Is Financial Services like gun crime?

Here in the UK we have some gun crime, its horrible, but it is still thankfully rare. In North America the obession with guns is perplexing, the rising death toll and increasing militarisation of police forces is alarming. We have seen further mishandling and stereotyping lead to deaths in police custody and now further riots in some American cities. I’m not anti-police, I am anti-stupidity and I don’t think I’m telling you anything you don’t already know. America has almost no gun control, you can wander into a gun store or general department store (heck, sometimes they even give them away for opening a bank account -see Bowling for Columbine) and buy a firearm and ammunition. No real checks. We tend to think this is insane.

Yet here in the UK we have an equally perplexing situation which has collectively blind-sided most people. Its in the form of pension advice. Yes that rather dull topic (believe me I know how dull). Anyway it seems that your neighbour – the one that’s tempted by all those offers of too good to be true (because it isn’t true) high investment returns is wreaking havoc with the rest of us, like a loaded gun.

Garbage in, garbage out..

Despite warnings from the regulator, or there being a regulator, believe it or not, there are some “advisers” out there peddling all sorts of… well…”junk”. These always promise high returns, but actually pay high commission (something that is meant to be banned). So I can only assume that the person that does this is greedy, gullable or vulnerable. If the latter, then they have my sympathy and support, but those that are gullable, well it may sound harsh, but at some point in life you have to take some responsibility for your actions. As for the greedy… why should the rest of us pay for your gambling habit? eh?

Back to the gun analogy. Say I am a shop keeper, I don’t sell guns, in fact I sell books, but the guy nextdoor does. Guess what? his customer went on a rampage in the mall and shot 60 people. Being a shopkeeper I am sent a bill for compensation because I am a shop keeper.

What do I mean? Well pensions are regulated products and in theory should be arranged by regulated advisers. However in some products (SIPPs – Self Invested Personal Pensions) you can hold “uncoventional” funds… or what I might call “stuff you shouldn’t ever touch”. The regulator (FCA) would call this “non-mainstream funds” and in fact categorise them as “unregulated” in other words not regulated and therefore not actually protected by compensation. However because they were bought through a SIPP (regulated) and arranged by an adviser (regulated) therefore when it predictably goes wrong (it will) anyone that is an adviser gets to pay for the compensation. Now I don’t know about you, but I thought being an adult involved taking responsibility for your actions, so being one, I don’t sue people every time decisions I take don’t work out right.

Yes inflation is 0% but fees increase 75%

I tell you this because on top of a £20million levy a few days ago in March, the new annual levy has been set, increased from last years £57million to £100million for those that arrange pensions (shop keepers). This levy always comes with 30 days to pay (thanks). This is only a fraction of the full regulatory fees that I and other adviser firms have to pay.

Nobody to blame… but the good guys can pay up right?

The pension companies that allowed these investments in their pensions claim “not guilty – the adviser did it”, the regulator claims “We can’t use our product intervention powers on unregulated investments”… so cannot stop the funds being sold (or bought).

Those that sold these things have scuttled off elsewhere, probably to re-emerge in a different guise, leaving the dwindling number of firms (now about 5,300) and advisers (now around 24,000 from about 250,000 20 years ago) to pay the bill. The bill is paid by the firm and is enough to wipeout some firms, meaning that next year….the numbers reduce, so the share of the bill increases. There is only so much “cost” that a small firm can manage before needing to pass this on to their clients. I therefore predict that as a consequence, many advisers will be “forced” to put up their fees… which means you are also coughing up for the greed of your neighbour, because they cannot be bothered to take any responsibility for believing in fairytales…

Sorry to moan, but seriously… this isn’t fair is it? Of course people that have been ripped off need compensating, but seriously, you didnt think investing in a timeshare via your pension was normal did you? Your comments would be very welcome…. perhaps I am missing something, perhaps my entire profession is… in which case I’d like to know so that I have a snowballs chance of improving it.

