Could You Spare 1/3rd Of Your Time?

Posted on March 2, 2014 by - Investments, News

I have recently finished work on a set of new investment portfolios for our clients. This is arguably my most important task as a financial planner because this is where I recommend my clients invest their money. It is a large responsibility, and one that I take extremely seriously.

This process has taken almost a whole month of solid work. I would approximate 130 hours in total. This is the amount of time required to conduct proper research, analysis and due diligence on the daunting amount of investment options available in the marketplace. What’s more, this is a process we will undertake every 3 months to ensure we keep up to speed with the fast changing world of investments.

Our process focuses on finding funds and investments that will meet our clients’ objectives, represent good value for money and that don’t expose our clients’ funds to excessive risk (however some risk is required in order to generate above average returns).

We repeat this process once every 3 months to ensure that our investment portfolios remain suitable for our clients’ needs. All in all then, this investment process takes up around 1/3 of my working time and even then we rely on external research and analysis conducted by experts in various fields to assist us in our endeavours.

While some people can and do “self invest”, I would suggest that they are unable to dedicate 1/3rd of their working life to such tasks. While some people feel confident taking this approach, most would feel more comfortable knowing that they have left the selection of their investments to an experienced professional, who can dedicate 1/3rd of their time to researching suitable investments and protecting their clients money.

If you would like to know more about our investment process or to find out how we could help manage your portfolio, please get in touch to request your discovery meeting, provided at our expense.

Should Planning Be Compulsory?

Posted on February 25, 2014 by - News, Pensions

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

Posted on February 21, 2014 by - Investments, News

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

Posted on February 14, 2014 by - News

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?

Posted on February 9, 2014 by - Investments, News

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

Posted on February 5, 2014 by - News

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.

Price Is What You Pay – Value Is What You Get

Posted on January 31, 2014 by - Investments, News, Pensions

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

Posted on January 28, 2014 by - News

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?

Posted on January 22, 2014 by - Investments

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

Posted on January 20, 2014 by - News

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.