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Wealth Modelling – Historical Simulation

February 22, 2012

Wealth Modelling – Historic simulation.

Past performance is not indicative of future results. You will notice this disclaimer, albeit with minutely different wording, on every single piece of investment literature available. However we can use the past to see what kind of turbulence investors in times gone by have had to face, and think about how prepared we can be as market volatility continues into the future.

Using our wealth modelling system we can bring history into focus and actually use it to model what really would have happened to you if you had been one of these earlier investors. In other words we can answer the following question:

If you first invested with this asset allocation many years ago, how would it have performed?

With historical market data, we project forward how your wealth would fluctuate if the market behaved in the same way.

Take our client Mr Example(i), Chart 1 below shows the normal projection for his net worth from today until mortality. His chosen portfolio grows at an average of 6.85% (ii). The chart has been displayed in real terms to allow us to take the inflation growth out of the equation and see how the actual monetary growth of his assets fluctuated over time.

Mr Example is 41 with a projected mortality of 90 so he potentially has 49 years of investing ahead. Taking the most recent 49 years of market information and using this to be the background market data for the next 49 years we can show his projections modelled on the historical data and this is reflected in Chart 2. Chart 3 displays the historical selection we are making.

In essence the system projects forward as though we are living from 1961 to 2010. It thus includes all the booms and busts in between, and we can see how Mr Example was affected in this period.

So what does this tell us? Firstly from the calculated growth of £1,000 display in Chart 3 and the significantly higher numbers Mr Example hits in Chart 2, this was a fine long term period to be invested.

Secondly, Chart 2 also lets us consider how Mr Example might have felt at age 53, 81 and 88 (the 70s, 2001 and 2008 recessions). Not good I suspect. This is where would be vital for him to have the investment discipline to ignore market noise that is integral to our investment philosophy. He must think about the long term picture, and he is rewarded for doing so: not even the deepest recessions in recent times hold back his growth for long.

This is just one of the many tools we have at our disposal to model potential losses for our clients. It is something we can all relate to, and for that reason it is a particularly interesting exercise.

Past performance doesn’t indicate future performance, but it can let us know the kind of turbulence we will always have to face as investors.

For more information on this or anything else, please get in touch.

Malcolm Stewart

22 Feb 2012

i Mr Example has been kept relatively simple for illustration purposes. He has an income of £75,000, cash savings of £20,000 (unaffected by simulation), and ISA & Portfolio investments of £150,000 in total in a ‘Cautious Growth’ portfolio (40% fixed interest, 60% equities). His total expenses per year is £35,000. He is 41 currently and is going travelling for 5 years in retirement

ii Novia Financial Plc Market Assumptions

The Lost Generation

February 21, 2012

There have been two recent conversations of late that serve to illustrate the worrying lack of understanding of how much retirement might cost.

The first was from someone wondering how we might get more income from his retirement pot. Put more money in I said, not entirely tongue-in-cheek.

Secondly, a young woman said she would save what was left of her income once her bills were paid and her “fun” money was set aside.

I’m not sure you can owe your pension plan the contributions, but you get the picture.

This from the MetLife 2011 Retirement IQ:

“2011 shows a significant increase of respondents who say that the greatest financial risk facing retirees is longevity. Sixty-two percent of respondents answered correctly in 2011, compared to 56% in 2008, and 23% in 2003.”

I’m genuinely concerned that our mighty Financial Services industry has not managed to get the message to the public that you need to plan to stop work and that you’ll need money to do it.

It’s a pretty simple concept and to take more from the MetLife’s Mature Market Institute research, even if people are prudent, sensible and save for retirement, longevity and market risk are leading to generations that will run out of cash before they have the good grace to die.

Whichever way you slice it, a large dose of reality has to be brought to bear when doing retirement planning for clients.

Wealth modelling plays a great part in determining the numbers, (Voyant is our system of choice) but it has really struck me that we, as financial planners, have a huge burden of responsibility to make clients aware of what’s involved in getting to your “number”

Taking this a stage further I got to thinking about whether we work with our clients, for our clients or do we take orders?

I’m sure we are more in category one and two rather than three, but it requires a genuine want to get involved at much more personal level.

David Jones of Dimensional Fund Advisers recently mentioned to me the idea of the one number on the fridge door that should anything happen to the couple, the family could ring the phone number and person on the other end of the phone would understand and be able to sort out the financials.

Does your current financial adviser educate you, train you and make you do what you need to get to retirement in the shape you need to be?

And is he or she your trusted number on the fridge door?

I know Shane Mullins of Fiscal Engineers of Nottingham is rightly focussing on the “trust” part of the relationship between client and adviser and I too believe that this is the key part of our makeup.