Dominic Thomas

Is Financial Services like gun crime?Dominic2023-12-01T12:40:08+00:00

DIY Investing

To my mind, one of the great ironies of financial planning is that a litigious culture, historic mis-selling, poor regulation, fearful professional indemnity insurers, better qualified advisers and RDR has meant that the cost of advising anyone has increased. Already this year our regulatory costs have increased by more than 10% (yet inflation is 0%). This will result in the continued rise of DIY investing (do-it-yourself).

I have tended to take the view that most people need to have a budget, a target, a savings habit and only when they have £50,000+ do decisions get complicated enough for me to get involved. Its not always the case, but largely. So it is alarming how poor most people are at investing – and by poor I mean really bad.

Just Unlucky?

An academic study from 2012 “Just Unlucky?” by Meyer, Stammsschulte, Kaesler, Loos and Hackethal at Goethe University in Frankfurt, into the success or otherwise of online investors (who generally think of themselves as well-informed) concluded that 89% of them lost an average of 7.5% a year. Let me repeat that 89% achieved -7.5% a year! Those that performed better were basically no better, exhibiting the same performance metric as luck. The research is based on German investors.. a nation that is historically characterised as shrewed, efficient, conservative and risk averse.

91% of DIY investors fail – big time.

Why? It would seem a significant element is holding the wrong asset classes and not well diversified globally. There is also a high degree of fear and greed at play, selling at the bottom and buying at the top. I can only imagine that some were following the tips from journalists and media commentators “best buys”. If dealing costs are factored in (and this was DIY investors using online dealing accounts, which presumably they thought were low cost) returns were 1% worse at -8.5% and achieved by 91% of investors.

Part of my job is helping people reduce their mistakes. We cannot be perfect, but we do apply sensible disciplines to remove a lot of errors. We call this advisers alpha – adding returns by good advice. Other research (of American investors) by Dalbar suggests that most investors underperform the market by 4-6% a year. But this latest research suggests it is far worse than that. Yet from next week, the new pension freedoms will mean that more people will take it upon themselves to go DIY with their pension. I don’t imagine that it will be a favourable outcome. This does not bode well for those using “discount” online investments, who eventually become so disenchanted with markets that they try less mainstream investments – which invariably blow up in their face and due to a peculiar twist, advisers such as myself pick up the bill… which to makes the cost of advice higher… and so the cycle repeats.

Dominic Thomas

DIY InvestingDominic2023-12-01T12:40:02+00:00

What about China?

For some time now, I’ve been complaining about the oversized contribution from investment in China’s recent expansion

[1]. Actually, I’m not the only one. Policymakers are busily crafting the conditions that might bring about a rebalanced economy – one less reliant on exports & investment and more reliant on domestic demand & consumer spending.

The IMF might be right

‘Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. Slower growth in China will also have important regional effects, which partly explains the downward revisions to growth in much of emerging Asia.’ WEO January 2015.

Building more and more factories to house more and more machinery manned by more and more workers will get you a long way; China’s economy is not far off 40 times larger than it was in 1978 when Deng Xiaoping succeeded Mao Zedong. But while ultra-high levels of investment are associated with rapid expansion they’re not generally associated with sustained growth. The returns that are associated with an over-reliance on debt-fuelled investment diminish with time (thanks in part to an inevitable inefficient use of capital) while the risks are amplified (owing to overleverage and rising volumes of non-performing loans).

China, I suggest, has a debt problem – today’s Financial Times reports that ‘Chinese corporations are now among the most indebted in the world’ – but with everything else that is going on in the world[2] investors are not yet fully alive to the possibility of a much slower pace of growth. Indeed the huge premium that the market for Chinese A shares (dominated by domestic investors, it has risen in value by over 60% in the last 6 months) has over the market for B shares (dominated by international investors, it has risen in value by a much less thrilling 19% over the same period) suggests that Chinese investors are most hopeful of sustained high growth rates.

