Personal Investment Account Archives | Oliver Asset Management

Behavioural Finance – An Introduction

February 11, 2019

Traditional finance and investment theories such as Modern Portfolio Theory (MPT) and Capital Asset Pricing Model (CAPM), are based on certain assumptions about how investors behave including such as the following:

Investors always behave rationally
Investors are well-informed
All investors have the same information available and will use it in the same way
Investors understand all the information that is presented to them.

This isn’t the full list, but perhaps you can see some of the potential flaws in these assumptions? Continue reading “Behavioural Finance – An Introduction”

Rags to Rags in Three Generations (and how to avoid it!)

October 24, 2013

It’s a well-worn phrase that I’m sure you’ve heard before.
The grandparents start the business, it becomes successful, the next generation build it further and the grandchildren subsequently ruin it and squander the wealth.
Of course it doesn’t happen this way every time. When we look at our typical client profile we see a great similarity – Families running businesses trying to build better lives for the future generations. And leave a lasting legacy.
We have developed what I guess market-teers would call a strap-line for our business that explains what we do – “We look after families, their businesses and their wealth across the generations”
By identifying this particular niche we can see that there are common financial planning requirements that come up frequently. That’s not to say that each situation is not unique but there are similarities in what each family is trying to achieve financially.
We find that we are often referred up and down the family generations and it really helps when there is family understanding and consensus when building the financial plan. Using our cash flow modelling process also provides a long term view of how wealth and indeed the value built up in the business can help families for a great number of years.
We can establish when it might be right to exit a business and extract wealth tax efficiently for the current generation while leaving a viable firm for the next generation.
We strongly believe that as family wealth financial planners we need to take a much longer view of our clients and consider 40 years, 50 years and even longer relationships.
Taking a cross-generational view also helps with our passively engineered investment approach by allowing capital markets to reward you for investing over the much longer term. You can let the beauty of compound returns achieve the family financial goals without exposing yourself to unnecessary risk.
In other words, if 5% pa or 6% pa return over the next 30 years gets you there, then don’t aim for 10% pa and find you are exposed to greater volatility and portfolio value swings than you’d like to be.
Being smart across generations with robust tax-planning can also provide greater wealth for the family and taxes such Inheritance Tax, can be mitigated or avoided altogether by taking the long term view.
Protecting the family and the business by using third-parties to shoulder the risk if something happening to the driving family member is vitally important and again something that should be known and understood by the family group. There is little point in creating wealth only to have is lost on the death or serious illness of one individual family member.
From a cost point of view, there are other benefits to this approach. There are often family discounts to be had by pooling assets on an investment platform – we do this through our Personal Investment Account and it can lead to substantially reduced costs that apply to all members of the family group over a long period of time.
I hear that slow-cooking is now become the natural antidote to fast-food and perhaps it’s time to apply this approach to your financial planning – easy does it, take long term considered views and we might just get beyond three generations.
Please speak to us if you have any concerns that your current financial arrangements are quite what you’d hope they’d be.
Roland Oliver
October 2013

Investment Decisions Based on your Personality

February 8, 2013

You may have seen the recent piece online by Kevin Peachy the Personal Finance Reporter for BBC News.

He opened his article with the following observation:

“A learner driver’s natural instinct, when their vehicle is veering to the left, is to overcompensate and find the car is swerving to the right.

With experience, the driver learns how to maintain a steady course by taking stock of where they are on the road and making slight adjustments as they go along.

The same can be argued for making choices about financial investments. Panic buying and selling when markets plunge or soar might not be the best course for what is generally a long-term strategy – even if that feels like the thing to do.”

He goes on to note that ignoring our natural instincts when it comes to investing is a mistake and that the psychology and personality of an individual is a very important factor when it comes to making financial decisions.

We couldn’t agree more and we were delighted when one of our clients who had also seen this article pointed out that our approach to investing would appear to have been ahead of the game when taking account of behavioural finance.

It has long since been an integral part of our process to ensure we not only know the basics on all our clients but that we have established their investing personality and carried out a complete client interview to ensure we know what makes them tick.

