Monthly Archives: January 2014

Price Is What You Pay – Value Is What You Get

With pension charges back in the news again last week following the governments decision to delay the cap on charges for auto enrolment schemes, perhaps now is a good time to consider value, rather than price. In the famous words of Warren Buffet “price is what you pay, value is what you get”.

Please don’t get me wrong; I am not excusing, nor defending, overly high or punitive pension scheme charges. In fact, I am one of the strongest proponents of better value pension savings vehicles. It does seem however, that in our never-ending quest to make all financial products cheaper, that we have forgotten all about value for money. Surely this should be the deciding factor.

Lets illustrate this with a simple example and assume for a second that both options are similar in terms of risk profile and financial strength. Fund A charges 1.5% per annum and generates a return of 8%, fund B charges 1% but only delivers a return of 4%. All other things being equal, I will choose fund A thank you very much.

Now clearly the above example is quite extreme, but the principle is sound. It should be the value for money of a particular scheme that we are questioning, not the fee itself.  Part of any good fund analysis should take into account the level of charges made by the fund manager, and the additional performance that the manager has generated (or, heaven forbid, subtracted) from the fund. Only then can we get a true idea of the value for money that the proposed investment represents.

While the government is right to look into the cost of pension plans for workers under the auto enrolment regime, surely it should be value for money, and not cost alone that is the primary focus of any review.

How To Become A Financial Expert

On Friday the Times ran a 4 page pull out which was entitled “how to become a financial expert”. Now this in itself doesn’t sound like a bad idea, after all, who wouldn’t want to be more informed about their money. What I would question, however, is just how much of an “expert” you are expected to become.

To put things into context, I am the proud holder of no less than 12 financial planning qualifications, which have a combined suggested study time of well over 1500 hours. I am also in the process of studying for two more! Combine this with many years of experience, countless hours of technical research and a rigorous continuing professional development programme and I don’t think I am blowing my trumpet too much if I refer to myself as someone who knows a thing or two about finance.

To expect others to possess this level of knowledge and experience is clearly un-realistic. For example, when researching an ISA recommendation (which is quite simple in the grand scheme of things) for a client, I was presented with no less than 240 options and variables. To arrive at a suitable recommendation took several hours of analysis. I would suggest that for someone who does not do this each and every day, the time required would be considerably more and the outcome probably not the very best solution available.

When I need advice on an employment contract, I seek assistance from a corporate lawyer. If I need to check if my proposed house purchase is a good investment, I ask a chartered surveyor to produce a report. I seek help from these professionals because I am well aware that I lack the knowledge, skills, qualifications and experience to do the work myself.

I think it is unlikely that next weekend the papers will run a pull out called “how to become your own legal expert” or “how to do your own structural survey”, so why should financial planning be any different. In the same way that I felt I had received extremely good value for money when a Chartered Surveyor told me that a house I was planning to purchase had subsidence, my clients feel that I have added significant value to their financial situation and are happy to pay for that service.

While I agree that we should all be a bit better informed when it comes to our finances, surely this would be best achieved by working in conjunction with an experienced professional, rather than going it alone!

Is Your Fund A Closet Tracker?

A report released yesterday brought to light the fact that many supposedly “active” funds are actually “closet trackers”. Perhaps I should first shed some light on the difference between the two.

An “active” fund is one where the fund manager is able to pick and choose the investments that make up the fund, normally constrained by some form of mandate, such as maintaining at least 50% of the fund in bonds, but this is not always the case. In an active fund the investor is hoping that the stock picking skills of the fund manager will lead to the fund outperforming its peers and the stock market index or benchmark which it is aligned to (the FTSE 100 would be an example).

In return for this stock picking skill and expertise, the fund manager will make a charge, usually a bit higher than the charge levied on so called “passive” or “tracker” funds.

In a passive fund the manager is simply trying to replicate the performance of an index or benchmark such as the FTSE 100. Because there is no active stock selection the charges on these funds tend to be lower.

What this new report highlights is that many supposedly active funds are actually very close to being a tracker, with little stock selection from the fund manager at all. The problem that this poses is that the investor will generally be paying a higher charge, but receiving the same performance as if they had invested in a tracker fund. In fact, the performance will usually be slightly worse, due to those very same higher charges.

