Monday, 30 April 2012

What does the future hold for UK financial planning?

The recent IoD Paper entitled ‘Roadmap for Retirement Reform 2012’ painted a stark picture where as a society we have moved from a society of savers to a society of debtors. This was fuelled by the explosion of debt, starting with hire purchase and credit cards through to perceived wealth through the explosion of house prices.

For many they both saw the writing on the wall and did nothing or they assumed it would continue for ever. Some did see the problems and did not partake. The problem is that the party is over. Even a small increase in interest rates will tip many over the edge. Those now waking up to the hangover left over by the party are desperately trying to clear up the mess, paying down debt and cutting back on expenses. The problem is that in doing this we are sacrificing saving for our future. 

We also have this unrealistic expectation that we can all retire at 65 and live for the next 20 plus years paid for by thin air. Retirement at 65 was designed when life expectancy post 65 was short. To live for 20 plus years past 65 means a whole new challenge for us. We can complain and moan but the reality is that the party is over and we need to look to the future. 

I will not pretend to be an expert on RDR but clearly the intention was to bring transparency to the market and help those at the lower end of the scale. The problem is that there is so much miss information that actually RDR has the potential to be another mess. I have always felt that RDR will split into three camps: 
  1. Lower value – clients with small pots of money will be dragged to the banks. The problem is that more and more banks are actually pulling away from this. So where do these people go to get advice
  2. Mid value – the average value of clients of the largest direct operation is £40,000 each. Financial planners have indicated that anything below £100,000 cannot work for them. Clearly these people need to go somewhere and the direct market should soak them up 
  3. Higher value – these clients are likely to be already serviced by financial planners and will continue to be serviced by them 
The problem is that the public is not being education, the FSA have not finalised important aspects of the change and financial planners are struggling to determine what they are going to do. I have stories of two extreme camps – one where a financial planner is ready, they have less than 100 clients, average investments of around £1 million and a fees of between 0.75% and 1%. The business model works well. 

On the other extreme I have seen a financial planner with 4,000 clients who thinks he only has close contact with 2,000 clients. The other 2,000 clients have around £70,000 and he has almost no contact with them. Now I would say of the 2,000 he has “contact” with in reality only 200 are high value clients. So what does he do? He doesn’t want to lose 3,800 clients and all the revenue that comes with it? 

And this is the mess that we are in. A lot of platform solution providers are providing financial planners with the tools to service these clients but actually they don’t know how to do this. 

The big problem I believe and this is where the government needs to have a ten year plus roadmap is that we need to re-educate people about financial planning. The direct operations do not educate people – they are marketing machines churning out products and solutions. The clients are not in control of their savings. When the markets fall clients rush to cash and the amount of cash clients hold is scary, this is because they have no plans and don’t know when to get back into the market. 

RDR is a mess because fundamentally it is leaving a whole slice of people without any means of advice. It means that they need to plan for their future and yet they have no idea how to do it. I believe strongly if a company could turn the whole marketing machine around and introduce the whole concept of financial planning i.e. goal setting, risk etc then over the next few years they could be a force to face. 

 Going back to the financial planner with 4,000 clients personally I would segment the client base and with slick systems introduce an element of non-advised service to the 3,800 clients with low charges but with a service around education, providing tools to set goals, consider risk and then look at solutions. In time like Australia these clients may have more money and want advice and then become key clients. 

The IoD paper just scratches the surface. We have a nation where we are indebted and we are not savers, RDR is forcing people down into the arms of direct operations and these operations are doing nothing to truly educate these people. They work on the assumption that they know what they are doing, this is not the case – they have no choice. 

The roadmap is key, the government seem to have no interest in financial education and this is because they have a short term view of the future. The reality is that we have a financial illiterate nation, a nation of debtors and a nation of people with unrealistic expectations of retirement. The future of financial planning in the UK looks very bleak, but I do believe there are small signs of light and it is those small signs that we need to hold onto.

Friday, 20 April 2012

Why is financial education so important?

I have often asked myself this question. 

When I started this journey I wanted to demystify financial advice because there is so much misinformation being pumped into the media and unless we can change this, the industry is in danger of being demonised. Ultimately the idea of demystifying financial advice underlies everything I do.

However, a lesson coming from this is a basic understanding of what we face and that many people are so far adrift from saving because of a basic lack of financial education. Effectively we need to relate to people in everything we do and produce. 

Financial education has been a central theme for me and this covers getting out to educate people about money, helping with job hunting and eventually teaching the concept of financial planning.

What I have learnt is that the road is rocky and when you think you are close to something it seems to get further away. In fact you sometimes feel that no-one wants financial education - I am not sure why but Pink Floyd came to mind:

"We don't need no education
We don't need no thought control
No dark sarcasm in the classroom
Teachers leave them kids alone
Hey! Teachers! Leave them kids alone!"

