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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

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

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.

taxable distribution entry form — *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.

liquid assets depletion — *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.

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

EU Gender Directive

May 11, 2012

On 1 March 2011, the Court of Justice of the European Union (ECJ) published its ruling on the legality of Article 5(2) of the Gender Directive 2004. The ECJ has reached a decision that, with effect from 21 December 2012, the use of gender as a factor must not result in differences to individuals’ premiums and benefits for insurance and related financial services contracts.

Simply put the changes taking effect at the end of this year means that women are likely to have to pay more when taking out new life cover and critical illness cover. It could cost around 15%* more for your life cover if you wait to buy it after 21 December 2012 so why would you want to pay more when you can act now?

If you are even thinking twice about why you might need cover here’s a few questions to ask yourself:

• What financial support do you have in place if you had to stop working due to critical illness? What if you were unable to return to work?

• How would you cope if a partner or someone you depend on financially were to die suddenly or get a critical illness? How would they cope financially if anything happened to you?

• Could your family continue in the lifestyle they’re accustomed to without you and your income?

If you’re a stay at home mum, don’t underestimate your value either, recent statistics from Bright Grey show that the cost of paying someone to carry out the many tasks us mums do could be more than £30,000 per annum.

Consider then how your family would copy financially if you were to die or become too ill to keep things running, how much would be required for childcare if your partner had to manage on their own?

Having the right protection in place can provide peace of mind when it’s needed most and if we girls are going to have to pay more in future then there is no better time like the present to get the cover in place.

Here’s an example of the potential impact of a rise in premiums to come:

Female aged 39 – £90,000 of Decreasing Life and Critical Illness Cover over a period of 21 years **

No one likes having to pay for insurance so why pay more than necessary – act now and get in touch to find out how we can help you get the right cover at the right price.

Even if you already have cover now is the time to review it and ensure if you need to increase your sum assured or add more to your plan you can do it without paying more than required.

More next week on the changing face of life and critical illness cover and some new options we are now looking at.

Dr Claire Armstrong

*HM Treasury Consultation Document, December 2011

**Premiums are correct as of 29/03/12, supplied by Legal & General and are for illustrative purposes only. 15% increase has been assumed based on current pricing in relation to the changes to the EU Gender Directive with effect from 21/12/12. Your actual premium will depend on your individual circumstance and could be higher or lower than 15%

Wealth Modelling – Income Protection

March 20, 2012

What would happen to you and your family if you became ill and were unable to work for some time?

We are able to tell you how this scenario might play out with our wealth modelling capabilities.

In the example below I will demonstrate how the Example family’s cash flow and liquid assets are affected. This particular Mr Example is the sole breadwinner for a family with three children. There are a multitude of different scenarios but this one allows me to illustrate the simulation effectively.

The details:

Mr and Mrs are 41 with three kids at primary age. Mr has a salary of £80,000, they have cash savings of £40,000, investments of £50,000, he has a pension fund of £50,000. They have a house worth £400,000 with a mortgage of £300,000. Annual expenses are £53,000 including extensive mortgage repayment. Various events such as university fees and expected wedding payments are scheduled into the plan.

The scenario:

Four years down the line Mr falls meaning he cannot work for two years.

From the cash flow chart we can see the savings and investments are called into action and dry up before the second year is out.

From the liquid assets chart we can see again the savings and investments drying up (orange) leaving the pension (brown) left and this cannot be touched. Note also the implication on retirement: liquid assets are £300,000 less than they are in the top chart at retirement age, and the ultimate effect at mortality is considerable.

Income protection cover typically pays up to 75% of your income in situations like this. Please consider your own situation and how your planning might be affected in the event you couldn’t work for a period of time.

This is one of the many scenarios we consider when producing a client’s wealth management plan. If you feel your planning would be seriously affected by an unexpected illness, then please contact us.

Malcolm Stewart

ISA Allowance – Use it or lose it!

March 2, 2012

With the end of the tax year less than 5 weeks away it’s no surprise there will be an avalanche of ISA applications arriving with Banks and Providers throughout March.

Despite the best of intentions much of the money invested into ISA’s doesn’t happen through the year with good advance planning it tends to go in tax year end.

Whether you complete your allowance early in the year or right up to the wire the key thing is that you make use of the allowance and more importantly that families make use of the full amount they have at their disposal to shelter as much savings and investments as possible from tax.

Are you aware the average family could shelter just over £58,000* from tax immediately if making full use of the back to back ISA allowance for this and the next tax year?

If you’ve already built up some cash in the form of an emergency fund then the next logical step is to invest in your ISA allowance. You should shop around, make sure you look at the best rates, understand the small print and do your homework before choosing what will work best for you.

