Thursday, 28 November 2013

Cash is not the right savings vehicle for everyone…..

I have read some tweets and articles saying the end of Funding for Lending a year early could be good news for savers and this made me think…….why do we assume that cash is the only savings vehicle?

With cash we seem stuck in the past:

  • The FCA and savers seem to think that cash is the safest means of investing
  • We continue to think that when we retire cash is where we should hold our money
  • For something a little more risky we might look at bonds

Cash can work for short term investments; so for example where cash only needs to be held for 12 months then it makes sense, maybe for a deposit on a house. Also if people have only a small amount of savings then perhaps cash is the only option.

But other than this, personally I think cash is not the right savings for most people who use it.

  • Cash used to be a good place to invest. In 1999 the average ISA was paying 6% p.a. tax free. Taking an income of 5% would still deliver growth of 1% a year (below inflation but still comfortable). Now the average ISA return is below 1%..... this means it can no longer deliver income and growth. I recently saw a 10 year fixed rate at 4% p.a. – if you are holding for ten years then surely equities are also worthy of consideration?
  • Life expectancy has changed and so have our retirement patterns. 65 was set as a retirement age where we were expected to live less than five years in retirement. It made sense to move all money into cash because the period you need it for was so short. Now life expectancy is nearing 20 years in retirement, would you really hold money in cash for 20 years? Consider at 45 investing in cash to 65, just considering this would be crazy
  • Past performance - bonds have enjoyed a 30 year bull run; we look at cash and we think bonds have to be the place to be. No! The bull run is coming to an end, we don’t know when but many people accept that over the next five years bonds are likely to return flat or negative returns

So back to my point; perhaps savers need a lift but it won’t happen until interest rates rise, and when they do savers will be the last to benefit. In reality, rates might not start going up for at least 2 years possibly three which means savers in cash could see another decade of below inflation returns which means no real income and no returns.

We need to educate people that cash is not the only savings vehicle. In a changing environment we need to change our thinking…….

Tuesday, 19 November 2013

Where’s the value….

In recent days we have been given an indication of what Hargreaves will charge. They have clearly indicated that the cost of both the bundled and unbundled structure will be the same. Even before this announcement I have often questioned where is the value in a structure like Hargreaves or any other direct platform.

This question perhaps is not as stupid as it sounds. Say, Hargreaves are taking 0.6% p.a. as a fee for their proposition what do we get for that. I am a Hargreaves customer and have been for some time. For this fee I get a trading platform for my pension and really for me that is all I value. I don’t value their website because I can get that information from independent sites, and from my own research, nor do I value the mailings I receive. So for me the fee seems a little steep.

For my ISA I use because they charge both me and my wife £80 a year which goes towards the cost of the trading charges. This is a no frills site and gives me everything Hargreaves give me but without all the mailings.

If we take our proposition as financial planners, we know that our investment portfolios including the investment funds, the platform charge and our fee come in around 1.70%. For an equivalent portfolio on Hargreaves this would cost me around 1.35%. So the extra cost of an advised proposition is 0.35% p.a. The pension is a little higher.

The argument has always been that you save money by going direct but I want to question where is the value? In reality if you go direct you are in control of your financial plans and your investment decisions, what you receive might guide you but ultimately that decision rests with you. Some individuals will feel that saving 0.35% p.a. is worth that.

However, I would actually argue that if I was going direct and confident to go direct then actually the saving should be a lot greater because in reality all they are, are a platform to enable you to facilitate your financial plan.

It made me think about what you get for the additional 0.35% p.a. from a financial planner. A good financial planner will deliver:

  • A financial plan which will take you through all your life steps both pre and post retirement i.e. it is a lifetime plan
  •  They will look to give you the most tax-efficient means of saving for retirement, and by doing this will enable you to save tax in retirement
  • They will look after your investments giving you peace of mind whatever the market is doing

There are so many statistics from both sides of the fence but it is true that it is very hard to be detached from your investments if you are managing them, and for all the stories of success there are disappointed investors looking for someone to blame.

If Hargreaves stick to what they have said then the question we have to ask is whether a saving of 0.35% p.a. is really worth it, and whether the additional cost against the additional benefits is worth paying for. If we think it is then we should seek advice. If we don’t then I would then question whether we value what they give as a direct provider and whether there are cheaper offerings delivering the same service.

In summary with such a fixation on cost, you need to ask where is the value? Only when you can answer that can you decide which is the best route for you.

Tuesday, 12 November 2013

Would you buy a car not knowing what you are paying for….

When I started this blog and twitter feed I wanted to provide some education and also highlight areas of interest. One area that remains a concern is the apparent disparity between how advisers are priced and how direct platforms are priced. 

We have been eagerly awaiting Hargreaves pricing and this has been put back, again and again. This is interesting because how they communicate this is really important. 

At the moment if I buy a fund from Hargreaves I might pay 1.35% p.a. The way the marketing goes is that effectively investing via them is free and actually if the fund price was 1.5% p.a. then I am getting a discount of 0.15% p.a. 

