Building A Robust Investment Process

October 22, 2012

We had our Investment Policy Committee meeting last week when we spent a great deal of time reviewing our investment approach, the robustness of our processes and the current portfolios we run.

We favour a passive approach and work with Dimensional Fund Advisers to create our portfolios but need to constantly review our process to ensure this is still the way we want to offer investment solutions.

Malcolm Stewart has responsibility for maintaining our investment strategy and as part of our approach he looks at other investment asset classes that we could use but currently don’t.

We will look at the entire investment universe and apply a set of rules and guidelines to see if any alternative asset classes should be ruled in or out for recommendations to our clients.

For example, we don’t currently recommend Hedge Funds and on applying our screening process, we have questions over the level of fees potentially charged, the transparency of the investment strategies and some of the details of performance reporting.

So in this instance, we will not use hedge funds in our portfolios but will review this again to see if there should be any changes in the future.

Applying these processes to commodities funds, gold, property and other asset classes helps to try and avoid risks we don’t want to expose our clients to.

Unless we can quantify that the level of risk a client is exposed to is justified by the level of return, we will generally avoid this.

It takes time and effort but ultimately a sound investment policy that we understand and have confidence in is what we are trying to achieve.

We feel very strongly about our investment approach and as clients, you should be asking detailed questions of your current adviser about his or her approach and how they have arrived at their decisions about how and where to invest.

Interestingly, it’s not so long ago that I was advised to copy fund performance figures from a well known industry magazine as justification for my investment choices.

I didn’t think it was a good idea or process then and I certainly don’t think it is now!

Roland Oliver

Share:

People who make bad money decisions can often rationalise them. Here are 10 common excuses.

October 16, 2012

Human beings have an astounding facility for self-deception when it comes to their own money.

We tend to rationalise our own fears. So instead of just recognising how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate short-term excuses that we use to justify behaviour that runs counter to our own long-term interests.

Here are 10 of them:

  1. “I just want to wait till things become clearer”.

It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that goes with the risk.

  1. “I just can’t take the risk anymore.”

By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds to retire on. Avoiding risk also means missing the upside.

  1. “I want to live today. Tomorrow can look after itself.”

Often used to justify a reckless purchase. It’s not either-or. You can live today AND mind your savings. You just need to keep to your budget.

  1. “I don’t care about capital gain. I just need the income.”

Income is fine. But making income your sole focus can lead you down dangerous roads. Just ask anyone who invested in collateralised debt obligations.

  1. “I want to get some of those losses back.”

It’s human nature to be emotionally attached to past bets, even the losing ones. But as the song says, you have to know when to fold ’em.

  1. “But this stock/fund/strategy has been good to me.”

We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

  1. “But the newspaper said….”

Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has already reacted and moved on to worrying about something else.

  1. “The guy at the bar/my uncle/my boss told me…”

The world is full of experts, many of them recycling stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes account of your circumstances.

  1. “I just want certainty.”

Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. It’s cheaper to diversify.

  1. “I’m too busy to think about this.”

We often try to control things we can’t change – like market and media noise – and neglect areas where our actions can make a difference – like costs. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it pays to seek out independent advice from someone who understands your needs and your circumstances and who keeps you to the promises you made to yourself in your most lucid moments.

Call it the ‘no more excuses’ strategy.

Share:

Can Your Planning Withstand a Major Loss Event?

October 1, 2012

Scenario

Meet John, 56, and his wife Janet, 54. John runs ABC Ltd, a company which provides high quality examples in many business settings. Janet is a civil servant.

They have 3 children: Jill, Jenny and Johnny. They will all have flown the nest by the time John is 62. At this time John and Janet plan to travel and spend more for six years. Following this they plan to downsize their house.

They have various investments in the stock market, including John’s pension, although Janet is lucky enough to have a final salary pension. They like to take a medium-high level of risk with their investments.

Assuming the economy and the stock market proceeds at a general average over the remaining period of their lives they will be in good shape, with no deficit at any stage.

