Let's talk about......

As a marketing professional I know headlines work, as does strong language which fires up the blood. So I had a small smile when I saw the latest piece from “This is Money”, parts of the article consider some interesting aspects of advice and the new world but others are wholly incorrect and poorly researched.

In this blog I just want to consider some aspects of this article. For over 20 years I have worked in financial services, for a long period of time for insurance companies and latterly I developed a direct to consumer investment platform. In all of this I had built a picture of financial advisers which matched the view painted by many journalists. More recently I started working in a financial planning practice and what I have discovered is a very different picture.

My point is this, the picture we see if often clouded by what we read and are told. If we take away the noise what we see is often very different.

So looking at Tanya Jefferies article, I want to talk about some aspects of this over a few blogs called “let’s talk about….”

The first one is let’s talk about fees.

Let’s talk about fees

I am one of those people who believe there is a mis-buying scandal waiting to happen. Let me explain. Let’s take a very well-known direct platform – recently another platform moved to a clean structure, by this they decided to charge a quarterly fee of £20 and rebate all fund fees back to the client – what did this well-known platform do? They wrote to clients (I assume who had moved their money to this other platform) and offered them to come back to them because they didn’t charge anything.

Now, it is common knowledge within the industry and with the research I did that this platform takes up to 1% in fees from the fund houses. Now we talk about influence for financial advisers but you have to ask if you are going to be paid 1% a year in fees which funds will you promote?

The problem is this, at some point this company is going to have to come clean and this is a challenge because actually if I buy a fund from them at 1.35% p.a. do I really care if they get 1% of that fee - possible not. But as a company the average client has £40,000 invested with them, say conservatively they got on average 0.75% on the client investment (i.e. £300) how will then charge the client.

We know from surveys that clients won’t pay much over £50 a hour on advice so they are unlikely to pay much for non-advised services. So say this big company has to move to a clean structure where funds charge 0.75% what will they charge? If they charge £20 a quarter then they are going to make a massive loss compared to previous profits, if they charge a percentage then what will this be?

The point is this, the mis-buying scandal with direct platform is perception it is sold as free when in reality it is not. The end consumer doesn’t lose out although they tend to have promoted those funds which offer the biggest rebate. However, come 2014 all of this will be blown wide open.

So let’s talk about these nasty commission hungry financial advisers, some advisers have sold commission high products in the past and I will not hide from this but what I discovered when I came into this industry was that the industry had changed massively over the last ten years. In the majority cases I have seen financial planners have a clear fee structure and service proposition.

Of course, there have been platforms where the adviser could get a kick back from the fund house but this was often only between 0.35% and 0.5% and so a lot less than any direct platform. So actually like for like advisers were often being paid less than the client going to a direct platform, and often in terms of charges the client was getting a better deal by going direct.

I suspect if the journalist did some digging around she would find that advisers possible were already recommending smaller value clients go direct not because they couldn’t afford the fees but because the client could get a better deal.

Why it’s always worth paying someone who knows?

There have been a lot of negative comments around the Retail Distribution Review (RDR) and how many financial planners are being forced to leave the industry. Some may view this as good news when it appears some have been taking unrealistic levels of commission however I want to paint a picture where actually now is the time where paying someone to advise you is more prevalent than ever.

One thing that fascinates me is behavioural finance. This studies the behaviour of investors and how although we would consider ourselves rational we tend to be sucked into bubbles. This goes back through time to the Tulip bubble and more recently the US housing bubble. 

It is well recognised that many investors look at the winners and invest where they see gains without really doing the research. Often when approaching investments, investors sell their losers and hold onto the winners. I recently looked at some of the best performing funds over the last 5 years and this showed a splattering of bond funds, is that the place to invest? 

As a business we have been saying for a while that we are in the biggest bubble ever, and that bubble will burst however we just don’t know when. Let me paint a picture. For the last ten years we have been told that it has been a lost decade for equities. In fact bonds have outperformed equities if we believe this. You just need to pick up the papers for confirmation on this. 

We also know that investors who have benefited from the rise in bond funds are reluctant to rotate their investments into equities. There was also a recent survey which showed that over 70% of investors were not prepared to take any risk with their money. 

Investors also seem unaware that retirement is not a short-term experience but can be twenty plus year.

So, we are facing a very different environment but an environment where individuals are being encouraged to make their own decisions, many of these individuals will act irrationally. Before I go on I just want to take an example of a share. If you purchased Liontrust shares in April 2012 the shares were around 120p, within a period of around four months they went down to 90p. 

At this point an irrational investor will jump ship to protect their losses, since November the share price has gone from 100p to a high of 150p. 