Of course we need to know all the general details of assets and liabilities but we find time and again what strikes a chord with all our clients is our genuine interest in how they feel about their financial position and wealth, what their future goals are and how they would approach their investment strategy.

We make a point of finding out about their values and goals, important relationships, interests and how they manage all aspects of their life. Along with the investment personality quiz this allows us to establish the psychology behind the individual and to ensure we get the investment strategy right.

We strongly believe our approach goes beyond the typical financial adviser’s questions about attitude to risk and market exposure and that once we complete the full interview process anyone who proceeds to work with us can be confident they have an investment strategy which fits with their personality and is tailored to their psyche.

Whatever the personality type we also strive to educate all our clients on the philosophy behind investing and adopting a good investment strategy for the longer term. We will never advocate panic buying when the markets shift dramatically up or down and we strongly believe in a maintaining a good investment discipline.

Roland already touched on this in his last blog and our Informed Investor brochure available for download from this site covers our approach to investment discipline in great detail.

The New Year is a great time for people to start to review their finances and although we are already racing through February there is no time like the present to really find out what you value when it comes to your wealth and what investment strategy would suit your personality.

We’ve been told in the past our interview process is “like a therapy session” and many clients have come away from the meeting really feeling like they have finally grasped what is important to them financially and as if a weight has been lifted.

Why not get in touch and book a “session” on the purple sofa to find out more about your personality type when it comes to investing and to start a new approach to planning a better financial future.

Dr Claire Armstrong

Here’s to 2013

January 7, 2013

It’s that time of year again.

Time for the slightly myopic review of what went right and wrong over the last 12 months and and hearty declaration of intent for the next twelve months.

Resolutions made, diets started, exercised commenced. Certain family members still ostracised for general bad Christmas behaviour.

It occurred to me that we do this every year in attempt to understand what has happened to us and how we can gain control over future events and live our lives with more certainty (and maybe stop certain things happening again in the future – waistline take note).

The constant dilemma of a species that craves certitude but exists in an uncertain and random world.

There will be many things that impact us all in the next 12 months and specifically in my field of financial planning, things I have some idea of but others I can’t begin to guess.

Given my complete belief that its impossible to try and control events, guess the future and predict events big and small with any certainty, it might seem strange to advocate as an essential the idea of planning for your financial future?

Well, blindly going along and having no idea how things might turn out is the same as Canute and the tide. The uncertainty and randomness will hit you anyway and if you have no preparations, a small wave may resemble a tsunami…

My 2013 resolution is to bring Antifragile financial planning to as many needy and deserving souls as I can.

In other words, (and please speak to me for an explanation of “Antifragile” if you haven’t read the book of the same name) a financial plan that is appropriate for your needs and goals now, can deal with future changes and volatility of many kinds and is flexible enough to deal with the stuff we didn’t expect.

A plan that allows things to happen and be absorbed with out blowing the whole thing up and to get you, your family and business to where you want to be.

I also don’t think it can necessarily be defined as doing “one thing” – cash flow modelling, a defined investment strategy and tax wrappers with cost controls are the component parts – but I think it more of a collective mind-set and planning philosophy.

In conjunction with this approach is a desire to understand our customers requirements better, provide a valued service for the long term is what we are striving to achieve.

We continue to review constantly what we do and how we do it, as we believe that accepting that changes will happen allows us to provide better financial planning and avoid the complete shock of the unexpected event.

On that note will 2013 turn out to be different to 2012?

In the way that it will still contain things we did or didn’t expect, changes we didn’t anticipate, benefits not yet defined, threats and opportunities, complete left-fielders, then probably not.

But it will be the things you can do and change in your own personal situation that will make the difference

Speak to us about putting you antifragile financial plan in place and it could be a great year.

Happy New Year

Roland Oliver – January 2013

Are you delivering what you promise?

October 26, 2012

As a nation we don’t half like talking about the weather, I think today so far at least 10 people have commented to me on how miserable and wet it is.