Modelling a major loss

Once the media start focussing on other things it’s easy to forget that there is still a substantial chance that Greece or many others may drop out of the Euro, triggering a mechanism that will essentially send confidence back to levels seen earlier in the year, or worse. I won’t get into too much speculation on that because a major loss can come from anywhere when we least expect it.

So is your financial planning robust enough for a tornado to tear through Canary Wharf?

John and Janet would like to know, and we can help them run one of many scenarios.

Let’s say our disaster event creates the following effect: a 3 year loss of -35%, -25% and -20%. This occurs when John is age 60 (in 4 years).

 

Each investment in the stock market that John and Janet have has been modelled as close to reality as possible in terms of asset allocation, and based on statistics from Novia Market Assumptions.

Each of these investments will be automatically affected by our loss simulation above.

So what do we find out?

Figure 1

 

 

 

 

 

Figure 2

 

 

 

 

 

 

In the cash flow chart we can see a period of red setting in from age 77, unlikely the status quo base plan chart from above.

The effect is more strongly seen in the liquid assets charts, with usable funds running out at age 76.

In the base plan the growth rate was 6-7%. Once we factor in that this major loss will occur, we see that 9.06% growth is required on these assets from the start of the plan, or 10.57% is required once the major loss has occurred, to ensure once again that there will be no shortfall.

So what does this mean? Well, for John and Janet, they would likely have to downsize again at age 77 to free up more liquid assets.

What would it mean for you?

Get in touch for a comprehensive look at your planning.

Malcolm Stewart

Share:

Multiple Income Streams

September 24, 2012

How do we get clients over the often held view that pensions are “rubbish”?

A by-product of the product lead sales approach, is to focus on the “thing” not the outcome – “I’ve ruthlessly and with malice aforethought, researched the market and have selected Split Pea & General as having the best pension product for you…”

Even writing this leaves me stone cold, imagine it from your client’s point of view.

We’re totally committed to cash flow modelling as the correct approach when visually demonstrating financial planning to clients here. The more we use the cash flow models with clients, the more obvious it becomes that once you demonstrate that a pension is just an income with a different name, all the scales fall away.

People get the picture pretty quickly when they can “see” what a pension can do for them and get the tax advantages too.

Rather than focus on the swamp that pension income options can be, we tend to talk about Multiple Income Streams that are required when you decide not to work anymore (not retire) and how to put these building blocks in place.

We have found that having the client’s focus more on how much they need by way of fund or income when they stop working, tends to work better.

We set out a program in which the clients use all the tax wrappers (Pension, ISA, OEICS,Bonds etc) in an appropriate time and manner for them and this ensures that the we are able to use the Multiple Income Streams to create the tax optimised replacement for income  in retirement (there, I’ve said it!)

We don’t dumb-down the detail but once we’ve established the high ground its an easier conversation. We also work hard in not overloading on tech talk or jargon when discussing the nuts and bolts.

A form of Plain English if you will and it’s always good to ask a client to briefly explain back to you what you’ve discussed and find that a good understanding have been established.

If not, I would always go back and cover the areas of difficulty again.

It’s never to patronise, but more for my peace-of-mind that I’ve been able to get the information required across to the clients in order they can make the correct decisions for them about the advice being offered.

We also use our cash flow software to demonstrate the way income will be delivered to them and the likely tax treatment.

It pulls together the concept of the Multiple Income Stream theory and the notion of a controlled replacement for income once you stop working.

You might even think pensions aren’t so bad after all.

None of this is new, earth-shattering or dangerous thinking, but then again providing sound financial advice doesn’t have to be complicated.

Roland Oliver

Share:

Automatic Enrolment

September 21, 2012

In more recent months the trend in our new enquiries has been from small to medium business owners who are not only picking up on the need for business protection but are also now looking into alternative savings for the business liquid assets AND the requirement to provide a company pension scheme under the up and coming automatic enrolment.

If you follow our blogs you will know we’re no strangers to business protection in fact we feel quite passionate about it and more recently we have posted commentary on the structured deposit accounts as an alternative for business cash holdings.  We will no doubt continue to revisit these topics with regularity but for this week auto enrolment is the focus.