I await his tweets with further interest.

So what am I saying?

Guiding clients to retirement requires reality, discipline and commitment from clients and a desire from the adviser to understand the client and their family’s needs and be seen as someone who can be trusted to deliver the plan.

We can’t get to the numbers until we put the time in to establish a relationship with the client that’s based on mutual respect and understanding.

So when your adviser tells you to put more money into your retirement plans because he thinks it is a good idea and it will benefit you and not him, you know you’ve got the right man and can post his number on your fridge.

We need to make the public understand that there is a big difference between going to see someone who will sell you a pension (insert you own local favourite or bank here) to working with trusted adviser who will have a genuine interest in helping you retire in good shape.

One final point; MetLife research would point to income guarantees being very important in retirement for clients and with the continued erosion of annuity purchasing power, is this the way forward?

0131 273 5202 – Cut out and stick on fridge.

Roland Oliver

Do You Have A Large Pension?

February 10, 2012

Urgent Action Needed by the Deadline – 5^th April 2012

Who does this concern?

Anyone who expects their overall pension value to be above £1.5m by the time it is crystallised.

Individuals in final salary pensions schemes who are expecting pensions of £65,000-£75,000p.a.

What is happening?

From April 6 2012, the Lifetime Allowance (LTA) – the overall maximum that can be drawn from a pension fund before tax penalties are imposed – will fall from £1.8m to £1.5m. Any pension benefits over and above the LTA will incur a tax charge of 55% for a lump sum and 25% plus income tax for regular payments.

However, the government has softened the blow for those currently expecting their benefits to be worth more than £1.5m by allowing individuals to lock into the current £1.8m limit.

How?

They must apply for fixed protection with HMRC.

Downside

You cannot start a new arrangement other than to accept a transfer of existing pension rights
You cannot have benefit accrual
You will be subject to restrictions on where and how you can transfer benefits

What are the consequences of not having fixed protection?

If you take a lump sum having exceeded the LTA, the tax charge is 55%. If you take the benefits as income, the charge is 25% plus income tax at the member’s marginal rate.

For more details please contact us forthwith!

Two Free Days

January 12, 2012

I listened to John Humphreys on Radio 4 yesterday quiz a medical expert on the recent pronouncement from MP’s on the idea of having two free days a week from alcohol.

It was clear that Mr Humphreys was desperately trying to justify his non-non-drinking days and it was great radio as the expert refused to sanction his habit without either party being specific!

Anyway, who is right and who is wrong is a matter of balance I guess.

What is evident is that as a nation we could really improve our diet, habits and exercise patterns significantly to deliver better overall health.

I’ve just come back from my local public gym and it was a classic early January visit – a smattering of recognisable regulars who were back doing their thing and about a 70% increase in January resolutionists a puffin’ and a pantin’.

I’m not going to talk them down as any attempt to change habits and improve health is good in my book.

I will say this: shiny silver trainers have no place in the gym.

Also what is it with the comfort blanket that is the sports-cap bottle?

It’s a fascinating item – it would appear to have magical powers that can render you invisible if you drink from it as you enter the gym.

I could go on and say that at least one of the treadmills was trying to understand why a bunch of local citizens had decided to go for a group run on one machine…

So what’s my point?

We’ve had a couple of underwriting decisions surprisingly go against clients and we are taking a much more in depth approach to understanding health and fitness issues as we create appropriate life, critical illness and income protection packages.

I’m encouraged by the likes of PruHealth’s Vitality program and the idea of discounts for improved health and lifestyle.

We still find clients reluctant to take out the full levels of cover that they really need. With our total protection review, we discuss all aspects of their health and fitness to allow us to get the right cover, at the right levels with the right focus on long term health.

Whether its two days off the laughing juice or a total commitment to an improved lifestyle, having the right levels of protection is vital.

Speak to us about all your protection needs, and we can even help you get fit!

Do I need a Business Will?

November 30, 2011

We’ve talked in recent weeks about the importance of considering business protection, identifying a need and considering your key man requirements.

We have also touched on Business Succession and it is with that in mind that we would ask – Do you have a business will? You would be surprised when this is asked how often the answer can be – “I don’t need it!”

As part of our Wealth Management Plan offering for clients we ask if they have considered putting a will in place and if they have already written one, when it was last reviewed.

It would be remiss of us not to cover this and in a similar vein it is crucial to any business succession planning that a business will is in place to ensure shares in a business go to the right people on the demise of Directors or key shareholders.

We feel it is vital that a business Director or key shareholder considers if they died or became critically ill, where their business interest would go?

