufficient Available Surplus to Buy Outright—New “Savings” Plan

J. L. RUTLEDGE January 1 1924


Bonds May Be Bought on Instalment Plan, When Purchaser Has Not Sufficient Available Surplus to Buy Outright—New “Savings” Plan

J. L. RUTLEDGE January 1 1924

IN EVERY income of $2,500 a year, after proper allowance had been made for food, clothing, shelter and general maintenance, and after something has been set aside, too, for the education of children and for reasonable recreations, there remains a theoretical surplus of $240 a year. This surplus varies with conditions, and becomes proportionately greater as the income increases, but the general fact holds, the average salary of that amount should show an average surplus of approximately $240.

There are many $2,500 salaries in Canada. Roughly speaking, it is probably the most usual figure, and the $240 surpluses, added together, would make a surprising total.

“If we could bring this money into the investment field,” said a responsible financial man, recently, “we would not only have a happier and more prosperous people, but we could finance all our governmental and industrial undertakings with our own capital. We could be absolutely self-sustaining from a financial standpoint.’’

As a matter of experience this surplus is more often, perhaps, a theory than a fact. Often enough it is dissipated in an enlargement of the appropriation for one or another of these classifications beyond the actual needs, or lost in unwise financial experimentation.

There is a considerable part, of course, that is banked against some rainy day, or tied up in realizable assets. That in itself is good. It is better that money should earn three per cent, than nothing; it is better still to have it earn six or seven. This thought, too, is probably at the back of the minds of many of the owners of this $240. They argue that if six is good, eight is better and twelve is better still, and thereby they may become easy victims for the unscrupulous.

Seeking The Small Investor

ONE reason why the small investor so readily falls a victim to the unsound trader is the fairly generally held belief that the large investment houses will not be bothered with his business. This is not the case. The investment house is as eager for the $100 investor as the bank is for the dollar depositor. It is not that either transaction shows a profit, nor is it a matter of pure philanthropy. It is, merely, the sound business principle that assumes that out of every so many of these small investors there will emerge a reasonable proportion who will later become large investors or large depositors whose business will show a profit, and therefore this preliminary service is a wise measure of business development.

The experience of the war loans opened up a new line of thought both for the man with the small income and for the investment houses. The “small income” man discovered for the first time that he was a factor in national financing, and the investment houses that had not before, to any great extent, considered the small investor, discovered that in the aggregate he represented an enormous investment force.

Out of this changed viewpoint has grown the instalment plan buying of securities, as it exists in Canada to-day.

One of the main reasons, perhaps, for this development is that the small  denomination bond, that played such a large part in the successful flotation of Victory and War Loan issues, by the Dominion, has not been generally adopted by other sellers. As a rule, bonds are issued in denominations of $250, $500, or $1,000; too high figures for the small investor to handle and, for that reason, his smaller amounts have drifted into less secure fields of investment. There are, too, undoubtedly, men in the investment business who have exploited this fact to their own advantage, with little care for the advantage of the small investor. That has been urged as a reason why the reputable houses should avoid the instalment plan system. But it is surely a reason why legitimate business might well adopt this policy. If the fraudulent, fly-by-night trader can secure funds by the instalment plan method, it is surely an indication that there is a class of small investors who are eager to invest, and who need encouragement and wise direction.

Payment by Small Sums

SOME of the strongest investment houses have, indeed, adopted this plan as a definite and announced policy. But even where this is not the case most investment houses, at the investor’s request, make such payment arrangements as will meet his needs. The common practice, where this policy has been definitely adopted, is to call for ten per cent, of the purchase price at the time of purchase, and proportionate payments thereafter at monthly or by-monthly intervals so that payment will be completed within the year. The bond is definitely purchased and held in trust for the purchaser. Naturally interest is charged on the unpaid portion of his purchase, but the purchaser has credited to him, at the same time, the accruing interest on the bond; that in most instances will more than meet these charges. It is a saving plan, but, better than that, it is an investment while saving.

There are many incidental difficulties, of course, from the standpoint of the investment house. There is a heavy overhead that, providing present systems of handling such business are retained, is made more heavy by the fact that each sale is handled ten times instead of once. There is the difficulty of the unstable character of some of the investors themselves under this plan. They start out boldly enough, but fail to go through with their obligations. There is the hesitation about being called an “instalment house” which some believe is detrimental to their regular business. These are logical enough objections, that must be met and faced if such a scheme is to operate successfully.

There are a multitude of reasons, however, why this system should be made effective. It is a logical system, in keeping with present-day business methods. The instalment plan is an accepted thing in business life. But therein a difference here, a difference that leaves a sound argument for the use of this policy for investment. Every other agency that uses it is, in a greater or less degree, dissipating capital. The person who buys an automobile or house furnishings or a suit of clothes on the instalment plan, however laudable the purpose, is discounting his future. The person who buys a sound bond, by this plan, is assuring it.