Although most employers won’t have their staging date until 2015/16, there’s a lot to do to plan and prepare for automatic enrolment. For example, employers will need to consider the cost implications and make sure the right systems and processes are in place to meet the new employer duties. On average, this could take up to two years so it is important employers start to prepare early and as I would say there is no time like the present.

Scottish Life* estimate there will be around 9 stages to the whole process starting off with Employers reviewing their current pension scheme and comparing it to the new requirements to identify any changes needed. If they don’t have a pension scheme, they’ll need to set one up.

Then it will be on to assessing the workforce to determine which types of worker they employ and the duties they have for each type of employee. Following this it will be time to consider the different scheme options available and how these will impact on the employer’s business and workforce.

When the right solution is designed there will need to be agreement on what this solution means for the business and one crucial factor will be ensuring the employer has the right balance between costs and administration of whatever scheme is to be put in place.

With the right scheme design ready and approved it will be important to then review internal processes, that is payroll and HR, as the employer will need to ensure they comply with the new requirements and can work to help keep the scheme compliant.

Depending on the nature of the business Unions may be involved and they will have to be consulted to ensure there is full agreement on the basis of the scheme or contracts of employment.

With all of these considerations covered it will then be time to implement the changes agreed and to ensure the scheme can run smoothly day to day, the workforce is engaged and provided with the right information at the right time.

The final stage will be to run the scheme and ensure the employers continue to meet their duties on an ongoing basis to remain compliant at all times.

It does seem like a lot of work and a long process but it doesn’t have to be daunting and we are already helping firms to make the first steps into the process so they are in a position to make the right decision for their company in good time without a deadline looming over them.

If you are interested in finding out more and would like to discuss the detail of how this could work for you we would be delighted if you got in touch, no time like the present to take a step in the right direction.

We look forward to your call.

Dr Claire Armstrong

*Scottish Life online resources published June 2012 (37W1107)

Share:

Structured Deposit Accounts

September 12, 2012

When I was recently asked to look at the Zurich Jade deposit account, I immediately rejected it out of hand as a “Structured Product.”

But we have spent a great deal of time understanding what the product is, what it can do, where the risks lie and whether it was something we would feel comfortable recommending to clients in the right circumstances.

I’m grateful to Tony Davies and Ian Black of Zurich for taking time to go through the product in detail and make us comfortable with it.

In essence, it’s a deposit account, held in real cash with an interest rate linked to a basket of stocks.  If all the individual shares are up in any way a year after the strike date, you receive the full declared coupon (currently 6% or 8%, depending on term) and if some are up and some are down, a calculation is done to lower the rate.

The minimum return you could receive in a year is 0% – thus you will definitely receive at least the whole of your capital back at the end of the term, 3 or 4 & 1/2 years.

Given the current low rates of interest, using a portion of your longer term capital to try and improve returns makes sense. In particular, companies sitting with large cash deposits should consider this carefully.

I also like Zurich’s approach to protecting the risks associated with the derivatives involved by insisting that the issuer deposit cash with Zurich equivalent to level of exposure!

Belt and braces from the cautious Swiss.

It’s not for everyone as the starting point for access to it is £100,000 and if you can commit £1m, then you can create your own bespoke account.

In summary, if you want a bank account that could pay you substantially more interest than you currently receive and are prepared to tie up your capital for a period of time and are comfortable with the low risk and capital back guarantee, then contact us today for an application pack and more information.

Roland Oliver

Share:

EU Gender Directive – 104 days to final deadline

September 7, 2012

A short while ago I blogged on the up and coming EU Gender Directive which will come into effect after 21st December 2012.

The deadline date is now fast approaching and we feel really there is no time like the present to shout again about these changes and the impact they will have on any cover you have in place or plan to do

Just as a reminder, from 21 December 2012, the EU Gender Directive means that men and women will be treated the same when it comes to insurance premiums.  Whilst also affecting car insurance and retirement annuities, the new European gender law will have significant repercussions for life, critical illness and income protection cover. The gender effect will result in most women having to pay more for life and critical illness – around 15%*, but less for income protection. Men, on the other hand might enjoy some reductions to the cost of life and critical illness cover, but pay more for income protection.

