Risk and Selection

If you are a client, you will used our risk profiling software, which is provided by FinaMetrica. We have been using this system for a good number of years now and I still believe that it is the most comprehensive risk assessment tool that is available. You may be interested to learn that FinaMetrica recently won a fairly high profile new award the Family Wealth Report Awards 2014.

Selecting the best

The quality of the Australian FinaMetrica kit is nothing to do with me, its selection of course is… its not just funds and investment strategies that we sift through here at Solomons, which reminds me of that John West advert “It’s the fish that John West rejects that makes John West the best”…. which I didn’t really pay much heed to in the past, but now am increasingly aware of the importance of an excellent selection process. Anyhow, public congratulations to FinaMetrica – well done Paul, Geoff and the team… its amusing to see you wearing ties on the corporate website – I had no idea that you had any.

World leader

FinaMetrica’s risk profiling solution has attracted widespread international acclaim and usage. The solution, which is a web-based risk tolerance test, operates in 23 countries and is offered in seven languages. The test is easy to complete and takes respondents just 15 minutes to complete. A risk tolerance report is then produced immediately, with a score of between 1 and 100 assigned to respondents. FinaMetrica’s test is objective and backed up by statistical analysis that it is valid, reliable and accurate.

Dominic Thomas

Risk and SelectionDominic2023-12-01T12:39:07+00:00

When will the penny drop?

I regularly meet people that have bought a variety of financial products from their Bank or Building Society. For some reason, some seem to think that a Bank is particularly trustworthy and I never really understand why this is the case. I wonder if it has something to do with the appearance that other types of savings account are just “better rates” than a current account and its all free of charge. Whether it is appreciated or not; an account with a Bank is a product, which generates revenue for the seller.

Santander fined £12.4m for bad investment advice

The news that Santander has been fined £12.4m by the regulator doesn’t surprise many financial advisers. I have had to explain what it is that people have, invariably not what they thought. What annoys me is that this continues to go on and however much training Banks supposedly do, the problems persist. It takes the regulator considerable time to build a body of evidence to have a clear case and the fines to Banks are inconsequential.

Would Jensen, Rory and Jessica approve?… I doubt it

The advantage that Banks have is their huge marketing and PR budgets, let alone high street presence. Paying very likeable celebrities or stars to appear in adverts tends to create a warm, trusting feeling towards the brand itself. The reality is that of course there is little or no real connection between the star and the business and any feelings are frankly misplaced based upon the overwhelming evidence.

Get commercially real, Banking 1-2-3

The biggest delusion is the notion of free banking. Nothing is free; it’s paid for by someone. If all Banks charged for providing proper administration of day to day cash management, and this more honest, transparent approach was continued into other elements of their business, I would be very happy. Banking is a business, an important one, as we all need it. I am not knocking the core business of banking, but why they are allowed to offer financial advice on anything other than lending and deposit taking is beyond me. This is its core business, not arranging investments that are dressed up to look like deposit accounts. If Government and Regulators are serious about addressing the savings gap, it should not use Banks and frankly should ban any advertising that contains anyone vaguely famous. The wrong financial products can do a lot of harm, we warn people about smoking or drinking, but the penny really hasn’t dropped about the risks of Bank products.

Dominic Thomas: Solomons IFA

When will the penny drop?Dominic2023-12-01T12:39:06+00:00

Adapt or die – warnings of an online world

Today Graham pulls no punches as he outlines the need for businesses to have a proper strategy for utilising new technology fully or face the plight of those that didn’t adapt quickly enough, such as Kodak or Polaroid.

Most businesses could collapse in the next decade

Let’s face facts: the digital world is fundamental to all businesses. Even if you sell offline or operate mainly in the “real world”, the digital world has an impact on your business. Whether it is for communications, such as email, or as a starting point for buyers researching your business, the Internet is central to customers.

The problem is that most businesses themselves use the Internet as a “nice-to-have” and not as central to their business. When I speak to Chief Executives and point out this difference they nod their heads in agreement. But then they say it is “impossible” to change their business to focus on the Internet because it would involve too much change.

Now, though, they are in for a shock. The highly respected consultancy firm Forrester has said that unless businesses make this change they will “face an extinction event” within the next decade.