The reality is that Hargreaves receives a rebate up to in some cases 1% on funds, part of this they share and part they keep. And why shouldn’t they, effectively you don’t build a business out of nothing (as can be seen by the bubble). 

The challenge they face post RDR is that charges have to be transparent and also they cannot bulk convert clients to a clean share class where they are worse off. Equally I am not sure of the rules on this but I assume if the clients are better off under the clean share class they should be offered the ability to switch.

So this then starts to create a problem. Hargreaves have announced they will not bulk switch clients to clean share classes because clients need to make that decision themselves. The press article gave an insight to their future pricing model because they state the position will be the same whether the client is in clean or bundled share class.

This now tells roughly where the pricing will come in – take the example. If the clean share class is 0.75%, then the Hargreaves fee will be around 0.6% p.a. 

The challenge for them is that now people are going to be able to see what they are actually paying and the question is like with financial planners whether they see value in that charge. If it comes in around 0.6% p.a. when there are operations like who charge £20 per quarter, which is better for the client? Remember Hargreaves have been vocal on the impact of charges. If you take the Hargreaves average fund value of £40,000 this is equivalent to 0.2% p.a. on the iii model but obviously goes down as the fund value goes up. 

Effectively people have been buying a Hargreaves product without knowing what they are paying for, if the statement is correct then the charge is high compared to other models. This is a challenge, they are good at what they do but so are others who offer the same at less. Don’t write off Hargreaves but equally don’t ignore this statement because lots of people have.

Friday, 8 November 2013

Timing the market

This is my second blog looking at investment performance and how this is seen as a given by clients.

I can quote every statistic under the sun about market timing and how hard it is to do. I want to give two examples.

I have indicated in previous blogs that I have purchased Lloyd's shares. I have noticed a pattern to the share price. It hits say 60p and then drops down for around a month to say 55p and then fluctuates before going back into the sixty territory before moving upwards. It has done this all the way through its rise from around 20p.

If I was good I would sell at what I see as the high and then buy back in at the low. If I had done this I would have made a fortune......until of course the time came when the share pattern changed.

We build portfolios for clients and we re-balance once a year on 1 July. I can tell you what the portfolios do every month. I know the best months tend to be in the first and last quarters. The middle two quarters tend to be flat. I am sure I could analyse a specific point when it would be the best time to invest, but that is only right until the pattern changes.

My point in all of this is, there are some people who claim they can perfectly time the market and choose the right investments. In reality these people are few and far between.

In my last blog I indicated that the markets were reaching fair value. Most people wait for the markets to recover before investing, this is not a bad thing but they tend to be disappointed because they expect the same returns as were being delivered during the recovery phase and that just won't happen. I can't say for certainty that our portfolios won't deliver 10% plus next year but I am sure at some point they will return to a more normalised return.

Timing the market is a fools game, all statistics demonstrate that the longer clients remain out of the market the more money they will lose.

In summary investment performance is a given, this means understanding the market is an essential part of the package and good communication should enable clients to rest easy during market wobbles because ultimately they buy into the long term picture. Trying to work out when to jump in is a fools game, and unless we are geniuses one to avoid.

How do we judge investment performance?

I recently read a report which indicated that clients of financial planners do not value investment performance, but they expect good performance as a given.

This made me think, if good investment performance is seen as a given and is not valued then how do clients judge the performance?

I keep it as no secret that I believe that financial planners should manage the investment side of a clients assets because only then can they really help and steer them along the path towards their goals. And this is important when looking at this blog.

I know very little about cars other than I want to get in my car and press the start button and then it will go.....if all cars were the same cost what would make me buy a Ford or a BMW. If we take it further and say the spec was the same what would make me choose.

For me it would be fuel efficiency, with our last car we got around 30 miles to the gallon around town, with the new car we get around 40 miles. So I can see the benefit.

If we only used the car on the motorway I believe we would get around 60 miles to the gallon, so if we switched from motorway to town and that dropped to 40 surely we would be disappointed.

If you are still with me then this is what investing is like. All financial planners are essentially the same, there are little things around the edge which make them stand apart from others and perhaps the charging is different but essentially for what clients value they are all the same.

So if the investment performance is a given then communicating this and knowing what is happening is an essential ingredient because it is this that gives the client peace of mind.

In our adventurous portfolio in 2010 it was up around 20%, 2011 it was down around 11%, in 2012 it was up around 14% and this year all things being equal it should do around the same. The figures look good but do we think this will continue. The long and short answer is no, we believe the markets are moving to fair value and if we can achieve somewhere between 5 to 7% p.a. after charges over the next 5 to 10 years we believe our clients will be happy.

The next question is, is this good, we build a benchmark and and aim to beat that benchmark over a 5 to 10 year period. In reality the benchmark is very hard to beat but it gives our clients a target that we are looking to achieve. And yes over most periods we do beat the benchmark, but not always.

So my point is this, if clients view performance as a given then we must know what outcome we are looking to achieve, we must also know what to say when the market is looking good (because that is when everyone wants to invest) and when it is bad. If we don't control this then it is very hard to communicate effectively on what is a given.