From January 2013, most life insurance companies will be required to pay more tax; raising more revenue for the Treasury, pushing up life insurance costs for insurers and ultimately their customers. Experts estimate this could increase costs by around 10%**, largely offsetting any wins from the gender changes.

The double whammy effect means that generally for both men and women the cost of protection is set to go up.

The extent of change will vary by provider, will differ by product class and be determined by the individual circumstances of the client. Added to this, we expect to witness a fair amount of re-pricing activity in early 2013 as providers attempt to get to grips with the new gender neutral world.

Liverpool Victoria have provided some useful figures which are based on their analysis of the entire market and some of the predictions made by key stakeholders and experts, and these are noted below to give you an idea of the potential impact this directive may have:

These statistics stand as a stark reminder that now is the time to act, particularly if you have cover on risk you want to review or increase or if you have been wavering on whether or not it’s the right time to look at applying for personal protection.

All applications submitted between now and the 20th December must be fully underwritten, accepted and on risk to avoid the new Directive and in our experience whilst most cases go through within 1-2 weeks some cases can take much longer depending on underwriting requirements and your personal circumstances.

Don’t fall foul of thinking there is still plenty of time, there are only 12 weeks to go until we are into December and we all know how quickly that will go!

We would strongly recommend if you want to review your cover or put new plans in place you should be taking action within the next 4 weeks to ensure you don’t miss out on current pricing.

Don’t delay any further get in touch for a protection review and ensure you’ve got the right cover for the right price.

Claire Armstrong

Sources: * HM Treasury, December 2011; ** Actuarial Profession, March 2012

***In some cases, women pay more than men

**** Adding together the estimates provided by LV=, June 2012 and Actuarial Profession, March 2012. The changes to costs will vary by individual, product and provider. They could be lower or higher than the average 16% indicated.

 

Share:

Modelling Your Legacy

August 21, 2012

As part of the Wealth Management service we offer a comprehensive look at your entire financial position. If you have significant assets, an important part of your planning is the future of your estate in the event of your death. This entails the obvious legal aspects such as having a will prepared but also how exactly these assets are arranged.

The basic things to consider are as follows:

– Inheritance tax is only due if your estate – including any assets held in trust and gifts made within seven years of death  is valued over the current inheritance tax threshold (£325,000 in 2012-13 tax year).
– Tax is paid at 40% on the amount over this threshold
– Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.*

Step one when producing an estate solution is to model your complete financial situation. This allows us to not only calculate what your immediate legacy or joint immediate legacy is, but also what it is likely to be factoring in rates of income and expenditure, as well as growth and inflation over time.

With this in place we can firstly analyse whether there is an inheritance tax liability at all. If there is, we will also be able to quantify just what this liability is and also, if desired, designate the estate split amongst other members of the plan.

The planning can be as detailed as appropriate

 

The calculations are presented in a detailed report. Once the liability is recognised we can then start to prepare what the best solution or solutions will be in discussion with the client, from gifting strategies to whole of life insurance policies.

You don’t have to be planning on leaving an inheritance to make the most of these tools. For some clients we have been able to take a different approach; how much can they afford to spend annually to make the most of their assets and gradually exhaust them? By adding in an arbitrary expense we can make an estimate. We can carry this out on a worst case scenario basis as well.

In this scenario we see liquid assets gradually being used up over time.

 

This approach takes a lot of the uncertainty out of inheritance tax planning and is of great benefit to our clients in this stage of their lives.

If you feel that this side of your planning hasn’t been looked at appropriately please get in touch. We offer a free second opinion service to anyone unsure about their current plans.

* Legislation from HMRC correct at the time of writing.

Share:

Coaching for success

August 9, 2012

When British Olympic rowers Heather Stanning and Helen Glover won a gold medal in the London games, they remarked that it was as if they had their coach alongside them in their boat. Great financial advisors should be like that too.

For a financial advisor seeking to maximise the chances of their clients reaching their goals, it’s the psychological aspect – being in their clients’ corner – that is often most overlooked.