In the first instance a company’s Articles of Association will deal with the issue of transferring and selling shares.

A company’s Articles of Association form the basis of the company’s constitution. They’re commonly referred to as the internal rule book of the company. The articles are chosen by its members and are legally binding on the company and its members. A company’s articles are subject to the Companies Act 2006 and can’t contain rules that would cause the company or its directors to operate outside the law.

When a shareholder dies, their shares will form part of their estate and ultimately pass to their heirs under the terms of their will or the laws of intestacy where they haven’t made one.

You wouldn’t want to die and leave your personal wealth subject to the rules of intestacy so why take the risk with your business assets?

It is vital that firms understand and know what their Articles of Association say about how shares transfer. All those likely to be affected by the death or critical illness of a shareholder need to know if the Articles enable the shareholders to do what they want with their shares should the worst happen.

If the articles are found to be lacking in terms of the preferred instructions then they can be amended by a Solicitor and a Business will can also be completed to ensure that everyone involved has the peace of mind that the value they have within a business will be protected and pass to their chosen heirs when the time comes.

If you are unsure about what you already have in place and want to revisit your existing arrangements we are happy to offer a second opinion service to look at your Articles and business will.

If you still need to put a business will in place then don’t hesitate any longer, let us look at your business and what is required and make the step to having everything reviewed and protected for the New Year.

Check in again next week where we will discuss in more detail how a business will can work in conjunction with a cross or double option agreement to ensure capital is paid back into the business if required or to the heirs of a deceased shareholder.

Claire Armstrong

RDR Thoughts

November 11, 2011

Thanks to SLI & Prudential for hosting a dinner last evening; an informal round table (literally) discussion on the omnipresent RDR in Standard Life’s impressive office in George Street (must be money in them thar GAR’s)

Wherever IFA’s gather, there will never be shortage of opinion (and ego) and I usually go out of my way to avoid such gatherings for fear of developing a criminal record for some sort of assault or bodily harm.

That said, I’m getting better at containing my feelings (I think…) and being very selective as to whichever event I attend.

I”m still curious enough or too fearful of missing something to cut out attendance at industry bunfights completely, but have been to a few things of late that have taken away good hours of my life that I can’t get back.

I avoid anything that looks like a fund launch, investment view, product launch and especially anything organised by a compliance/network firm.

Technical information, business process structure and understanding improvement along with anything to do with bashing active fund management usually blows my skirt up.

Clearly I now get invited to very little.

What’s my point? Well, it was curious at the meeting last night about the wildly differing opinions on what, how & why the RDR might be (no surprise) for the businesses involved and the industry generally but…

The Elephant not mentioned in the room was, for me, who’s going to tell the public and when?

What are IFA’s doing to advise their current and potential future clients about what the RDR means for them?

After all, its going to impact them the most.

I’ve gone all overboard and written a “white paper” (very grand) on what RDR might mean for the consumer and if you’d like a copy, please let me know.

Be warned; it’s a weighty tome and you may lose several units of time from your life that you certainly won’t get back from me.

Let’s be having you.

Roland Oliver

11/11/11

Persistency is Key

October 28, 2011

I’m going to be lazy and let someone else make the points in my blog this week.

I’m too old, too long in the tooth and most definitely too irascible when I hear the phrase “…But XZY Fund Management (insert your favourite fund here) is a top performer” to respond rationally any more.

I thought the evidence of persistency of performance detailed in Standard & Poors twice annual scorecard to be pretty interesting.

Getting the asset allocation right, keeping costs under control and maintaining investment discipline still makes sense to this writer.

Here is a quote from the Standard & Poors half yearly SPIVA results:

“The phrase “past performance is not an indicator of future outcomes” (or some variation thereof) can be found in the fine print of almost all mutual fund literature. Yet due to either force of habit or conviction, investors and advisors alike consider past performance and related metrics to be important factors in fund selection. Does past performance really matter?

To answer this question on a continuous basis, the S&P Persistence Scorecard, released twice per year, tracks the consistency of top performers over yearly consecutive periods and measures performance persistence through transition matrices

Summary of Results

Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending March 2011, only 0.96% of large-cap funds, 1.14% of mid-cap funds and 2.59% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.

Looking at longer-term performance, 19.15% of large-cap funds with a top-quartile ranking over the five years ending March 2006 maintained a top-quartile ranking over the next five years. Only 9.38% of mid-cap funds and 23.26% of small-cap funds maintained top-quartile performance over the same period. Random expectations would suggest a rate of 25%.