It’s a hot topic of conversation all up and down the country all year round, its either too hot or too cold, awffy windy or just doesn’t stop raining. I’ve heard more than once lately someone comment on the fact that “it was an awfully disappointing summer and now they’re saying it’s going to be a harsh winter!” The general consensus is the seasons are all over the place and although we have an expectation of what each should bring in terms of the elements, experiencing temperatures in excess of 25 degrees in March and bitter cold and floods in August is just not how it’s supposed to be.

For me, Autumn is the best time of the year, the season that delivers, does exactly what it says on the tin, rustic colours on the trees, a crispness in the air, blue skies and pale autumn sun with the first frosts round about now. It’s the season of mists and mellow fruitfulness and all that and I just love it, it never disappoints.

So where am I going with this? Well the idea of something delivering and doing exactly what is promised seems quite pertinent in our industry just now. With the Retail Distribution Review (RDR) deadline fast approaching every firm is in the process of reassessing its internal processes, Adviser qualifications, the client experience, the services on offer and how these are paid for.

From day one for this business it has been crucial for us to have a defined process and to offer a service that is valuable to all our clients. Over the last 18 months we have given much thought and discussion to how this process can continually be improved and how we can communicate clearly to all our clients each of the stages along the way. This applies to all contact from the initial discovery and fact finding to research and implementation right through to following up once the initial business is completed and then carrying out ongoing reviews at the agreed time period.

We take great pride in delivering what we promise and use the Expert Team and a robust back office system to keep track of where in the process all our clients are at any given time and to ensure reviews happen as and when required. We like to think we are delivering what we promised at the outset and that our clients know what to expect, they value the service available and develop a long and personal relationship with us.

Just last weekend one of our longer standing clients passed away and on the Monday morning his daughter contacted me to inform us of what had happened.

She noted that one of the first things the family discussed over that weekend was that it would be important to let us know as soon as they could as they valued our relationship and knew we would be able to assist with the next steps for the family in terms of support and also advice on what is to happen with the existing investments and pensions.

This contact meant a lot to us and to me personally, as it was a clear demonstration that we are important to these clients, we weren’t an afterthought or the last people to be contacted we were one of the first and that is a strong testament to our relationship with our clients and how they look to us for reassurance and guidance on many matters

With the coming RDR deadline all Advisers should be investing in higher qualifications, better services and more transparent charges so clients now shouldn’t be afraid to ask their Adviser exactly what advice they offer, how their process works, how well qualified they are and how they plan to charge for their services. All of these points should be easily answered if they are ready for the post RDR world and all firms should be able to deliver what they promise from the outset.

We are ready for business post RDR and will continue to offer our existing and new clients the best possible service at all times. We are committed to providing expert advice with a clear charging structure and know that our Wealth Management service can help in terms of providing guidance to all our clients that the financial steps they are taking are right for their current stage in life and will help them achieve future goals.

If you would like to hear more about our service or would appreciate a second opinion on your existing advice or arrangements we would be delighted to hear from you.

Dr Claire Armstrong

But My Clients Value Me, Right?

June 8, 2012

Amongst other stories of questionable advice heard this week, my favourite was (and I’m certain this is what was said) that investing in Ethiopian water funds would be a good basis for long term pension planning. Clearly there is still a huge gap in existence between good and bad quality IFA firms and this lead to some thought on the process by which clients “select” their financial adviser of choice.

Can they recognise whether the business they might engage with has a high quality service that they will value?

What is available within that business that helps give potential clients the information to make a reasoned judgement?

Or is it simply the winning smile of the adviser?

Recommendation and personal knowledge of the individual concerned might figure highly in the criteria used (amongst a whole range of other things before you start calling)

Whatever it is that gets you there, once a relationship is established, does the client value the individual giving the advice or the advice itself going forward?

Or even a bit of both.

I’ve heard this week that well worn phrase “my clients value me over any fancy-dan report/
service/investment strategy. I could, but don’t, give them” and in context of RDR Adviser charging this needs a little further investigation I believe.

And as one who has indeed uttered the above phrase in the past but has since had successful treatment to stop doing it, I felt qualified to comment.

Many years ago, I opened my first personal bank account with the Clydesdale Bank because the local manager had set up a help desk in the Office in which I worked.

At the time I thought it would be handy to know the local “man.”