They are saying this because their latest research shows that only 21% of companies have a clear vision for the future use of digital within their business. That’s in spite of 90% of firms agreeing that digital will revolutionise their sector within the next 12 months….! And they are not the only consultants sounding the warning bell – just three months ago Capgemini published their own research suggesting that businesses simply have to make the Internet central to their company, regardless of their sector or industry.

According to Forrester, businesses are now just “bolting on” the Internet to their existing business structures. But what is required, they say, is a complete “re-set” – a fundamental shift in the way businesses are structured and run. Business leaders I meet are totally unprepared to do this because of the seismic shift required. Yet the warning from Forrester is stark: do it or die.

When you look at successful businesses online they are mostly businesses which focus their firm on the Internet – Google, Facebook, Amazon for instance. But it is not just technology-based companies like these online startups which have embraced digital as central to their business. Back in 2012 Starbucks transformed itself into a digital centric company.

Business leaders, used to a non-digital world, find it hard to make the transformation necessary. So, what is the solution? The first step must surely be to conduct an immediate review of the kinds of people setting strategy and plans for your company. The data from Forrester and Capgemini both point to the need to use the services of those “digital natives” in central roles in your company. The future of your business could well depend upon giving the strategic reins to your grandchildren.

Graham Jones

Adapt or die – warnings of an online worldDominic2023-12-01T12:39:06+00:00

How does 2014 Budget make ISAs NISA?

You will probably have gathered that the Budget 2014 announced improvements to ISAs. This is good news for investors who have been making use of their annual ISA allowance each tax year. As a reminder, if you haven’t yet used your 2013/14 allowance, you have until 5^th April to place £11,520 into tax free savings… you had better hurry.

ISAs got NISA

So what has changed? Well from July the new ISA (NISA) allowance rises to £15,000 and the restrictions for cash and investment ISAs ends. Today you can convert a Cash ISA into an investment ISA, but not the other way around. This will help clients who are low risk in nature, but also anyone else seeking to hold cash for the short-term, perhaps when planning a significant withdrawal.

Over £443 billion in ISAs

If you followed my recent blog about the ISA millionaire, one has got to now wonder how long ISAs will have before they are attacked. There are now an estimated 3.8million people with at least £30,000 in ISA with around £443bn held in all forms of ISAs by around 15m people (almost 1 in 4).

Tax free income

Let’s take a theoretical example. Ivor is 65 and has around £400,000 in his ISA portfolio. He expects to live to 85 and has a State pension and employers pension providing him with an income of £20,000 a year. He would like to spend £45,000 a year and so draw £25,000 from his ISA each year. So his income is £45,000 a year. I won’t get into the detail of the tax calculations, but this would normally trigger higher rate tax; however only about £10,000 is taxable at 20% due to his personal allowance and ISAs providing tax free income. He pays £2,000 tax on £45,000 an effective rate of tax of 4.4%. Now call me a pessimist, but I cannot imagine that many UK Governments are really keen for pensioners with incomes of £45,000 to pay less the same in tax as someone earning £20,000.

Will you outlive your money?

Just for your information, if the £400,000 ISA grows at 6% a year and he takes income of £25,000 a year and increases this by 3% each year (to keep pace with inflation) he will run out of money in the 23rd year… at which point, he would be 88 (8 years above the average male life expectancy).

Dominic Thomas: Solomons IFA

How does 2014 Budget make ISAs NISA?Dominic2023-12-01T12:39:05+00:00

What Doctors can teach investors

Today’s guest blog is from Andrew Webb, who is a writer, marketing and communications expert. He currently works for Dimensional and used to work for Fidelity. Here he highlights why at Solomons we use evidence based investing, not the latest fad. You may know that I advise quite a lot of medical consultants and I imagine you will find his topic title amusing.

What Doctors can teach investors

Newspaper reporters who interview centenarians on their landmark birthday cannot seem to avoid the temptation to ask how they have lived so long. Because most people haven’t the faintest idea how they have reached 100, they tend to attribute their good health to something like a weekly tea dance.

Medical professionals will say that the most likely reason for a long life is a combination of favourable genetic and environmental factors, access to reliable medical care and a healthy dose of good luck. It follows, therefore, that anyone serious about improving their chances of a long life is better off seeking the credible advice of a doctor, not taking speculative tips from a pensioner.