This service, too, is a protection to the public. It is building investors, teaching people system in saving, and emphasizing the dangers of haphazard investment. It is meeting the unscrupulous “investment” broker on his own ground, and protecting the public against him.

Profits for Bond Dealers

IN CANADA there has not been a background of experience sufficient to prove whether such a system can be made profitable to the dealer. It is certain that they are not largely profitable at the moment, except as they are business and good-will builders for the organizations which have adopted this selling policy. They are developing business, there is no doubt of that, and developing it, too, by the splendid advertising by word of mouth. New investors are coming at the urging of others who have found the scheme satisfactory. That is undoubtedly a most hopeful sign.

In the Old Country, however, the system has been long established, but largely on a somewhat different basis. The investment trust is an active and sound factor in the financial trading. These investment trusts are a step between the small investor and the industry. Instead of buying the bond of some industry, he buys the bond of the investment trust, and they buy the industries’ bonds.

This system has not been adopted in Canada, though the trust companies in Canada are to a considerable degree operating on a similar basis, if on a larger scale. There is a general feeling, however, among those interested in the subject that it may be the logical development. This plan has many advantages, primarily, perhaps, that it distributes the small investor’s eggs in more than one basket. When the small investor buys an industrial bond on the instalment plan he does so, probably, on the advice of the investment house. This advice is given after a careful consideration of the industry. But the bond, once paid for, is out of the hands of the investment house Conditions in the industry may change, and these changes may affect the value of the bond. The investor should, of course, know this, but unless he is the reader of some financial paper, or a careful student of the financial page of a daily newspaper, he is likely to miss this fact.

With the investment trust, the trust official is the investor. He is a man trained to' consider investments. He is always on the watch for such changes, and is in a position to take prompt action when such changes occur. He is in a position, too, to demand and secure information that would not be readily available to the small investor. He carries on a systematic oversight of the stocks in which he trades for the investor’s interest.

Of course the whole success of the policy is dependent on sound management, but the experience of the investment trusts has been a satisfactory one. They have not been permitted to grow so large that they lost the asset of personal oversight, and they have the great advantage of being able to operate at a low overhead.

Blame Unwise Investor

THIS system has still other advantages. It would have a salutory effect on many industries. Take the case of the mines. They are suffering by reason of unwise investment. An operator gets $100 from this man and that man—he may get these amounts by hundreds on the strength of glowing promises. He may be careless, or unwise, in the distribution of this money, he may be even dishonest, for he knows that there is no curb upon him. The hundred dollar investor can, theoretically, call him to account but, practically, the operator can laugh in his face. It is thus that many ill-advised schemes prosper, for the operators at least. And the same thing applies to industrial stocks, and even to oil stock. It is the unwise investor that makes unwise undertakings possible and the investor is unwise, because he is not trained in finance and because he knows of no way to get the information that would enable him to judge the proposition soundly. In the investment trust he has the insurance that his $100 will be profitably and soundly invested. He has the knowledge that these trusts are strong enough to call a delinquent to account, and that therefore a potential delinquent will be careful. He knows that the investments in which he has his interests will be carefully watched.

It might seem that this was an encroachment on the field of the investment house,  but these houses are by no means opposed to such a development. Indeed some of them have established, within their own organization, a system based on the same principle to govern the investments of the firm members. But, apart from that, the investment houses would profit by such organizations, in that they would represent another large customer. They would profit, too, in that it would be an intelligent customer, to whom they could refer others, as an evidence of the soundness of their offerings.

But while this solution is considered, by many, as the logical development, it falls foul of the Canadian type of mind. We are not, as a people, given to admitting that anyone can do for us better than we can do for ourselves. We still believe that we can invest wisely without understanding, and until we can reach a wiser viewpoint such a development can not hare the far-reaching effect that it has in the old country. It is probably a wise development, but it needs education before it can be achieved.

The next best thing is the development of the instalment plan. It will not protect the small investor who wants to gamble. It will not give him any fabulous return for his money. It will merely put him on an even footing with the large investor, in that he will be enabled to buy the bonds of governments and municipalities and sound industrial ventures. He will still have to use his head, to decide between the sound business that is giving him this opportunity, and the fly-by-night that is taking his money; though it is reasonable to suppose that the legitimate development of this plan will modify the activities of the illegitimate.

If the investor does not know the legitimate trader he can readily locate him. His banker will tell him, or his financial paper. If he invests blindly, and without any consideration of character of the agency that is handling his funds for him, no one can help him. No one can protect a fool from his folly. There is this one thing to remember always: the sound financial businesses are eager and anxious to help. Most of them would arrange for distributed payments on gilt-edged bonds. A goodly number of them have specialized departments for this very business. They do not look askance at the hundred dollar business, for they know that from the hundred dollar investors come the men who will later invest their tens of thousands.**