While consistent top-quartile and top-half repeat rates have been at or below levels one expects based solely on chance, there is consistency in the death rate of bottom quartile funds. Across the board, fourth-quartile funds have a much higher rate of being merged and liquidated than all other funds.”

I think that not actually managing to achieve results above compared with what could be reasonably expected by chance is quite astonishing and really should make you question what you pay your fund manager to do.

The S&P scorecards can be found at www.spiva.standardandpoors.com.

I also think that this information should be shown to all compliance consultants when they are looking for evidence as to why funds have been selected…

Game of darts anyone?

Roland Oliver

October 2011

Death and Taxes

October 27, 2011

Business Protection Revisited

For all business owners when it comes to protecting the business the key considerations are continuity and succession.

On the temporary absence or loss of a key person business owners need to consider for how long (if at all) the business could continue to run efficiently and remain profitable. In addition to this they need to consider what plans are in place to ensure business assets are valued correctly and passed to the right people.

Businesses look to protect themselves against every eventuality, buying cover for their buildings, contents, materials and cars. However, the majority don’t cover their single biggest asset – their employees. According to research carried out by the British Chambers of Commerce in 2009, more than 60% of businesses have at least two key individuals. However, 44% of those surveyed said their businesses wouldn’t survive longer than 12 months if they lost one of these key people.

We touched on this subject in our blog last month and it is a subject we plan to revisit regularly as there continues to be a staggering need for companies to address this issue.

We’ve all heard at one time or other someone quote those famous worlds from Benjamin Franklin “In this world nothing can be said to be certain, except death and taxes”. Ask any business owner what concerns them when it comes to tax and they will most certainly respond that they want to ensure they maximise all available tax advantages and to have the correct accounting procedures in place to do so.

Why then do so many companies remain resistant when it comes to having the correct plans and procedures in place to ensure death or serious illness does not affect the daily running of the business?

Consider the likelihood of at least one partner/director in a firm dying before age 65*

Age	Number of Partners/Directors
	1	2	3	4	5	10
35	7%	13%	19%	25%	30%	51%
40	7%	13%	18%	24%	29%	49%
45	6%	12%	17%	23%	27%	47%
50	6%	11%	16%	21%	25%	44%

Further to that consider the likelihood of at least one partner/director in a firm having a critical illness before age 65**

Age	Number of Partners/Directors
	1	2	3	4	5	10
35	29%	50%	65%	75%	82%	97%
40	29%	49%	64%	74%	81%	97%
45	27%	47%	62%	72%	80%	96%
50	25%	44%	58%	68%	76%	94%

Are the percentages as you expected?

Whether you are a Limited Company, Sole Trader, Partnership or Limited Liability Partnership the threat of death or serious illness of a key person is very real and it doesn’t have to mean the end of a business you have worked hard to create and make profitable.

If you are considering (or know someone who should be considering) continuity or succession planning we can help with calculating the level of cover required, how to set up the arrangement and the tax implications associated with the premiums and benefits payable on these plans.

We have dedicated teams with 5 of the top Business Protection Providers who can help us help you put the right plans in place, allowing you to get on with making your business profitable without the worry of what happens if someone takes seriously ill or dies.

It isn’t as complex or as expensive as you might think, so don’t delay, get in touch with us today and let the Expert Team at Oliver Asset Management ensure your business goes from strength to strength safe in the knowledge your protection needs have been met and will be reviewed regularly.

We look forward to hearing from you.

Dr Claire Armstrong

Source: www.actuaries.org.uk/knowledge/cmi/cmi_tables

*Based on mortality data from TMN00 (temporary assured lives, male non-smokers, 1999-2002) at five or more years’ duration.

**CIBT02. Based on 1971-2003 population data and experience, published in SIAS paper Exploring The Critical Path, 2006. Males, stand-alone extended cover, including own occupation and total and permanent disability.

Business Protection – Can you identify a need and are you covered?

September 16, 2011

As of April this year there were over 2.5 million registered companies in the UK* and a staggering Business Protection gap defined by Legal & General as £1.1 trillion **.

44% of business owners said their businesses would fold within 12 months of the death or critical illness of a key person and only 4% of business owners have shareholder protection in place**.

If you are involved in a business small or large you will know that an integral part of the running costs includes insurance in relation to buildings and contents, key equipment, stock, vehicles and Public liability to name but a few.

The cost of each is taken as a given and paid regularly to ensure a business is functioning within the right legal requirements and to provide backup should the “worst” happen.

There is no doubt that equipment, vehicles, location etc provide the means by which a business can offer goods or services but what is the real backbone of any firm are the people who make it successful and profitable.

A successful business is one which not only makes the most of its key individuals but nurtures their expertise and reaps the reward in terms of the relationships they develop with suppliers and customers.