But these facts rarely get in the way of a good story.

The treatments doctors use to keep us healthy are tested by a process of empirical research and clinical trials. Considering health and wealth are both high on the list of priorities for many people, it is a shame that the investment industry is typically less rigorous than the healthcare industry.

Most people turn to the investment industry to help them research their investments. This is the same as asking a pensioner how they have lived so long. The industry’s self-analysis can range from outlandish to plausible, but it will almost never be based on scientific study.

We take a different approach; one that is based on scientific rigour and hard evidence. This approach identifies the sources of investment return and we aim to deliver them to you. This gives us confidence that we understand why your investments behave the way they do and why we are more able to design investment portfolios that suit your needs.

Andrew Webb

What Doctors can teach investorsDominic2023-12-01T12:39:04+00:00

Business owners heed lessons from online retail

Graham Jones is a man that knows a thing or two about the web and our relationship with it. He is an internet psychologist with a lot of useful insights, in particular for those that own or run a business in the UK. Here is his latest piece to get business owners thinking – which includes me. So let me know how I can help you too.

Business owners heed lessons from online retail

Where do you go to buy things these days? The chances are you use a variety of sources – local shops, out-of-town retail parks, town-based shopping centres and, of course, the Internet. However, increasing amounts of evidence show that the starting point for our purchases is the web, with Google being our “number one” place to go to start our shopping journey.

The latest piece of research comes from the incentives company, Parago. They found that the majority of shoppers begin their decisions about what to buy on the web. It means that if you are not using your website as central to selling, you are missing out – big time. Only for groceries, building supplies and pet supplies do people choose a retail store as the first port of call – though second on the list is either Google or Amazon for those shoppers.

But look deeper into the figures. They show that your products and services need to be found on Google – but that you also need to be on Amazon and have your own retail website too, if you are to pick up the most shoppers. Indeed, even for subscription services, people prefer to look for you on Amazon than in social media.

The study also found that the time taken to buy something is now down to 2.25 days. That suggests that if you don’t follow-up website visitors immediately, then you are losing out on sales because the decision to buy will have already been made if you wait more than a day or two to contact people.

In other words, to sell these days you have to be fast and you must have the web as central to your sales process.

Graham Jones

Business owners heed lessons from online retailDominic2023-12-01T12:39:04+00:00

Pension, annuities, the Budget and life’s big gamble

I’m well aware that we in financial services often seem to live and breathe pensions, savings, investments and tax… and for most people this is a necessity not an interest. This week my peers and I have been quite taken aback by the changes to pensions, annuities and ISAs. Assuming the proposals are approved, this means significant improvements for clients, but not without risks.

So What?… meet Mr & Mrs Cash from Wimbledon

Let’s suppose a healthy, non-smoking married couple Mr & Mrs Cash are both 65 years old, and live in the leafy suburbs of south west London in Wimbledon (SW19). They want an income of £30,000 a year and would like this to rise by 3% a year to keep pace with inflation. They want this income, even if one of them dies, continuing at the same rate until finally both have left this mortal realm.

Annuities are so poor at present that £100,000 buys only £3,359.04 a year, so as the Cash’s need £30,000 a year initially, they would need a pension pot of £892,857 to provide this, excluding any requirement for tax free cash. Now that you have picked yourself up off of the floor…a joint life 100% spouse’s annuity with a rising income today has a best annuity rate of 3.36% (and by today, I mean I got this quote online today).

Life’s Gamble…

So now the “interesting” part, which is where the educated guesswork begins and the gamble with life really gets exposed. Remember that the annuity I have shown will last for the lifetime of the couple, income will be £30,000 a year and keep pace with inflation (provided inflation is 3% or less). Once the couple die the annuity stops, there is nothing left.

The alternative for this couple, with a fund of £892,857 wanting £30,000 a year increasing by 3% a year is to convert their pension into a flexible Drawdown pension, keeping the money invested. Let’s suppose the investment grows at 6% a year on average (3% above inflation). It NEVER runs out. In fact by the time they are 100 the fund is worth £1.9m having had a total income of £1.8m out over 35 years (by the way their income in that year… 35 years from now is £81,957… which in real terms is £30,000 today. Yes the investment will fluctuate in value, but we are, in this instance only wanting a modest income from it each year.