Clients may want to review their investments to see what they are actually paying for. While we believe that there is a place for both active and passive funds in a clients portfolio, when recommending an active solution, we would always want to see that the fund manager is adding demonstrable value to justify the higher fee.

As part of our analysis of fund we will consider the amount of the fund actually being managed on an active basis. This will let us know if the fund manager is really generating additional performance, or whether the fund is actually a closet tracker with an unjustifiably high fee.

We Could All Learn A Thing Or Two From Dave

As someone who takes a keen interest in all things financial, I always make a point of watching the programmes on channel 4 which follow the attempts of Dave Fishwick to make the financial world a more straightforward and friendly place. I find Dave highly amusing and uplifting with his seemingly never ending high sprits and a level of determination that would have Churchill quaking in his boots.

Those who saw his previous two shows would have seen how he took on the big high street banks and came up with his own local bank based on old fashioned values. The simplicity of the service he offers has to be seen to be believed. You can deposit money at 5% and borrow for slightly more, and that’s about it. No huge contracts, no industry jargon, just a simple, efficient service. The whole operation runs from a small shop front with a few hard working people crammed behind a single desk. There are no trading floors, no high-rise towers, just a man with a good set of ideals trying to help people in his community.

What really strikes me about the service that Dave offers is that it is highly personal. He gets to know his customers and makes decisions about lending based on relationships rather than computers and credit reference files. He also helps the businesses he lends money to develop, providing his expertise and time, all as part of the service.

I think a lot of businesses in the financial world could learn a thing or two from Dave, I know I certainly have, which is why we try to make things as straightforward as possible for our clients. I can’t promise a single interest rate or just one piece of paper, but what I will promise is a concise, efficient service without all of the complexity and jargon that normally surrounds the financial world.

Could Inflation Be Back In 2014?

For the first time in four years, inflation has now fallen to the governments 2% target. This was welcome news for the many people who have experienced low (if any) pay rises, coupled with the well publicised rising cost of living. Sadly, the current low rate of inflation has the potential to come to an end before it has even really started.

With the base rate currently set at an historic low and the price of property now rising again faster than people can keep up with, it only seems a matter of time before inflationary pressure returns to the market. Halifax today reported that average property prices rose 7.5% in the 12 months ending in December and that trend looks set to continue. Businesses are reporting record profits just days into the new years reporting season and already there is talk in the media of 3% average pay rises this year.

What this all adds up to is consumers feeling more confident, after all, their property value is now back on the stairway to heaven, they will finally be getting that pay-rise they have been waiting 5 years for and even the good old BBC seems to think the economy is ok. What could possibly go wrong? Well, more confident consumers will likely spend more which in turn will have the impact of increasing prices once again, just as they started to get back under control.

My fear is that perhaps we are a little too confident. Our economic recovery is still in it’s infancy and that base rate will have to increase one day. The risk is that inflation will spike “too soon” triggering a rise in interest rates that will bring the country back to earth with a bump when it realises that it does actually cost money to borrow money.

As always, a well-diversified portfolio of asset-backed investments stands the best chance of beating the rate of inflation over the long term. Clients may wish to consider a review of their investments now, before inflation starts to pick up again.

Please get in touch to book your discovery meeting, provided at our expense.

“Switchable” Annuities Are Nothing New

The suggestion by pensions minister Steve Webb on Sunday that providers should offer so called “switchable” annuities has raised some eyebrows amongst those in the advice profession. You see the concept of a switchable annuity is nothing new; in fact, it has been around for quite some time.

Fixed term annuities involve the purchase of a short-term annuity (up to 5 years) with a part of your pension fund. Using this type of annuity can have a number of advantages for clients:

  • It allows you to fix your annuity rate at least every 5 years, rather than locking in for life, one of Mr Webb’s main bugbears.
  • Should health deteriorate in later life you could then take advantage of an enhanced annuity rate.
  • It leaves your options open to take advantage of a different form of retirement income in the future.

As with all attractive financial planning options however, there are some risks. The main one being if annuity rates continue their long-term downward trend. In the same way as fixing into a mortgage deal can be a risk if interest rates fall lower the same is true for a fixed term annuity. You could find that the rate has fallen when you come to “renew” your retirement income.