Through time I switched to The Royal Bank of Scotland and have been with them for 25 years.

I used to value greatly the staff at the branch in Sauchiehall Street in Glasgow who knew who I was and sorted any problems I had quickly and efficiently. They also put more staff on at lunchtime.

Contrast this with a recent visit to the local Mussleburgh branch where I watched the manager look at the ever growing lunchtime queue, put her coat on and get the hell out of Dodge!

I suspect if I were to create a list of criteria to select a bank today, it would differ greatly to my original drivers.

Number and handiness of ATM’s, online service capability and reasonableness of charges might hold more sway over how nice or helpful the staff were.

So, do I value the service or the people?

In this case, clearly the service has more interest to me than the staff, but imagine how delighted I’d be if I got both.

Do I sense that the bank has more interest in increasing shareholder value? Or do they want me to value their fabulous services? The latter would, in the long term, lead to a more robust version of the former than any quick tricks.

I will never deny the right of any business to make a profit but if you lead with this as your defining criteria, the customer will suffer in poor overall service (and, as I’ve said before, it takes more than a fancy ad campaign to convince me otherwise).

So back to my point (at last, some may say).

How do you create a list of criteria for selecting your financial adviser?

Trustworthiness, honesty, experience, qualifications, recommendations, process etc etc.

You may well also value them as individuals but this need to be backed up by a defined range of services, actions and documents that helps support the warm fuzzy glow.

In the world of adviser charging, it’s not enough to assume that your clients will be happy to pay for this emotion. In fact, it never has been enough.

Detailing why existing and potential clients might need and value your service, how it is delivered and what the clients can expect from you, is a basic building block of today’s advice process and if your not already able to do this (and document it) you’re dead in the water.

Clients may indeed value you more than any fancy-dan report/service/investment strategy but it certainly wouldn’t do any harm to provide this too. And I’m pretty sure clients want the information in the correct format to back up the words.

This approach doesn’t need to make things more complicated. It can be a complex process but conveyed in the right terms.

Empathy, reassurance and practical help. It’s all us clients ever ask for.

Big and small business, take note.

Roland Oliver
June 2012

Discipline as Europe Decides

May 16, 2012

As markets fall once again on the back of indecision on the Greece problem, one might be forgiven for starting to get a little exasperated. The commonly accepted outcome of the French and Greek elections is a rejection of the austerity that has been imposed on the eurozone. One might say the same about our recent council elections.

From personal observation it would seem that whilst austerity makes sense, the way that governments are set up makes it impossible to carry out. It is quite apparent a term of 5 years is nowhere near long enough to complete the task, and that is the longest any government is going to last while attempting to carry it out. Undoubtedly one of the failures of democracy is that the intentions of long term government must be inherently fickle.

Aside from political musings, however, we must decide what to do with our money.

This exasperation that will no doubt be emerging as we head back to the recent doldrums of August 2011 could well cause many to lose faith in equities full stop. Maybe it is time to quit equities and choose some slow and steady fixed income investments until the tide turns?

On paper, market timing offers a seductive prospect: By predicting market direction ahead of time, a trader might capture only the best-performing days and avoid the worst.

The depiction below tells the other side of that story. Large gains may come in quick, unpredictable surges. A trader who misinterprets events may leave the market at the wrong time. Missing only a small fraction of days—especially the best days—can defeat a timer’s strategy.

As we can see, over a twenty-five-year period (1986-2010), missing the best twenty-five trading days would have cut FTSE All-Share Index annualised compound return from 10.18% to 4.75%.

Trying to forecast which days or weeks will yield good or bad returns is a guessing game that can prove costly for investors.

We don’t chase the markets, we are proponents of long term discipline for these very reasons. We would be more than happy to discuss what we can do for you.

Malcolm Stewart

Will Apple be the world’s largest stock?

July 28, 2011

It was interesting to see Apple shares reach an all time high of $403.91 a couple of days ago, while shares around the world were still down following fears of Greek default and record gold prices.

With a market value of over $344 billion, Apple has already overcome Microsoft the world’s largest technology firm and they are now second only to energy group ExxonMobil among US stocks. This has all happened so quickly that despite being a main player in the US stock market, Apple shares are still strangely absent from the Dow Jones Industrial Average.