Its all in the gene’s..

Ok, so back to life’s big gamble…. How long will Mr & Mrs Cash live? The average UK female aged 65 will live another 20.62 years which is longer than the average male who has 18 more years according to the ONS figures. Let’s assume this is a couple that due to diet, lifestyle and good genetics live longer – to 90 (that’s 25 years). To do this they would need £512,153 in a portfolio, which grows at 6% a year. This would then run out at 90. Nothing left, nada, gone, zilch.

My point being that a much smaller pension pot is required (with these assumptions) its about 58% of the fund you would need to do the “same thing” when buying an annuity. I say “same thing” as of course if the couple live beyond 90 the annuity continues to pay out, the pension has all gone.

Not living long enough

Equally if both of them die “prematurely” at say 78, then the annuity finishes, there is nothing left. If the money is in the pension, there is a balance which can be passed to beneficiaries. Today this would suffer a 55% tax charge, but if I’ve understood the proposals, this will reduce to income tax rate levels. This is still to be clarified, but either way there would be money left in the pension (£1.2m by my maths). Let me say that again… there is £1.2m (one point two million) left rather than nothing.

The advantage an annuity provides is that it is guaranteed for life, so you know what you are getting. This can be a very good thing in the right circumstances. But it’s a one time decision and if you don’t live long, one might suggest that it was terrible value for money, it is only in year 22 that the total income that you would have had over 21 and a bit years would surpass your original capital investment… making one or both of you 87 essentially before you’ve “had your money back”. This is all down to low annuity rates, which are due to interest rates, inflation, economics and life expectancy… things that you and I can influence very little.

Should we trust people with their own money?

Of course the danger of access to a pension is now being discussed in the media, there is justifiable concern that people may simply take their fund and blow it all at once…. on a nice car? Remember that this is taxable income, so any amount over £150,000 would be taxed at 45% and once its gone its definitely gone with no further help from the Government. There are concerns, and yes some people will blow it. However, from next Thursday, this feature is only available if you have £12,000 a year in guaranteed income (in your own name) currently you need £20,000. This amount does include your State pension and any other employers pension. So a lot of people will qualify, but of course not all by any means. Those with small pensions will not be able to use this feature, but they can use “capped drawdown” instead, which has also been improved, but clearly those with smaller pensions probably need more certainty for their own budgeting.

So where is the catch? well, between you and me….. I imagine that the cost of residential care will now be raiding many people’s pension pot in a rather more aggressive fashion, so spouse’s be warned… have your own pension pot.

Of course there are many more options and you could always decide to use the fund to buy an annuity at a later date (annuity rates tend to improve with age) and careful maths needs to be done and dreaded terms like “critical yield” may become a familiar term to many pensioners in the future. This is why reviewing your financial planning regularly (annually) with a us is really important and of course we can demonstrate the options and their consequences. So get in touch.

Dominic Thomas: Solomons IFA

Pension, annuities, the Budget and life’s big gambleDominic2023-12-01T12:39:03+00:00

Budget 2014: Social Impact Investment

Social Impact Investments: Budget 2014

This is a guest blog from Gavin Francis of Worthstone. If you follow my blog, you will be aware that Worthstone are voice piece for the social investment world here in the UK, providing advisers like me with valuable insight into this “new” sector, access to research and tools for the job.

Improved tax relief now 30%

The Government has set the rate of income tax relief for the Social investment tax relief at 30%. That is the same as the rate for Enterprise Investment Scheme and Venture Capital Trust investments and creates a level playing field for investment. Individuals making an eligible investment at any time from 6 April 2014 can deduct 30% of the value of that investment from their tax liability for the year in which the investment is made.

Unlike the other venture capital tax reliefs, SITR will be available for debt as well as equity investments, and for organisations with fewer than 500 employees. That will make it easier for social enterprises to access the relief and reflects the particular characteristics of the sector. These terms are unique to SITR.