As I have argued for some time now, surely the best way to ensure a comfortable retirement is to diversify your retirement income in the same way that you would diversify an investment portfolio. For many clients taking an income from a variety of different sources could be a suitable hedge against “annuity rate risk”. For example, you may wish to take some income in the form of a lifetime annuity, some from a fixed term annuity and some in the form of a drawdown pension.

Clearly the correct mix of retirement income will depend on your personal circumstances and objectives and given the long term nature of annuity purchase, I would recommend that you take advice from a Chartered Financial Planner before making any important decisions.

Buckingham Gate’s 2014 Financial Planning Thoughts

With the new year now underway, I thought it time to share our early thoughts on some of the key financial planning issues clients are likely to face in 2014.

 1. Re-balance investments

Given the fantastic market performance of 2013 both in the UK and abroad it is likely that many portfolios will now be out of balance when compared to the intended asset allocation. If left unchecked this can cause a large increase in the risk and volatility within a portfolio and could lead to larger than expected losses in future years. As such now would be a prudent time to review your financial planning goals for the years ahead and rebalance investment portfolios accordingly.

2. Plan ahead for pension legislation changes on 6th April

The 6th April 2014 sees the introduction of a reduced lifetime and annual allowance for pensions. The annual allowance is a limit on the amount of tax advantaged pension contributions an individual can make in a single “pension input period”. The lifetime allowance limits the total amount of pension savings you can accumulate in your lifetime. Any excess over these allowances can lead to large tax charges, which in some cases can be as high as 55%. This is a high priority area, which should be looked at well in advance of the deadline of 6th April. Clients who are members of a final salary or public sector pension scheme could be particularly vulnerable in this area.

3. Make considered use of tax allowances – Now!

Many people make use of their various tax allowances right at the last minute, especially ISA payments. In some cases this means that there is not sufficient time to complete the significant research required to make a suitable recommendation for investment and we are unable to assist. Furthermore, by leaving the use of these allowances to the very end of the tax year you are effectively losing out on a whole years worth of tax advantaged fund growth. Now is the time to start planning for the end of the tax year on 5th April and it would also be a great time to start planning for the 2014/15 tax year as well.

Some diligent individuals who have made full use of their ISA allowance since it’s introduction now have in excess of £1m sheltered away in a tax efficient home with no income or capital gains tax liability. For most this would make a most welcome addition to any retirement planning or investment goals.

4. If you are an employer – Start preparing for auto enrolment

While the new auto enrolment rules have already taken effect for the largest of employers, 2014 is the year where this new legislation will really start to impact on owner-managed business. Each employer will have an auto-enrolment staging date, this is the date on which a particular business will be required to comply with the new legislation. At an absolute minimum we would recommend that employers start preparing 6 months before their staging date preferably a year or more. If you would like an initial assessment of your auto-enrolment staging date and liabilities as an employer, please do get in touch.

5. Make the most of the low interest rate environment – While you still can!

While the low bank of England base rate is likely to persist for some months yet, the markets are starting to price in a rise in the benchmark interest rate within the next 18 months or so. This will begin to have an impact on the rate at which lenders can secure funds and In turn, this will start to filter down to mortgage rates. Clearly each individual will have different circumstances but in general those clients who have variable rate mortgages or borrowing may want to consider locking into the historically low rates currently available.  While no-one can say for sure exactly when a rate rise will occur, we can say with some certainty that the base rate will have to increase at some point from its current low.

6. Make a thorough financial plan

We all have different financial goals and objectives, however many of us are unsure as to exactly how or when those objectives will be achieved. Whether you aspire to retire early or fund a new business venture, by creating a comprehensive cash-flow model we are able to predict how close your existing provisions are to meeting your personal needs. As well as looking at the “ideal” scenario a cash flow plan will also enable you to consider your financial position in a number of “what if” scenarios such as the illness of a family member. This exercise is often eye opening and can show how well prepared (or not) you are for the financial challenges which life could throw at you.

By making time to sit down with a Chartered Financial Planner, you will be able to start 2014 with a suitable plan in place to ensure that you meet those all important financial objectives.