ISA season is a great time to take stock of your finances and see how you are placed to make tax efficient savings, it’s also a good time to review your money in general and speak to someone about how you want to plan for the future.

There is no time like the present for starting good savings and investment discipline and wouldn’t it be great this time next year when everyone is rushing to do their ISA or wishing they’d looked at it earlier if you could relax and rest assured its already been taken care off as part of your financial planning in the year.

If you’ve always thought investing in an ISA makes sense but never get round to it then make 2012 the year you use that allowance not lose it.

It’s not too late to put something in place and we would be delighted to hear from you if you want to make the most of a great opportunity before the 6^th April 2012.

Dr Claire Armstrong

Client Relationship Manager

Join Me – Embracing New Technology

March 1, 2012

The financial planning industry in the past must have decimated several forests a day. Reams of paperwork piled up on desks, filing cabinets, and for some, or so I have heard, the floor.

These days are long gone (for most) and at Oliver Asset Management we embrace the opportunities new technology provides to keep our process fresh, efficient and effective.

One particular innovation we have been using lately is a simple and helpful website called join.me. Using this we are able to display our screen on the computer of the client, wherever they may be. In combination with a phone call or Skype, this allows us to talk them through their plan as though they were sitting in our office.

This means that there is no need for any extra travel arrangements, or waiting until they are next in Edinburgh, for clients further afield.

The second innovation that is very quickly gaining ground in every dimension is the cloud, allowing us to not only back up certain important documents but also to share and edit documents collaboratively with clients on one of the best services cloud computing has to offer: Dropbox. Although the ability to send attachments via e-mail is relatively new in the grand scheme of things, this is already comparatively cumbersome and inefficient compared to this secure and straightforward service.

Unfortunately one area where excessive paper use cannot be avoided is signatures, which must be presented physically no matter the requirement.

Maybe Echosign will eventually be the answer to this? If the online signature service ever became fully trusted and compliant it would certainly bring efficiency in this industry to an unprecedented dimension. With the increase in tablet usage it is not out of the question.

While some in the industry may be resistant to change this is not part of our culture. This can also be seen by our readiness for the Retail Distribution Review. We will always be happy to embrace the best of the new, and you can trust in our service to be as efficient as it can be.

Malcolm Stewart

Resistance is Futile!

February 24, 2012

Those in the industry would have to have been living under a rock to be unaware of the coming Retail Distribution Review (RDR) and its impact on all firms in the industry post December 2012.

This period of transition throws up three main areas for consideration which are qualifications, service propositions and charging structures. It also involves considerable planning around the systems, processes and controls we need to have in place to implement and support these considerations.

I could blog on each in its own right (and may well do so) but for now I’d like to focus on the qualifications aspect, how this affects everyone in the business and feeds into the quality of service we can offer now and going forward into the brave new post RDR world.

I’ve been in the industry now going on for 10 years and it’s fair to say the last time I sat an exam wasn’t exactly yesterday. I thought my studying days were a dim and distant memory so it has been unnerving and also quite refreshing to find myself delving back into the study books and revisiting old and new topics.

As my husband said at the beginning of this cycle of studying “resistance is futile, just get on with it” and you know he was right. There was nothing for it but to just get in with it and now I find myself enjoying the work, yes, I actually said enjoying!

It has taken a few months but I am now of the mindset that these exam are not a necessary evil but in fact are a means to refresh my knowledge, a way to better myself and ultimately will equip me with the experience required to do my job to the best of my ability. The knock on effect of this will of course benefit not only the team I work with but every client I help look after.

I’m not alone in pursuit of improved knowledge, my colleague Malcolm is working on the same qualification and Roland is working towards Chartered financial status.

It strikes me that in this current climate that clients are looking to firms who are knowledgeable, capable and professional and that means we have a responsibility to understand the rules and regulations within our industry and the legislation around the services and products we offer.

We pride ourselves in being proactive and not reactive and we can only do this with a sense of confidence if our knowledge is up to date. We need to be constantly striving to better ourselves so we can say at any given time that the service and advice we offer to our clients is the best it can be.

The first issue for 2012 of The Personal Finance Society magazine is headed up with the CEO (Fay Goddard’s) letter to members which is titled “Helping you be the best you can” and I think this should be the mantra going forward into 2012.

I believe anyone involved in the industry at present should view the need for extra qualifications as a way to help them be the best they can be which will ultimately benefit the firm and the client.

If you’re currently reviewing the service you receive from your Adviser and looking at whether the proposition provides value for money you might also want to consider how well that firm is embracing the need to refresh and improve on their qualifications.

Is everyone involved in managing your finances striving to be the best they can be?

Dr Claire Armstrong

Client Relationship Manager

24^th February 2012

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