The Government have also announced the maximum amount of tax-advantaged investment each organisation can receive. Eligible organisations will be able to receive up to €344,827 (around £290,000) over three years. The amount is expressed in Euros in order to maximise the amount organisations can receive without infringing EU rules for de minimis schemes, and is nearly double the limit proposed in the consultation paper last summer. The sterling equivalent to the maximum amount in Euros will be set by the spot exchange rate on the date of investment.

These decisions reflect the Government’s firm intention to grow the social investment and its recognition of the valuable role social enterprises play in growing and rebalancing the economy, reforming the public sector and promoting social justice. The relief itself will be introduced in Finance Bill 2014 to come into effect in April 2014. The link is here https://www.gov.uk/government/topical-events/budget-2014

Legislation and guidance

HMRC will publish interim guidance on the relief alongside the Finance Bill on 27 March. Full guidance will be available in the autumn. HM Treasury have also been consulting (informally) on legislation to include social impact bonds within the scope of SITR. Due to the complexity involved, those pages of legislation and interim guidance on the accreditation scheme for companies issuing social impact bonds will be published a few weeks later. Individuals will still be able to claim tax relief for eligible investments in social impact bonds from 6 April 2014, as for other SITR investments.

Gavin Francis

Budget 2014: Social Impact InvestmentDominic2023-12-01T12:39:03+00:00

Can Entrepreneurs Take Anything from Scorsese’s New Film?

Today, with eyes and ears very much fixed on the news about the Budget 2014, some thoughts for business owners and entrepreneurs that won’t be in the Chancellor’s Budget. Dave Landry Jr. guest blogs today, he is a financial consultant in California.

Can entrepreneurs take anything from Scorsese’s new film?

“Let me tell you something. There’s no nobility in poverty. I’ve been a poor man, and I’ve been a rich man. And I choose rich every

[expletive] time.” *^{^[1]}

Those are the morally questionable but undeniably entertaining words of the man known as Jordan Belfort, a real life wall street crook who spent 22 months imprisoned for fraud by manipulation of the stock market. Belfort screwed over a lot of people, and as most of us know recently became the antihero of the Leonardo DiCaprio/Martin Scorsese film The Wolf of Wall Street.

While many sat through the film and thought Mr. Belfort was a despicable force of nature, unrelatable and in need of being brought down by impending justice, I for one could not take my attention away from him no matter how hard I tried. While I refused to agree with any of his actions, his charisma, work ethic and creativity in finding new ways to make old business models fresh and functionable were incredibly inspiring. I found value in watching Mr. Belfort’s exploits, for better and for worse. Did you?

Here’s a monumental lesson entrepreneurs can take away from Scorsese’s picture, one that gets overlooked when building a brand: when Belfort ventures out on his own and begins building the foundations of what would later become his kingdom of white collar illegitimacy, grandeur, drugged-out decadence and bombastic success, Stratton Oakmont, Inc., he chose not to hire battle-hardened financial vets who knew how to work a prospect, but rather a group of young misfits lacking a purpose in life. He trained them, he motivated them, he incubated his young “pups” until they became the hungry wolves that finagled money by the millions. But his wolves were loyal: when Belfort asked them to move behind him into the trenches of controversial and downright illegal business procedures, not a one of them bit the hand that fed them while they couldn’t fend for themselves. Make no mistake, I am not trying to endorse illegal or unethical activity: my point here is that Belfort bought his employees’ undying allegiance by investing his own knowledge, charisma and power into each and every one of them. That’s an impression any budding entrepreneur should jot down.

A business of simplicity was also the model Belfort chose for Stratton Oakmont. He explained stock brokerage in terms that his people would understand rather than bore them with stocks and bonds 101. “And as word of this little secret began to spread throughout Long Island—that there was this wild office, in Lake Success, where all you had to do was show up, follow orders, swear your undying loyalty to the owner, and he would make you rich—young kids started showing up at the boardroom unannounced.” That’s the campaign that won Belfort his election. He started out with a simple savings account and apprenticeship at a well-to-do firm, learned the antiquated systems until he could design a fresh system based on what did and didn’t work, and built a loyal following of staff who admired and loved him, even as they helped him swindle the masses. That’s charisma, that’s strength. Now imagine applying that to legal operations?

You may not have liked the film, but what did you learn from The Wolf of Wall Street?