It is worth considering this when investors pick last year’s winners, or hold onto their gains. It is about understanding the market and that is why I believe it pays to pay someone to guide you with your financial plans.

Going back to the bubble, consider this:

• Over the last ten years the FTSE All Share Index has risen by 132%, Gilts 56% and RPI 38%
• Bonds have given stellar returns and continue to deliver but gilts are hovering at around 2%, there will be a correction, we don’t know when but it will happen
• Between 1992 and 1997 inflation was 14.9%, the Halifax Liquid Gold account returned 16.4%. Between 2007 and 2012 inflation was 16.5% and the Halifax Liquid Gold account returned 0.8%
• The new Bank of England Chairman has clearly indicated his focus is on growth and not inflation, inflation is headed in one direction and that is up
• Interest rates are unlikely to rise until 2017, and banks will not be quick to pass on the rises to savers. Inflation rising, cash is dead
• The bubble is that of risk aversion, as individuals we fear losing our money and therefore we move to “risk free” assets like bonds, cash but the party is over

My point is this a good financial planner will not only understand an individual’s goals and deliver a plan but he will also be a contrarian and look to really understand the the direction of the market. This may mean he makes decision that are contrary to what the market is saying. That is why paying a financial planner for his knowledge is worth its weight in gold.

A New Year – New Year Resolutions?

We often spend New Year with friends, inevitable the conversation turns to what your New Year Resolution is. The problem with New Year Resolutions is that in many cases they are made without any thought or plan and that is why over 78% of people who set New Year Resolutions fail and often failure is within the first four weeks of setting them.

Over Christmas I was given a book by Bear Grylls which talks about his life and in particular how he climbed Mount Everest at the age of 23. At the time the cost of joining an expedition to Mount Everest was around £60,000. However, no amount of money guaranteed success. In fact climbing Mount Everest is like playing Russian roulette.

The mountain throws up all sorts of challenges and can result in death. Even reaching the summit does not guarantee that you will return alive.

This is perhaps extreme but when we consider New Year Resolutions we should consider that we have a mountain to climb with an end goal, and when we achieve that goal we need to consider what we are going to do next.

Attempting to climb Everest requires planning and preparation and although fitness plays a key part the mental preparation is an equally important aspect.

RDR has changed the landscape of financial services, at this stage we can only guess what the changes will be like but in five years’ time it will be very clear. Of course there is inevitable talk about how the internet means that more and more people will adopt a DIY approach to investing. In fact Hargreaves Lansdown predicted that over 84% of investors will go without advice.

I have argued that there is a place for advice and DIY investors but to assume that RDR means that more people will go down the DIY route is dangerous. Just because information is more readily available doesn’t mean people can make their own decisions.

Climbing Everest is not about reading lots of information on the internet, it is about raising money, it is about getting the right equipment; it is about fitness and mental agility but most of all it is about the team around you - experienced Sherpas who help guide you to the top of the mountain. But even after all of this you are not guaranteed success. I have very little evidence to support this but I suspect that very few if anyone doesn’t look to have a team around them before they attempt to climb Everest.

So when I consider a New Year’s Resolution the one thing I do each year is look at my financial plan for the past twelve months and look forward to the next twelve months. My financial plan has many threads. Firstly there is our family budget which we monitor on an almost daily basis because ultimately if we can control our outgoings then we can get to the second part. The second part is about our financial plan and goals. We have three goals, firstly to build a short term savings pot, the second an emergency pot in case of for example unemployment and finally a third pot which is our retirement savings.

When we built the plan we sat down and discussed what we wanted to achieve and set our goals. We then worked out timescales to deliver the different goals. Over the last twelve months like climbing Everest there have been things that have happened which we didn’t expect and that has meant we have had to tweak the plan to achieve our goals.

As a result of the plan we have been able to select the right investment vehicles to deliver the goals and the right investments. With the investments we have an investment diary particularly for shares; we have target prices when we will sell the investments if they achieve a high price or low price. For funds we look to understand the philosophy behind the fund and the investment style.

Effectively we aim to take emotion out of investing by not chasing last year’s winners, the latest fads and equally not panicking when everyone else is running for cover.

The point is this, this is not a New Year’s Resolution this is about having a goal, we know that to reach the summit will take time and we know that unexpected events will happen but constantly reviewing and adjusting will help us achieve that goal. The danger with promoting the ease of DIY investing is that the focus is on cost and ease and not about planning, ultimately without any plan many people will fail and be disappointed.

So if you have a financial plan and budget review it, and if you don’t then put one in place and make it part of what you do. If this is complex, or just something you don’t have time to do then seek advice it is likely to be money well spent.