Apple’s products set the benchmark for personal communication and entertainment gadgets, and the company’s fresh approach to store design has led to more success, generating impressive sales-per-square-foot numbers. As the company goes from strength to strength and the billions pile up on the balance sheet, I found a source to help recall how bleak the future for the company looked according to the “experts” not so long ago.

N.B. Apple historical share price adjusted for splits to ease comparison with $403 price.

$39: “Lately hitting a new high above 77, stock in Apple is not just high-priced—37 times this year’s estimated profit—but high-fashion. … Apple doesn’t tempt me.” Robert Barker, “Apple: It May Be Too Late to Take a Bite,” BusinessWeek, February 14, 2005.
$12: “But behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business, which still accounts for 70 percent of the company’s sales, is withering. … What’s more, despite their soaring sales, iPods are depressing profitability because of their lower profit margin.” Stephen Gandel, “Why iPod Can’t Save Apple,” Money, March 24, 2004.
$12: “I give them two years before they’re turning out the lights on a very painful and expensive mistake.” Quotation attributed to David Goldstein, Channel Marketing Corp. Cliff Edwards, “Sorry, Steve: Here’s Why Apple Stores Won’t Work,” BusinessWeek, May 21, 2001.
$11: “Our conclusion is that Apple has started down a path that will lead to its demise as a serious player in the PC market. … Further, we do not believe Apple will survive its next downturn, which will presage the company spiraling into insignificance as it loses any advantage of scale.” Excerpt from Dataquest company report. “Dataquest Sounds Death Knell for Apple,” Reuters, September 23, 1997.
$4 “Apple has attracted a growing crowd of short-sellers, professional speculators who bet against a company by selling borrowed shares they hope to replace later at a profit if the stock falls. The short-sellers, in fact, now hold the equivalent of 10 percent of Apple’s shares.” Steve Lohr and John Markoff. “The Incredible Shrinking Apple Computer” New York Times, January 26, 1997.
$6: “Apple may have few options other than to shrink the company or to eventually sell out to a deep-pocketed partner.” E.S Browning and Jim Carlton, “Apple Still Hobbled Despite Write-Down,” Wall Street Journal, March 29, 1996.

Undoubtedly, over its thirty-plus years as a public company, Apple has turned out to be a very rewarding investment. One hundred shares purchased at the initial offering price of $22 in December 1980 have multiplied to 800 shares after four stock splits with a current market value in excess of $299,000. Over the same period, $2,200 invested in the S&P 500 with dividends reinvested grew to approximately $49,000. But how many investors would have tolerated the three decade wait for these rewards? At the end of 1985, for example, Apple shares were still at $22, and by the end of 2002, they had appreciated at an annual rate of only 4.4%.

How many of us could have stuck it out, especially with industry “experts” telling us at the time that Apple’s best days were behind it?

No doubt some will conclude that the case of Apple’s share price illustrates why clever timing is essential to successful investing.

But predicting the future is difficult and forecasting success or failure in the fast-changing world of technology is harder still. A tiny number of stocks available today will produce incredible results in the years ahead. Owning a broadly diversified strategy provides exposure to the world market’s unexpected winners.

Malcolm Stewart

Later Life Planning

July 12, 2011

As a son of parents in their 80’s, I see first hand the effects of living longer from both a health and financial perspective.

I’m lucky that they are both in good health and are managing to survive on their pensions and savings but the gap between income and expenditure has eroded over the years primarily down to the inflationary costs of just living.

They don’t go holidays, run a ten year old car and rarely buy any “treats” yet they consider themselves well-off.

The outcry amongst our public sector workers is understood (if not always sympathised with) as the all important safety blanket of a Final Salary Pension is threatened.

The pressure on all workers in the UK, when they arrive at what I rather call later life than retirement, to maintain current standards of living will be immense.

I’m not going to tread the well worn pathPension as to why we are where we are but rather make a plea for a sea-change in mentality from one of dependency to one of personal responsibility and of saving for later life.