Dave Landry Jr.

^{^[1]} This not a direct quote of Mr. Belfort, rather a quote from the film’s screenplay by Terence Winter and performed by Leonardo DiCaprio as Jordan Belfort.

Can Entrepreneurs Take Anything from Scorsese’s New Film?Dominic2023-12-01T12:39:02+00:00

Fear and Greed – The Greener Grass

Fear and Greed

I suspect at some level everyone has “issues” with money and these tend to play into some fundamental concerns that we all have the capacity to display – fear and greed. I may be rather naïve but I like to think that the “proper” newspapers (those that make an attempt at investigative journalism) are there to expose deception by informing and educating, equipping us all to make better informed decisions. So it was disappointing to read an article in the Guardian this weekend, which seemed to play into the two dynamics that are fuel to anxiety.

Lord of the ISA?

It was an article about John Lee, a Liberal Peer, who it reports has made £1m from ISAs. Set aside the facts are scant and not verified; he poses a particular investing theory. His approach is essentially a buy and hold strategy, though rather than use funds, he purchases individual shares, rarely trading. “He says he always goes for genuine quality smaller-company UK shares”. This is an investment strategy – there are probably almost as many investment strategies as there are investors. The pros and cons of it are not explored, other than to imply that this is what got his ISA portfolio to £1m.

ISAs, PEPs and some real numbers

So how about some hard facts? PEPs were introduced in 1987 at the time with an allowance of £2,400. By 1999 the PEP allowance (£9000 at the time) was replaced with a lower ISA allowance of £7,000. This only began to rise in 2009 and is now linked to inflation. Aside from possible TESSA allowances and windfall shares from various sell-offs including Building Societies, since 1987 it has been possible to invest £212,080. If these investments had grown at 7% a year (no investments grow in a straight-line) they would be worth approximately £546,388. 7% isn’t an unreasonable annualised return since 1987. The inflation adjusted return (“real return”) for the FTSE All Share from 1987 to the end of 2012 was 5.3% a year with UK RPI at 3.6% (so a gross annualised return of 8.9%).

Risk isn’t simply a game

So a couple of points. We don’t know from the article, if Lee has achieved a return of virtually double this (from his strategy) or if he has simply used his wife’s allowance as well. If it’s the latter, then I guess there isn’t much of a story, if he has doubled the return then we can all marvel at his genius right? Well no. Lee has taken some investment decisions that are considerably outside of the range of the typical, ordinary investor, which may be all well and good for him as I assume that he can afford to lose the money, most cannot and as a result have a more diversified portfolio of holdings to suit their ability to cope with risk, or more accurately loss. Those with large resources can, in theory cope far better with the volatile nature of stockmarkets. Yes it is true that anyone can do it (provided they have the money to invest and can leave it alone for 26 years) but in practice his strategy is not appropriate for probably 98% of people that I meet. He has also been investing for 50+ years, and invests a lot of time in following the markets and various companies.

Success proves skill right?

Lee appears to have no time for Fund Managers, yet it is very hard to believe that most people have either the time or knowledge to research small UK companies. This knowledge can be learned, but it requires time and effort and most people are simply not interested, it’s not as easy as is being suggested – otherwise all investment managers would be achieving similar results right? Professionals with this as their full-time job. To be blunt, I’m not really bothered if he is a genius investor or not, the concern is simply that the article makes investors question why their ISA portfolio isn’t worth £1m and the inference is that this is due to buying funds instead of individual shares. There is no suggestion that this might be a high risk strategy, it’s simply playing the envy card that for Lord Lee this has worked out rather nicely so far. This is simply another tale of “the grass is greener”. Even if higher returns have been achieved, there is a high degree of luck in the result – not needing to touch the money for 26 years for starters. Call me a cynic, but the fact that he has a book out may be nothing more than a red herring and anyone with a particular investment strategy, whether it’s buying small companies, art or property has a vested interest in getting others to do the same, the increased demand pushes their “portfolios” higher as others seek to copy this “winning strategy”. If investing is so easy, why are so few able to even outperform the market over the long-term? Questions for another day.

Dominic Thomas: Solomons IFA

Fear and Greed – The Greener GrassDominic2023-12-01T12:39:02+00:00

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