Have you considered the cost to your business if you were to lose one of your key individuals through ill health or death? If you can think of someone within the business whose temporary or permanent loss would affect the company’s ability to maintain turnover and generate profit then they are a key individual and they should be covered.

If you lose a Key Person from the firm you need to be able to cover the cost of recruitment and replacement for that individual as well as making up for loss of profit directly attributable to them. You may also require reserves in place to ensure any business liabilities such as overdrafts, business loans or even Directors Loan Accounts can be repaid if they are recalled.

Business Succession Planning

As well as Key Person cover there is a massive need for Shareholder Protection within firms, or more specifically Business Succession Planning.

Business Succession Planning not only protects the company but also the employees, their families and the shareholders.

Some of the most frequently asked questions for shareholders within a company when considering the death or critical illness of a co owner include:

What happens to their shares when they suffer a serious illness or die?
How would the control of the business change?
What would be the cost of buying out the co-owner’s share?
Where does the cash come from to purchase shares from the co-owners family if they do not wish to retain an interest in the business?
What agreements can be put in place to ensure remaining shareholders and surviving families can exercise their preferred options when it comes to retaining or selling shares?

We can help answer these questions for you.

The partner, shareholders and key people in any business are its driving force, they are a valuable asset and you need to have plans in place that ensure if they suffer a critical illness or die your business can still continue and remain profitable despite the loss.

The death or critical illness of a key person in your company could threaten everything you’ve worked so hard to achieve, is it really worth the risk not to have the correct cover in place?

If you’re not sure where to begin then we can help. We can take you through a step by step guide which helps you consider who needs to be covered and for how much. In conjunction with this we will make you aware of the tax treatment of your premiums and benefits paid on any plans and talk you through the appropriate agreements which should be in place to ensure benefits are paid correctly.

It may seem like a minefield of information but we can pinpoint the need within your company and provide you with a complete report on what would be required and the monthly cost, incidentally it isn’t as much as you would think.

Whether you are a Sole Trader, Co-Owner, Partner or perhaps even a Key Person in a firm we will be able to talk you through the options and help you through the process from beginning to end. We also offer a regular review service and would revisit all your planning on an annual basis to ensure your protection planning is keeping pace with any business changes.

So don’t put off any longer, if you want to speak with us further about how to protect your Business then we’d love to hear from you.

Claire Armstrong

*www.companieshouse.gov.uk (as at 03/04/2011)

**www.legalandgeneralcomms.co.uk/businessprotection

5th August 2011 – response to market conditions

August 5, 2011

In the uncertainty surrounding North America and Europe lately, and the sharp fall in the markets that has come with it, it is easy to both feel panicked and miss out on the good news in the global markets.

It is fitting to refer you to pages 8 and 9 of our Informed Investor brochure (see the link above) to understand the emotional ride you must take with investment, and why panicking now is the very worst thing you can do.

It is also fitting to mention these lesser headlines that you may well not have been exposed to, but your well diversified portfolio will have: –

Robust Growth in Germany Pushes Prices—Analysts see a strong chance that German inflation will head towards 3 per cent by the end of the year against a backdrop of robust growth in Europe’s biggest economy. (Reuters, July, 27, 2011)
Brazil Domestic Demand Still Strong—The Economist Intelligence Unit says economic growth in Brazil surprisingly picked up speed in the first quarter, challenging the government’s efforts to cool the expansion. (EIU, July 6, 2011)
Japan Retail Sales Top Estimates—Japan’s retail sales rose 1.1 per cent in June, exceeding all economists’ forecasts and adding to signs the economy is bouncing back from an initial post-disaster plunge. (Bloomberg, July 28, 2011)
No Fear in China—Traders betting on gains in China’s biggest companies are pushing options prices to the most bullish level in two years. The Chinese economy is projected to grow by 9.4 per cent in 2011. (Bloomberg, July 28, 2011)
Southeast Asia Booms—Southeast Asian markets are the world’s top performers in 2011 thanks to strong economic and corporate fundamentals. Thailand’s index hit a 15-year high in July and Indonesia’s a record high. (Reuters, July 22, 2011)
Australian Boom Keeps Rate Rise on the Agenda—The Australian dollar hit its highest level in 30 years in late July as traders looked to the prospect of another rise in interest rates on the back of a resource investment boom. (WSJ, July 27, 2011)
NZ Bounces Back—The New Zealand economy has grown more strongly than expected after the Christchurch earthquake, helped by improving terms of trade. The Reserve Bank signals it may raise interest rates soon. (Bloomberg, July 28, 2011)

Roland Oliver