Take portfolio rebalancing as an example. In bull markets, clients are naturally going to feel cocky. “Risk? No problem!” they might say. In that case, the advisor’s role is to rein in the client’s exuberance. “It’s been a good run,” they should say. “It might be time to bank some gains and rebalance.”

Likewise in difficult markets, as we have been seeing, the clients’ natural inclination will be to say “get me out of here. I can’t stand it anymore.” In this case, the advisor needs to remind the client that excessive risk-aversion comes at a cost. “You’ve drifted from the original goal,” they should say. “This is the time, when prices are low, to rebalance.”

The point of this is that just like an Olympic coach, the advisor’s role is not to always to make the client feel perfectly comfortable. Indeed, sometimes they have to challenge outright the comfort-seeking instincts of the client to go with the herd.

This doesn’t mean bullying the client. It means encouraging them to take ownership of their own decisions -to recognise how they are feeling, while pointing out the potential consequences of acting on those emotions.

Of course, this rebalancing challenge is made easier if expectations were set very early on in the piece. “Remember, we had this discussion?” the advisor might say. “How did you feel then?” The client will remember the decision they made at the beginning. “So what has changed since then with you?” the advisor prompts. “Well, nothing really,” the client might say. “It’s just that markets are scarier now.”

And this is when the advisor puts on the coach’s hat and challenges the client to reflect on what they might do to their financial future if they shifted their asset allocation every time the market changed. We have touched on the effects of attempting market timing in previous blogs. The intention here is to bring the client back to their original intention and reinforce the belief you instilled in them at the start that they can reach their goals. But they can do that only if they focus on those factors within their control.

So this process is about setting expectations, instilling belief, reinforcing those beliefs in good times and rough times, keeping the focus on the end goal and giving the client full ownership of the decisions they make.

Now the coach is not inside the boat with the client. Ultimately we all row our own boat. But for the client, it must feel like the advisor is there with them in good weather and bad.

We’ve seen that this is how they win gold medals at the Olympics. And it’s how ordinary people generate a secure financial future. At the end of the day, good coaches often make the difference.

If you need a new coach we would be happy to get you in shape.

 

Share:

Keeping you informed: The Grecian story so far

June 22, 2012

The Eurozone crisis has been dominating the news in recent months, and as European leaders from France, Germany, Italy and Spain meet in Rome to hold talks on the Euro, many of you may have concerns. We thought this would be a useful explanation of where things stand.

• Greece is a very small economy. According to an IMF list of the world’s economies ranked by size (GDP in purchasing power parity terms) it is 42nd.

• Greece’s public debt is large at around 160% of GDP. Athens has received a total of US$300 billion in bailouts from the IMF and the EU (the equivalent of the GDP of the United Arab Emirates). The latest US$160 billion payment on the condition of imposing austerity measures to reduce debt to 120.5% of GDP by 2020.

• In March, Greece avoided an uncontrolled default on its obligations by agreeing to a bond swap with private creditors. But after five years of recession there does not appear to be much public support for further cutbacks. Amid this backlash, national elections on May 6 failed to yield a definitive outcome.

• On June 17 the two largest pro-bailout parties won enough seats to form a parliamentary majority. This provided some immediate reassurance to markets. The incoming government still has to convince official party lenders of its capacity to push through required reforms before securing further bailout funding.

• EU governments have indicated they are willing to ease terms if a new government swiftly emerges

• Central bank officials from leading developed economies say they are standing by to flood the financial system with cash if there is any credit squeeze. Bad news for those looking to purchase an annuity, as this brings rates even further down.

 

The unknowns:

• Whether Greece will hold on and stay in the euro

• Whether European policymakers manage to hold the single currency together beyond this

• Whether a smaller currency union with France, Germany, Italy and Spain might emerge

• The process that will take us to one of these outcomes

 

The knowns:

• The benefits of remaining calm and disciplined

• Basing investment decisions on forecasts is counter-productive – something even more true in such a rapidly developing and multi-stranded story.

• Those nearing retirement must be particularly careful.

Share: