The Film Interview at Common Sense Money

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The Film Interview at Common Sense MoneyThepowerof1

A while back a friend and fellow financial planner asked me if he could interview me for his podcast show. He knew I was interested in film. Chris Daems is a thoroughly good bloke, doing some great work on his side of town. It’s a bit of a strange interview as neither of us knew where it was going, but both enjoy films. As you may have gathered, I like most art forms and seek to draw out what lessons I can from the stories and the characters that are portrayed, be it Coriolanus which I saw last night. This was streamed live by the National Theatre to a local cinema (and hundreds around the world) from the Donmar Warehouse (which was excellent, though I won’t be giving up going to actual theatre) or a film like The Reluctant Fundamentalist.

The underdog, freedom and passion

If you want to listen in to the interview, I’m put on the spot about my top three inspirational films and to be honest I hadn’t given this that much thought, but those that I mentioned for various reasons were Braveheart, Field of Dreams, The Power of One and The Reluctant Fundamentalist (though I couldn’t quite remember the title). My three least favourite – Elf, The Tree of Life and, well… rather unfairly “The Double”, which I had only recently seen. Its far from one of the worst movies I had seen, its just that I was disappointed and it was recent in the memory. Anyhow, the podcast is “out there” in cyberspace as episode 18 of Commonsense Money. Apologies to film aficionados for being rather limited, I hadn’t really thought too hard about what I would be asked…well that’s my excuse – I won’t be giving up the day job to become a film critic.

Here’s the trailer from the film that I blundered over (it had been a few months since I saw its UK premier). I can thoroughly recommend it.

Dominic Thomas: Solomons IFA

The Film Interview at Common Sense Money2023-12-01T12:38:54+00:00

What is the best way to save for retirement? Part 5

Solomons-financial-advisor-wimbledon-top-bannerThis is part 5 in the series “What is the best way to save for retirement?”

Using a business as a pensionfamilybusiness

Many of you, most of you, won’t currently be running a business. You are not excluded from this option. If you view a business as a type of bank account you wont go far wrong. The issue is generating revenue and making profit. A major advantage that business owners have is that they can put many things through a company as expenses, such as cars, pension contributions and so on. There are rules. However a business owner of a Limited company has shares in the company which pay dividends. The amount of dividends paid out can be adjusted regularly. In essence many people in this scenario pay themselves a low salary (low enough to pay little or not tax and national insurance). The rest of their income is paid as dividends, which have a lower tax rate than employed or self-employed tax rates. Yes this is daft, but blame the Governments we elect and HMRC not me. True businesses pay corporation tax, but this is currently only 20% on the first £300,000 of profits and profit is after costs such as salaries.

Unleash the entrepreneur in you

Over the years your business  can build up cash, investments, property, goods, services and so on – even goodwill has a price. As the business owner your main objective is to run a successful business that provides the income you want. However the structure of the business should not be overlooked. You might sell the business upon retirement, but tax may be relatively small in this respect due to entrepreneur’s relief, where the first £10m of gains are only charged at 10% tax. Why? Because the Government believes that entrepreneurs create jobs and wealth, risking their own capital in the process in the pursuit of a “successful business”.

On track

However, keeping to our target of £20,000pa from age 65 a business is a shell into which any of the previously mentioned options (pension, portfolio, property) can be placed. Indeed one can place a commercial property into a pension owned by a business…with the pension charging rent to the business which is then paid back as pension contributions. All entirely legal, encouraged and workable in the right circumstances.

Setting aside various taxation issues, to achieve our goal, you need to have a business that generates £20,000 of profit a year. Whilst I wouldn’t wish to suggest that this is easy, is it as difficult as some would have us believe? £20,000 profit is £1,666 profit a month. The best business model is that of royalties. You do your work (say an album or book) and then it sells and sells. The royalties keep coming month after month for that work you did all those years ago. Now imagine that you have several “products” or services that achieve this. Anything from a design on a T-shirt to selling soap or widgets. A successful business is a money printing machine. However the biggest risk or blind spot that businesses face is failing to adapt.

Adapt or die?

In a world of rapidly evolving technology, this years best selling gadget is forgotten in 5 years. Technology is everywhere, not just in IT, in processes and systems. How you do business requires considerable thought. You are now probably not printing off your holiday snaps, or using a travel agent, or actually going to a Bank.. or…or… the world is changing and every business needs to adapt, that is the real risk to any and every business, however as an investment it can be ideal, provided that you only sell (if you do) when you don’t need to.

So I hope you will excuse me for not putting any numbers on this one, but it is a vehicle limited only by your imagination. However before we unleash your creativity, I think it best to blow your mind with some facts about that all very familiar but not well understood concept of inflation, which will challenge many of the numbers and assumptions that we have considered.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 52023-12-01T12:38:53+00:00

What is the best way to save for retirement? Part 4

Solomons-financial-advisor-wimbledon-top-bannerThis is part 4 in the series “What is the best way to save for retirement?”

Property as an investment strategyRent

It is a widely held view that property is a safe form of investing. Everyone needs a home right? The property boom was created by a credit boom. Its essentially fake money backing fake property prices. We all know houses are overpriced but are caught in the cycle of needing property values to rise in order to “move up” or “along” the property ladder. So whether this is right or wrong, sustainable or not, it has been our general experience.

Its all about the yield

In essence with a property strategy you are buying houses or flats that then provide a rental income. Let’s keep with the target we had yesterday, needing £20,000 a year as income from the age of 65. We might say that rental yield (the ratio of rent-to-property value) is around 5% a year. So the simple sum is that to generate £20,000 a year you need a property or properties worth £400,000. Lets also assume that you have a 25 year mortgage ending when you are 65. Let’s assume that you spend the first 10 years building a 20% deposit (£38,210) for a buy to let property which you buy for £191,000 so that with 3% inflation it is worth £400,000 at 65 (you may be detecting an alarming theme).

Deposit and mortgage

So you save £214.71 a month growing at 5% (as you want the money out for your low risk investment into property). As before we increase this by 3% a year, so you actually save £29,941 to have your £38,210 deposit. You then borrow £152,800 at commercial rates of an average 6% over 25 years (yes rates are lower now, but ask anyone over 40 what they once were). Your average monthly mortgage repayment costs you £996.09 (which is taxable income, though you are able to offset interest costs). A total outlay of £298,827 on the mortgage (nearly double what you borrowed). However you are letting the property at the 5% yield, so you are getting £9,550 a year, rising by 3% a year so your rental income is £352,950 over 25 years – which covers the mortgage cost completely. Assuming that there are no empty periods. So all you have really paid for is the deposit… and quite a few costs.. but not as much of an outlay as a pension or ISA.

The cost of being a landlord

Setting aside the costs of annual insurance for the entire time (45 years) the evident repairs and improvements, some tax deductions and payments (income tax, stamp duty) and perhaps letting agent fees. Let’s just say that your cost is the cost of getting the deposit together (£29,941), the mortgage is cleared and you have an asset appreciating by 3% a year and generating £20,000 a year. So on paper you have paid considerably less for your £20,000 income. However you have had a mortgage liability and the costs of insuring are probably at least £500 a year as a landlord over 45 years (£46,360 over 45 years). Then there is the cost of accountancy, repairs and given it’s a 45 year period, probably some major plumbing and re-wiring over the years. Still the principle is quite clear – getting someone else to pay for the mortgage and of course you still have the asset (which is appreciating in value). You always have the advantage of being able to sell the property (assuming good market conditions). There would be capital gains tax to be paid on gains. Over a 45 year period naturally one would not expect constantly favourable property prices, but the same is true of investments. However it is certainly true that when it comes to property the most important feature is location, location, location. I have also excluded the possibility of improving the property, increasing both its value and rental income.

Applying leverage

Now, its no walk in the park being a landlord anyone that has been one will tell you that its all about the quality of the tenants, but what I hope to have demonstrated is the power of leverage. That is to say borrowing money with your money, which places you into a high value asset which then appreciates at the same rate as a lower valued asset. Financial advisers are generally not keen on this form of investing, largely because there is little in it for them (no money to manage) however a financial planner is paid for designing and reviewing your financial plan – so ought to be completely impartial about this. There are risks as there are with anything, but this is a valid way of providing for your retirement. The kicker though is that all important inflation factor which I will reveal makes something of a mockery of all my numbers (but I will explain why and how to plan with this in mind).

There are lots of factors to consider with this option, rental income is taxable and may cause you to pay considerably more income tax, you might also have serious problems with tenants and need expensive legal advice and of course if you let through an agency, typically you will see a 15% fall in your income, hopefully in exchange for continued good tenants. Each case needs assessing on its own merits.

Tomorrow – Down to Business – yours as your retirement fund.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 42023-12-01T12:38:52+00:00

What is the best way to save for retirement? Part 3

Solomons-financial-advisor-wimbledon-top-bannerThis is the third post in the series “what is the best way to save for retirement?”

So what are the alternatives to a pension?The Employer

As we have discovered, a pension, at least in the way the financial services industry use the term is a savings plan. Its has two main advantaged over other forms of savings plans. The first is that an employer or business can pay into the savings plan for you. The other a more obvious is that contributions attract tax relief. These are both massive advantages and could be described as “money for nothing”. Under the new auto enrolment rules your 4% payment to a pension is essentially doubled, with 3% from your employer an 1% from HMRC. However be aware that as with all things, today’s rules are no predictors of the future, one that I may remind you is shaped by economic realities and the politicians that attempt to pretend otherwise.

So what are the alternatives? Well they are almost infinite, but lets narrow this down to three simple ideas.

  1. Investments
  2. Property
  3. A Business

As a pension is simply a pot of money to take income from for the rest of your life (with the option of buying an annuity if you want to). Then any form of investment can do this job, including a bank account (if indeed we can call holding a cash deposit account an “investment”). Today I will only focus on the investment option.

An Investment Portfolio

Investing is fraught with possible mistakes, almost every investment promises “out-performance”. This is largely hot air. Apart from selecting suitable investments and constructing a portfolio, investing has costs and any income from an investment, for example a dividend payment is liable to tax. Gains are also subject to capital gains tax. There are “tax free” investment products such as ISAs, but for many people the amount that can be put each year into an ISA is unlikely to be enough for your retirement (though many will find it more than they can actually save).

Are investments more risky than a pension?

No, you could have identical holdings in a pension and a “regular” portfolio. The issue is understanding how the portfolio is constructed, why and what returns over the long-term are likely to be achieved. Anyone that promises guaranteed results is being less than honest with you. Everyone has a different idea about which assets or markets will perform best – that’s kind of the point of a market – where people agree a price on something when they disagree what direction that price is heading. Its true that there are other tax efficient ways to invest, using EIS, VCTs and such like, but be warned, the term venture or enterprise is used sensibly and most people are neither.

So let’s take an example and agree lots of assumptions

Suppose you need an income of £20,000 a year and inflation-linked at 3% a year (yes we are guessing). If you only expect to live 10 years from retirement at 65 and are happy with this assumption (that the money runs out, all gone, nothing left!) then the income (actual cash) you take will be nearly £230,000 over 10 years to age 75. If we assume that the portfolio grows at 5% a year during this time (which may be ambitious as you are probably keen to have certainty that the money will pay out for 10 years) then you need a fund of about £175,000 at 65. If you expect to live for 20 years and then the fund runs dry… well you would take out total income of nearly £540,000 and need a pot of £320,000 at 65 to provide this.

What would an annuity give me?

If you were to buy an inflation linked annuity at 3%pa as a 65 year old, you would probably need about £500,000 at 65. This is based on a 4% annuity rate (4% of £500,000 being £20,000pa) The advantage of the pension route is that if you live longer than 20 years (85) it continues to pay a rising income until you die. The investment pot has run out. Both have the same assumptions about inflation (which will be wrong in practice, unless you are going to credit me with mystic powers).

Pension or ISA?

So here’s the hard numbers. The pension pot needs to reach £500,000 and the ISA investment portfolio, well let’s go for £320,000 and assume we can predict death at 85. Lets suppose we start saving at 35, giving us 30 years to grow the money by the time we are 65. Let’s also assume the pension and investment portfolio hold the same stuff and perform identically, with the same charges, let’s assume that over 30 years the funds grow at 7% for the sake of simplicity. We will also assume that you increase what you save by inflation (3%) each year so that the amount you pay is proportionally the same each month. This is now virtually a GCSE maths question (if only they’d taught us the maths that was important in life right!).

So to build £320,000 in the ISA investment portfolio, you need to invest £195.64 a month rising by 3% a year, a total outlay of £113,220 over 30 years. As you may imagine to achieve £500,000 in the pension over the same time with the same returns, you need to invest £305.69 a month initially, increasing by 3% a year. A total outlay of £176,906 over 30 years. So the pension costs you £63,686 more (about 36% more). However, with the pension you had 20% tax relief, so you really paid 80% of £176,906 or £141,524, still more than the ISA, but not that much more.

  • £500,000 Pension pot actual cost for basic rate taxpayer £141,524
  • £320,000 ISA pot actual cost for basic or higher rate taxpayer £113,220

Your employer can make payments too

Now imagine that your employer was also paying into your pension pot (which they cannot do with an ISA).  Suppose that they are paying 3% of your salary – as they will be under auto enrolment, let’s assume you want £20,000 a year because you reckon that’s what you need to support your equivalent lifestyle today, so let’s just assume you earn £30,000 at the moment, so 3% is £75 a month. So if your salary rises at 3% a year in the same way, over 30 years, that’s £43,404 of employer payments in total. You can therefore reduce your own payments from £305.69 a month by £75 to £230.69 a month, which in practice is £184.55 a month net of basic rate tax relief…. Which is marginally less than the £195.64 you need to save into an ISA.

  • £500,000 Pension pot with 3% employer contribution £106,804 net of 20% tax relief
  • £320,000 ISA pot £113,220

Of course the more your employer pays the better, but I hope that I have demonstrated that tax relief and employer contributions make a big difference. Don’t forget that the annuity dies with you (unless you build in benefits for your spouse) but anything left in the ISA portfolio is merely added to your estate and subject to inheritance tax. The big gamble is predicting your life expectancy.

Tomorrow I turn to property as an investment. I hope that it evident that this is not advice, I am merely outlining an example and doing the sums. You should get specific advice to suit your circumstances.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 32023-12-01T12:38:52+00:00

F&C bought by Bank of Montreal

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F&C bought by Bank of MontrealF&C logo 

Foreign & Colonial have announced that they have agreed a deal to be acquired by the Bank of Montreal. Clients that have ethical investment requirements may have holdings in F&C funds who have a history of providing ethically screened investment funds. As with many investment companies, the printers are probably the ones most delighted by the news, having to reprint all branded stationery.

F&C Management was established in 1972. In 2001 F&C Management was acquired by financial services group Eureko, and the European presence of F&C was expanded through the in integration of fund management businesses in the Netherlands, Portugal and Ireland. In 2004 F&C Management merged with ISIS Asset Management and obtained its stock market listing as F&C Asset Management PLC. In 2009 F&C was de-merged from Friends Provident, achieving full independence for the first time. In 2010 F&C acquired the boutique asset manager Thames River Capital, bringing additional Investment and distribution capability to the group.

Oh Canada

As you may gather, the current Governor of the Bank of England is Canadian, whilst here in the UK the Canadian economy and stock market may not get that much coverage, the value of its stock market at the end of 2012 was 4% of the world stock market. Germany makes up 3% and France 3%. The UK 7%, Japan 7% and USA 46%…. and if you are interested China 2%. I shall be monitoring progress of the takeover and how this may impact investors. However the Canadians do seem rather more sensible than most when it comes to Banking and are of course one of our greatest allies.bank-of-montreal-logo

Dominic Thomas: Solomons IFA

F&C bought by Bank of Montreal2023-12-01T12:38:51+00:00

What is the best way to save for retirement? Part 2

Solomons-financial-advisor-wimbledon-top-bannerThis is the second in the series “What is the best way to save for retirement?”

The Alternatives to the Big Annuity Gamble

Thanks to some new(ish) rules, you don’t have to buy an annuity. In fact to be clear, just because your pension is set to mature at 60 or 65, does not mean that you have to take it then anyway. You can decide to take money out of your pension from the age of 55. Doing so beforehand will break the pension rules and get you into serious problems with HMRC. So don’t be tempted by firms promising “pension release” or “pension liberation” this is a load of rubbish and you are being lied to, it’s a scam to get money out of your pocket (or rather pension pot).

Delayed gratification

Ok, so you could defer taking the annuity. Why would you? Well because you reckon you don’t need the money now and annuity rates should rise the older you get (because you have left time to live). This is a truism. True in theory, but in practice over the last 20 years annuity rates have fallen from around 15% to around 5% for a variety of reasons which I won’t bore you with (you and I cannot do anything about it anyhow).

Have your cake and eat it..forrest gump

You could phase your retirement, taking a slice of the pot (much like cutting a cake). As before, 25% of the slice will be tax free, the remainder is used to buy an annuity. The balance (rest of the cake) remains invested and hopefully growing. You can take slices gradually, or just take the balance when you want, same principles applying. Why do this? Well you might be gradually stopping work and want to plan how you take your income and in particular how your income is taxed – so it can be a helpful tax planning tool.

Drawing what you want

Another option is to go into “DrawDown”. This is where you can take the tax free cash bit, and then income. The balance is left invested. Not much different from phased retirement, but meaning that you could take all of the tax free cash now. The amount of income you can take is restricted based upon, wait for it, quango speak coming “GAD rates” this is a rate set by the Government Actuarial Department, who figure out a rate for everyone. It changes, but its not far off the same as an annuity. Alternatively, if you are lucky enough to have guaranteed income of £20,000 from pension sources, then you can do whatever you like with the balance of the pot, take it all out at once, or over the rest of your life. You have to prove you have £20,000 a year mind you. Once its gone..well its gone. This is a really useful feature, but doesn’t apply to most people (who do not meet the £20,000 a year requirement).

Temporary annuities

A newer and evolving option is temporary annuities. These are really DrawDown pensions, but paying an income for a fixed period, typically 5 years. The remaining fund is invested and usually has a guaranteed level of growth (which means using derivatives) so that you can elect to buy a full annuity or do the same again at the end of the term. I have lots of reservations about anyone in the investment world guaranteeing anything, but it is an option.

Life is like a box of chocolates…

All of these options give you more choices. Invariably you have more control over how and when the income is paid to you. As a result you can do some tax planning to hopefully keep your taxable income within your control. You are also keeping your options open that should your health worsen you could then buy an enhanced annuity, or worse if you die, the balance of the fund is passed along to your spouse or possibly your estate, depending of tax charges being met and some other rather dull criteria that we don’t have time for here.

So these are all options. You aren’t being forced to buy an annuity, you can control the income. Tomorrow I will look at other options to pensions – other ways of investing to achieve the same result, income in retirement.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 22023-12-01T12:38:51+00:00

What is the best way to save for retirement?

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What is the best way to save for retirement?

As pretty much everyone is now being told to open a pension under the new auto enrolment rules, perhaps it is appropriate to cover the basics of what pensions are what some of the alternatives (or additions) that are also available. I’m going to provide a basic course on pensions, annuities and the alternatives. Bite size chunks that we can all manage.

Pension Plan BasicsBack To The Future

Let’s start with some basics. A pension is not a pension. A pension is little more than a savings plan or pot with tax relief (a Government sweetener). The income that you ultimately take is really your pension, however to confuse matters this is invariably called an annuity. Yes, if it wasn’t true, you’d think that the financial services industry simply made it up to keep you in the dark.

Cut to the chase

In the hope of not boring you to death, I’m going to start at the end. Let’s say you have now decided to retire. If you have a pension (and there are lots of types based on history) they tend to fall into one of two camps, firstly a final salary (sometimes call defined benefit) pension and secondly a “Money Purchase” pension (or in plain English an investment based pension). In this post I’m only going to refer to the latter (an investment based pension).

A pension fund is a pot of money

So you are now at retirement and have a pot of money. You have loads of choices. You can take 25% of the fund as tax free cash and put it straight into your bank account and go spending. The balance (or all of it) is normally used to buy an annuity. This is simply an income for life. The income will stop when you die unless you have a spouse and you have included an option to have the income continue to him/her after your death for the remainder of their life. Simple enough right? Well yes and no. Simple idea, tough decisions. Why? Because you have to take a gamble on what you think the rate of inflation will be for the remainder of your life – do you buy an annuity that rises each year at RPI or an agreed amount (say 3% each year) or do you have a higher initial income but that stays constant. As a guide it will take about 12 years for a rising annuity to catch up with a level one and another 12 years to have paid out more in total. So as well as having to predict inflation (which by the way economists, Bank of England, Chancellor, professional investors) all fail to get right) you also have to guesstimate how long you will live.

Are we there yet?

Oh and if you think, “not long” remember that the average age of death for a man is now about 80 and about 84 for a woman… but then consider your own family’s longevity and perhaps add a bit for improved diet, lifestyle and medical care… unless of course you are wolfing down the processed food whilst spending no time outside getting any exercise. Alternatively like about 40% of people at retirement age, you may be taking regular medication for high blood pressure etc, in which case you probably qualify for an enhanced annuity. This is a polite way of saying “you have a reduced life expectancy”.

Back to the future..

So – a pension is not a pension, an annuity is a pension. You have to take a gamble on what inflation will do and how long you will live. You may want to build in a spouses pension, if not the annuity will die with you. To make the decision a little more pressured, once you have gone down this route, there is no U-Turn, no change of mind. You have to live with it. Sadly there is no time machine to see the future. Steve Webb, the pensions minister doesn’t like this either… but there are no easy solutions, unless you have a DeLorean with a Flux Capacitor.

Next up…what are your other options to buying an annuity? I will cover that tomorrow.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement?2023-12-01T12:38:50+00:00

When is £50 worthless?

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When is £50 worthless?

£50

How closely do you observe the cash you hold in your wallet or purse? The Bank of England has announced that the £50 banknote carrying the portrait of Sir John Houblon, the first Governor of the Bank of England, will be withdrawn from circulation on 30th April. From that time, only the £50 note featuring Matthew Boulton and James Watt, which was introduced in November 2011, will hold legal tender status.

Don’t confuse your Boulton with your Houblon

If you have any Houblon £50 notes can continue to use them up to and including 30 April, but technically they will not be legal tender. After 30 April, general retailers are unlikely to accept the Houblon notes as payment. However, most banks and building societies will continue to accept them for deposit to customer accounts. Agreeing to exchange the notes after 30 April is at the discretion of individual institutions. Barclays, NatWest, RBS, Ulster Bank and the Post Office have all agreed to exchange Houblon £50 notes for members of the public – up to the value of £200 – until 30 October 2014.

The Bank of England will continue to exchange Houblon £50 notes after 30 April, as it would for any other Bank of England note which no longer has legal tender status.

Dominic Thomas: Solomons IFA

When is £50 worthless?2023-12-01T12:38:49+00:00

Moneybox and the Diamond Scam

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Moneybox and the Diamond Scam

blooddiamondThis week BBC Radio 4 Moneybox featured a story about a diamond scam. This is sadly a rather familiar tale and one that prays on financial naivety. It’s the classic boiler room scam, a cold call from what sounds like a busy dealing floor (though why the sound of lots of people on the phone should suggest something good is rather beyond me). Anyway, the latest revision of this scam is in the form of diamonds… which of course is nothing to do with the stoc kmarket, which to some “investors” has appeal as a possible form of “alternative investment”.

Don’t miss out before its too late! (er… no)

The promise is… yes you had better sit down for the obvious statement “this will provide a guaranteed return of XX%”… which is never true for the investor, no matter who says it. The only guarantee is that there is no such thing as a guarantee. Everything carries risk. However it’s back to that same old phrase – if it’s too good to be true, then it isn’t true. Yet so many people forget this, when placed under pressure… pressure from another person at the end of the phone…which you can hang up… yet our nature is to be nice, friendly, amenable and rarely do people like to say “no”…. well a lot of people (it is alleged).

The carat carrot… what’s up doc?

Back to the scam – the diamonds may not even exist, you haven’t seen them, and so there is only a verbal suggestion of their value (even if this were a written valuation, it should be treated with caution). The price of the diamonds is naturally inflated, by an estimated 1500% and the broker/trader… oh lets call a spade a spade… criminal, takes a 25% commission cut… which is the only guarantee. Now of course, it’s wrong that anyone gets taken in by these criminals, but it is particularly concerning that they target the elderly, who are more vulnerable.

New tales, old tricks

How is this different from the penny shares sold by the Wolf of Wall Street? Well, it’s not much different, the process and tactics are very similar – selling much overpriced things to over optimistic “investors” who will never recoup their investment. This isn’t investment, its basically stealing… not to mention that there are serious issues about conflict diamonds, as highlighted in the 2006 movie “Blood Diamond”.

The question behind the action

Of course building a diversified portfolio is sensible, so that your wealth is not exposed entirely to the stock market. Hence why when we create a portfolio it has a variety of different “asset classes” within it, including cash, alternatives and potentially a wide range of different sorts of investments. So I have every sympathy with someone trying to diversify their portfolio – a good adviser will do this. Oh and by the way, it was a financial adviser that raised the alarm about the scam to the victim (not the media, not “the internet” , not the bank, not the best friend and not the regulator)… I’m feeling a little sanguine as the obligatory levies that advisers pay to regulators in their various forms (FCA, FOS, FSCS) have increased a staggering 300%… and frankly that feels like a very big scam.

Dominic Thomas: Solomons IFA

Moneybox and the Diamond Scam2023-12-01T12:38:49+00:00

Moneybox and Platforms

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Moneybox and Platforms

platform 934

This week BBC Radio 4 Moneybox featured the running spat that seems to be developing in the investment platform market. Platforms are online administrative services that both advisers and clients can use to buy, sell and value investments. To say that they vary considerably in price and functionality would be an understatement. There’s an entire market for helping advisers assess what platform is best for their clients (which I pay for and use for no small sum of money). In essence there is a price war or what I might call a race to the bottom. Cheap is not always good, but then neither is expensive. Moneybox kicked the tyres on the new Hargreaves Lansdown (HL) platform, which is really aimed at DIY investors. As far as I’m aware (which means from the latest research data) they have a decent platform with a reasonable range of funds. Their new charges aren’t that competitive and whilst they provide extensive fund information (most now do) as the HL spokesman said on air, there is the belief that they provide “the best funds at the best prices”. Whilst I can understand this statement, it rather betrays the belief that selecting “the best” fund is easy to do. It isn’t. This is a convenient belief, I might suggest delusion and one that DIY investors also suffer (hence a marketing match made in cyberspace).

Here’s the big one

Ok, here’s the big issue that the financial services industry generally doesn’t want to acknowledge, but when you read the next statement, and reflect on it, you know it is true. Here it is. It is not possible to consistently outperform the market without taking additional risk to the market. You might want to re-read that. Now there are some that that do outperform, but do so over the very short-term. Given that most fund managers do not manage their fund for very long, (a cynic might suggest that they quit whilst ahead) looking at the longer term performance of winners is equally unhelpful. Suffice to say a very small percentage outperform the market over 20 years… and the proportion that do is about the same as random chance. Its also depends on when you buy into a fund and don’t forget that hundreds of awful funds are closed and if had been included, would demonstrate that an even smaller proportion outperform over the long-term. Here is a chart a friend of mine shared recently.

underperformance

Experience isn’t priceless, but it is highly valuable

As for the platform, well on one hand it is an administrative system. They are not all equally as good as each other, they all have different charging structures and functionality. A key issue for me is “does it work?” and you’d be surprised at how many fail the test. Theory is one thing, reality is another. A good financial adviser will review the platform you use, sometimes it is better to move, sometimes it isn’t. Whilst it is important (always) to challenge the way things are to improve, the assertion that there is “one way” of doing things, that “cheapest is best” or that similar products are in fact  “all the same”, is simply not accurate. Experience isn’t priceless, but it is highly valuable.

Profit or profiteering?

However, let us not ignore some obvious facts, there are vested interests. Financial advisers (myself included) are not charities, we are businesses. Platforms are businesses, Fund Managers are businesses. All need to make a profit to continue to exist, the real question is what level is reasonable and fair – which is almost impossible to answer to everyone’s satisfaction. Moneybox challenged the 71.5% profit margin that HL make.

Dominic Thomas: Solomons IFA

Moneybox and Platforms2023-12-01T12:38:48+00:00
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