So far as I can see, two paths are apparent; China’s rate of growth can slow in orderly form or disorderly form, but it will slow nevertheless.

Steve Williams

[1] Post 2008 in particular, where gross fixed capital formation has accounted for around half of the Chinese economy[2] It’s all so exciting; an extraordinary oil price decline, huge gulfs in monetary policy between those in the US and Europe, Syriza’s rise to power in Greece, another full-blown Russian crisis and Japanese policymakers throwing everything, including the kitchen sink, in a spectacular attempt to kick-start their economy

What about China?Dominic2023-12-01T12:39:57+00:00

When the clouds are seen

Here is a piece by Steve Williams of Cormorant Capital Strategies. Steve helps me with the investment committee and provides invaluable impartial and independent external expertise.

When the clouds are seen

The October edition of the International Monetary Fund’s (IMF) World Economic Outlook reveals an expectation for global growth to amount to 3.3% in 2014 and 3.8% in 2015. That compares with growth in the Emerging Market and Developing Economies which is expected to reach 4.4% and 5.0% respectively.

If the IMF are right, the remainder of the year will see the fastest pace of expansion, among the emerging market economies, in Asia (6.5%). Asian growth will eclipse that in Emerging and Developing Europe (2.7%), Latin America (1.3%) and the Middle East (2.7%). Only Sub Saharan Africa (with output expanding at 5.1%) will see growth at anything like the pace set by Asia. Asia’s charge into the lead is boosted, in part, by an improved outlook for India…

‘In India, growth is expected to increase in the rest of 2014 and 2015, as exports and investment continue to pick up and more than offset the effect of an unfavorable

[sic] monsoon on agricultural growth earlier in the year.’
I’m a little less certain that India can prevail in the next few years – high levels of corruption and stalled infrastructure improvements represent formidable barriers. But there are good reasons to be optimistic.

Foremost among them is the incumbency of the impressive Mr Raghuram Rajan as Governor of the Reserve Bank of India. Presenting him with the award for Best Central Bank Governor of 2014, Euromoney explained that ‘his tough monetary medicine combatted the storm ravaging the deficit-ridden economy in the recent emerging market crisis’. Indeed, I suspect the Indian central bank’s performance during the ‘taper tantrum’ did much to deflate fears that were apparent well beyond the boundaries of the sub-continent.

In addition, assuming that slowing global growth keeps a lid on commodity prices, India’s high rate of inflation will slow without the need for tighter monetary policy thereby affording India’s central bank the opportunity to underwrite faster growth. In any case investors in the emerging markets must be cognisant of the risks they face.

Most notable among them is the threat from a reversal of the flow of cheap capital that these economies have enjoyed in the last few years as central banks in the West supported liquidity. Just such a reversal is already underway. Beginning in May last year – when Ben Bernanke, then Chairman of the Federal Reserve, first mooted some tapering in the pace of its stimulus package – the MSCI Emerging Market index has underperformed the MSCI World Index by 10% having shed and then regained close to a fifth of its value along the way.

Steve Williams

When the clouds are seenDominic2023-12-01T12:39:33+00:00

Asset Allocation Review

We have posted the revised asset allocation models to clients today, these should be with you by the weekend. The printed pack will include an instruction letter for you to sign and return in the first class Freepost envelope so that we can implement the changes to your portfolio. We cannot (and will not) make alterations to your portfolio without your permission as we are not discretionary fund managers (meaning we do not act under our own impulses to move things around and then tell you what we’ve done after the event).

Please let me know if you do not receive this and expected to do so.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Asset Allocation ReviewDominic2023-12-01T12:49:00+00:00

Asset Allocation Review

I have reviewed all client portfolios and am urging caution in the current market conditions. I have amended asset allocations to reflect this and documentation will be issued directly to clients shortly. If you are eager to implement changes, please request the pdf version from me. You will recieve full instructions in due course.

Asset Allocation ReviewDominic2023-12-01T12:49:02+00:00