Imagine that you had 35 years of work ahead of you and that for argument’s sake, you started on a salary of £30,000 and it stayed static until later life and you stopped working.

That’s £1,050,000 of earnings over that period and assuming that it was enough to keep you, then it might be prudent to again assume that if you were to live a further 20 years post stopping work, then 20/35th of this figure would be needed to maintain your lifestyle.

£600,000.

Modest numbers, no assumptions for inflation, investment growth etc but I think it illustrates the point simply that generally we don’t plan to have enough in later life.

Working with a Wealth Manager to plan out what later life might mean for you and how to get an idea what the numbers might be will be initially daunting if not downright terrifying.

But once you have had a look at how you’d like it to be it’s the job of the Wealth Manager to help you take you there, provide the discipline of saving, use all the tax advantages at your disposal and make the whole exercise achievable.

Being specialists in later life planning means we understand the concerns of our clients who need not just pension advice but advice as how to create a tax efficient wall of money that will deal with all eventualities when they decide to stop working.

Our Personal Investment Account allows clients to see the progress they are making towards their goals on-line and we can provide efficient-frontier investment portfolios to control risk.

Having all your savings in our Personal Investment Account makes sure we can make optimum use of all your tax breaks now and importantly, when you need income in the future.

More details on how we provide later life planning are contained within the website but I’d be happy to hear from you personally if you like more information on how we can help you.

Roland Oliver

Rising Above The Noise – as to be published in Scotland on Sunday early June

June 3, 2011

Some investment professionals work hard to make their work confusing. They believe they have a vested interest in creating investor confusion. They use jargon that can intimidate and make it difficult to understand relatively simple concepts.

But investing is not that complicated. It can be broken down into two major beliefs.

• You believe in the ability to make superior share selections, or you don’t
• You believe in the ability to time the Markets, or you don’t

Let’s have a look at which investors have which belief systems and where you should be with your own beliefs.

If we break investment decision matrix down into four quadrants, then quadrant one is the Noise Quadrant. It characterised by investors who believe it is both possible to time the markets and pick better stocks.

They think that they or their favourite financial guru can consistently uncover mis-priced investments that will deliver Market-beating returns. In addition, they believe it’s possible to guess whether entire Market segments or geographical areas will go up or down.

The media need you to return to them time and time again and encourage this thinking to try and sell newspapers, magazines and TV shows.

Conventional wisdom is quadrant two and includes most of the financial services industry. Most professionals (including financial planners and stockbrokers) won’t bet the farm on predicting markets swings with any degree of accuracy and know that making incorrect predictions on stock selections can mean losing clients.

However, they do believe that there are fund managers and high tech information systems out there that will find undervalued securities for their clients and add value.

Most economists believe fundamentally that capital markets work and so in an efficient Market this methodology adds no value on average.

Quadrant three, Tactical asset allocation quadrant, is populated by investors that think the markets are efficient and stocks are priced accordingly, and they (and only they!) can see mis-pricing in entire Market sectors.

They believe the way to add value is by buying a Market they think is undervalued and wait until other investors realise their mistake and then selling when the market is considered to be fairly valued again.

If you believe that stock prices are priced fairly, we think it is inconsistent to accept that market prices would be incorrectly priced as, after all, this is an aggregate of the fairly priced individual securities!

No prudent investors are found in this quadrant.

Finally, and most crucially, is the Information Quadrant.

Most of the academic community and institutional investors reside here. They believe that dispassionate research into what works, and then following a rational course of action based on empirical evidence is the way to go.

As far as results from the first three quadrants are concerned, research indicates that on average, they return no better than the Market after fees, transaction costs and taxes.

Passive investments, those in quadrant four, because of their lower costs have higher returns on average than the other types of investment over time.

Clearly there are instances of Market timing and stock selection providing better returns than the passive approach but we believe these are not consistent enough to warrant the typically higher costs.

Investors need to make smart decisions about their money and we believe that they should move from the Noise Quadrant to the Information Quadrant as this is where you should be to maximise the probability of achieving all your financial goals.

For more information or to arrange a meeting with me personally, please follow the contact us link below.

Roland Oliver