What I am excited about is that today I have completed my first financial education lesson covering job hunting, cvs and budgeting / goal setting. This will be on-going but the buzz from helping just one person makes you realise why financial education is so important, if we can all help one person we can make a big difference. 

Tuesday, 17 April 2012

We can all do it ourselves – can’t we?

Over this series of blogs I have explored many issues around financial management and planning, and one area I have mentioned is around this perception that financial education is about providing information around investment “opportunities”. This made me think how upside down we are in our thinking.

The perception is that people understand what they are investing for, i.e. what their goals are and as a result of this they know how to achieve these goals.

Let me take this a step further, I have a car – I have a choice when it needs servicing I can either buy a manual that tells me how to do it or I can go to an expert. I know the expert will charge me but I am putting my faith in them to do what I need doing. Now I can save money by doing it myself I can buy the tools, the parts and fix the car. In reality I don’t know whether I have the right part and in the end I could end up having to go to an expert to sort out my mess. 


To be fair there are people who can fix their own cars and know what they are doing and why shouldn’t they do it themselves. They know when they need expert help and are prepared to take the risk that they might get it wrong. They may turn to expert help via books, blogs etc but in the main they will use their own experience and ignore all the noise.

In this blog I want to look at the art of investing, I will expand on this in future blogs but I just want to question the idea of financial education centring on investment “opportunities”. Investing is easy, anyone can do it – that is true but it needs a lot of thought and thinking. The problem is that for many they are looking for a positive return and because of information overload the idea of short term thinking is creeping in. We are also swayed by what is in the press, China is the next growth story, China is dead, China is a tech bubble. This sways how we invest.


An excellent example of this is the Fidelity China Investment Trust managed by Anthony Bolton. This was promoted heavily by a number of companies and many people invested in this fund. On the surface it looked good – Fidelity is a well-respected global fund manager, China has seen explosive returns and Anthony Bolton is an amazing fund manager. The papers promoted this and well respected platforms wrote fantastic reports on the prospects for this fund. However, consider Anthony Bolton had never managed a China Fund and this was an investment trust. The point is cut through the noise if you want to invest in China - is this the right fund to choose and is using an investment trust the right vehicle.

Going a step further and looking at your goals is China, however wonderful it may look, the right place to achieve your goals, or should you diversify your assets. I am not saying emerging markets are a bad place to invest in fact far from that personally I believe emerging markets in turns of both equities and debt offer the greatest potential for returns over the next 20 years plus. The point is you have to understand what you are doing.

Many people are disappointed with the performance of the Fidelity China Investment Trust but did those people do their research, how long are they planning to hold the investment etc. Most investments should be long term and who knows whether in five years this fund may have performed above its peer group.

The key is also diversification, if you invest all your money in China and don’t spread your investments then you will suffer disappointment because different sectors, regions, assets will perform differently at different stages of the cycle.

And then we turn to individual stocks, we may all have some shares but do we understand them. My father had shares in Barclays and they were always worth around £10,000 after 2008 they fell in value and he couldn’t understand it. In fact he didn’t understand anything about Barclays and whether they were a good or bad company. Many people think they can pick a winner when it comes to investing and some can. But this is no different to investing in a fund are you looking short or long term? Another example is Lloyds, are they a good share – possible they are at around 30p a share, they have potential to grow over the next five years, but do you understand why? Or what about Apple could they become a $1,000 a share?

Often we don’t understand this level of detail and therefore we turn to a fund or fund manager to do this for us. Turning back to the Fidelity China Fund before we invest we need to do our research, what is the process, what is the style, how does this sit with other funds in the sector, is the fund too risky for the goals I am looking to deliver and what do I know about the fund manager. We also hear cries that passive funds are better than active funds so does the fund hug the index i.e. is the fund so large that all it is doing is buying the biggest companies that make up the index and are therefore quasi-tracker funds. 

And of course building a portfolio is not just about one fund it is about mixing funds to spread the risk. What this comes down to is that investing is easy if you know what you are doing, papers and platforms make us think that simple education makes us experts but unless you know what you are doing you will get burnt. Paying an expert to diagnose what you want, identify goals to achieve this  and providing the solutions is I believe in many cases worth it when compared to the pain of getting it wrong.

Take a step away from the noise - consider the average financial planner may charge you a fee of 1% per annum. In reality if you do it yourself you will be paying 1.5% p.a. - the assumption is that with the fee of 1% the financial planner charge is 2.5% p.a.

Consider again - when you go to a financial planner you will get rebates on funds and actually the net cost may only be around 2% p.a. 

The question you have to ask is whether an additional 0.5% p.a. is worth peace of mind.