Monthly Archives: February 2014

Should Planning Be Compulsory?

In an interview with the Financial Times, Legal & General chief executive Nigel Wilson has called for several financial products to become compulsory, namely income protection and long term care insurance, in addition to the already launched auto enrolment pension system.

The case made is that the state cannot be expected to continue to provide for us in the event that we fall ill or require long term nursing care. Wilson suggests that insurance for these needs should be compulsory, however perhaps this is a bit too much of a one-size-fits-all approach.

While I agree that most individuals do require further planning and protection in these areas, is compulsion really the solution? It would seem that if we are going to force people to take out these insurance products, then an increase in taxation and state provision would be the simplest, if not the most desirable solution.

Many people certainly need to do more to protect themselves in the event of a spell of time off work, or the need for long term nursing care, however, there are many ways that this protection can be achieved.

One way for example, is to hold a sufficiently large emergency fund in cash and other investments. The fortunate people who already have this type of provision in place would justifiably feel a little aggrieved if they were forced to purchase insurance to cover a need that they have already taken care of.

Income protection and certainly long term care insurance are complex products with myriad different options. Surely it would be better for individuals to have a say in the type (and cost) of the cover that they require, rather than trying to fit all individuals into one mass solution.

How To Control Your Inner Pigeon

An interesting article on IFA online today likened investors to pigeons. While some might say that this is a little offensive, the similarities can be stark in some cases, when it comes to investing.

The premise of the report is an experiment in which pigeons were given a red light and a green light to peck on. The green light would dispense food 60% of the time and the red light would only give a morsel of food 40% of the time.

Now it seems obvious that the pigeon should continuously peck the green light, as this is the one that will distribute food most often. What the pigeons did however, was try to “time” their pecks and they would peck the green light 60% of the time and the red 40%.

What they were in effect doing was trying to “time the market”, thinking that they could correctly select which light was going to give food at any given time. It goes without saying that this was not a good strategy and the pigeon would have been more successful by sticking to the green light alone.

Investment markets are cannily similar to the above example and markets post gains in around 60% of months and losses 40% of the time. The issue is knowing which months will be winners and which losers. Some people will try to “time” their entry and exits from markets to take advantage of its ups and downs, however this is a strategy most likely destined for failure.

Multiple studies have shown that long term “buy and hold” investors are far more likely to be successful than short term traders. While there is an argument for small “tactical” allocations into different markets to take advantage of opportunities, the general position within a portfolio should be long term holdings.

As investors we need to “control our inner pigeon” and make logical, long term investment decisions, otherwise we will find ourselves pecking more lights than we need to and receiving less food!

A Light Bulb Moment With Cash Flow Modelling

On paper a cash-flow forecast seems quite simple really, it’s a summary of your expenditure, both now and forecast into the future, along with an idea of the income and capital that can be used to meet that expenditure. The net result of the exercise is a good idea of how long your money will last. This is something that clients ask us about all the time.

The data that drives this plan, however, is very complex and requires a significant investment of time and effort on our part to get right. We will need to establish suitable assumptions for inflation, asset class performance and earnings growth as well as considering the impact of unexpected market events on the plan.

The foundation for any good cash-flow model is the “base plan”. This is what your financial future could look like based on todays position and known future income and outgoings.

Following the completion of this base plan, we can then consider various “what if” scenarios. These allow us to model the impact that different courses of action will have on a clients’ overall financial plan.

For example, if the initial (base plan) cash-flow model had identified that a clients assets would only last until the age of 76, we could consider the impact that downsizing their home would have on the picture. This might generate sufficient funds to last until the age of 80. Following this, we could then calculate the investment return that a client would require to ensure that their funds would last until the age of 90, and then make an appropriate investment recommendation to make this a reality.

A client had a real light-bulb moment when we were completing his cash-flow model a few months back. The gentlemen in question was desperate to retire in 6 years time at the age of 68, but was unsure as to whether this was realistic based on his current level of investments and pension provision.

We put together a detailed cash-flow projection for him which not only showed that he had sufficient funds to support his desired retirement lifestyle right now, but also that he would be able to sustain that level of expenditure until the age of 107!

Based on the outcome of our cash-flow modelling the client felt secure enough to take an early retirement, a whole 6 years before he had planned. He is very much looking forward to spending this time with his grandchildren. He has also now gained the confidence to start to pass down some of his wealth to help fund their education.

The output of cash-flow modelling may just look like a fancy graph, but it is fantastic lifestyle outcomes like this that make it so much more than that! Cash-flow modelling is, in fact, a powerful, enlightening, life changing tool.

How Clean Is Your Fund?

You may have seen the term “clean” or “super clean” funds in the news recently. What this refers to is the “unbundling” of fund manager charges and the shift on to a new charging structure.

To “clear things up” (no pun intended), it may help to first explain what a “dirty” share class is.

Historically a fund manager has made an annual management charge which included the cost for actually managing the fund as well as an additional provision to pay some money to a broker for introducing the client to the fund. For clients who use online platforms, the fund manager will often rebate some of the total charge to the platform as an incentive to introduce more clients to the fund manager.

This old system was rather “muddy” (I’m really on a roll now) to say the least so the FCA has seen fit to introduce a new charging structure. So called “clean share classes”.

Under a clean share class you pay predominantly for the costs of fund management and as such there is little or no rebate paid to the platform. Consequently, most platforms will now charge an explicit fee for their services.

The idea is that charges should be clearer and more transparent, however due to the number of deals being done between fund managers and platforms, that ambition has only been partially realised.

Investors should review their investment holdings without delay in light of these new charging rules, in some cases a switch into the new “clean” share classes will be beneficial. For those investors in tax wrappers (ISA’s and pensions for example) it may be better to remain in the old “dirty” funds.

If you would like tailored advice on your investment holdings, please get in touch to arrange your discovery meeting, provided at our expense.

We Are No Fee Dodgers

A recent report by Which? Highlighted the fact that many financial advisers were slightly coy about their fees. The report highlighted that during a phone call to 30 financial planning firms enquiring about the fee for a typical £60,000 investment, only 14 gave a “clear indication” of what their fees would be. In addition only 9 firms published details of their fees on their website.

I do sympathise to a certain extent with the above mentioned firms. Pricing for a financial planning job is certainly not simple, as each set of client circumstances is different and upon further inspection, even 2 seemingly similar jobs can turn out to vary significantly both in their scope and complexity.

I do feel however, that financial planning advice should be clear and transparent and to that end we publish a detailed list of our service packages and indicative prices on our website. Each client who engages our services, does so following the receipt of a personalised “scope of work” letter, setting out the range of work that we have agreed to complete on their behalf, as well as a full breakdown of the initial planning and implementation fee, and the ongoing advice fees required.

We are not coy about our fees, because we feel that they offer exceptional value for money. The value we add often covers our fee several times over.

For some reason the report is also quite critical of “free but lengthy face to face sessions”. Now personally, when I appoint a professional to deal with an element of my personal or business life, I like to meet that person beforehand. A face to face meeting gives both parties the opportunity to get to know each other and to decide if they are a good “fit”. In most cases financial planners offer at least an hour of their time to new clients and will often meet them at home for their convenience. I would suggest that this is far more generous than some other professionals would be before any money has changed hands.

If Which? would rather we charge them for an initial discovery meeting then we would be glad to, but from experience most clients really appreciate the chance to get to know us, and find out about our services, without pressure or obligation.