Honesty Report

Honesty Report

I was listening to the radio on Wednesday morning and a story that caught my attention was about a report published by Noddle, the credit rating agency. In essence their report is perhaps best described as an honesty report.

The research reveals something that anecdotally, most of us probably know already. The data, when extrapolated suggests that something approaching 1.9million couples keep financial information secret from one another. The suggestion being that this isn’t simply a case of not fully admitting how much was actually spent at the shops, or how much those birthday gifts really cost, but a rather more concerning inability or unwillingness to reveal the degree of personal debt.

The report found that 44% of married couples do not know how much their spouse earned. Relate therapist Arabella Russell and MD of Noddle Jacqueline Dewey briefly discussed some of the issues about couples struggling with honesty about money on the Radio 4 Today programme with Justin Webb. The BBC remove programming after a while, but the link is here.

Over the years I have observed many different approaches that couples take to the subject of money, all have their presumptions and “baggage” and I try to gently discover attitudes towards money, it is, as Arabella Russell outlines, so much more than simply an accounting system, how we think and talk about money connects deeply with how we think of and value ourselves (and others).

Common language

It isn’t quite the case that talking more honestly about money would save marriages, how couples communicate is more complex and frankly the territory of therapists not financial planners. However, it is clear (and obvious) that money is a one of the most significant “stress points” in any relationship. Relate’s own report “The Way We Are Now” found that 61% of adults with children, found that money worries was the greatest strain on their relationship, for those without children the figure reduced to 47%. That said, the report does provide some good news – 87% of people in couples are happy with their relationship.

Speaking Safely

When I meet with couples, it is important that both people are able to express themselves in relation to money and their hopes and fears about the future. I am often told at the end of our meeting that the experience wasn’t what had been expected… despite the website and this blog, most new prospects seem to assume that this is all “marketing” and that in fact I will “revert to type” and just talk about numbers, products and bore them to tears. For many, simply sitting down together with an impartial third (me) who asks pertinent questions about their past, present and future is a rarity. It’s different for each, but it is certainly clear that it is a welcome experience and the opportunity to get some clarity of how things really are.

Of course such a discussion needs to be conducted thoughtfully and sensitively. It isn’t therapy and it isn’t confession, to my mind its a safe space, to clarify… the issues that are raised may or may not be then requiring either therapy or confession, that is naturally dependent completely upon the couple and the information revealed. Of course this is not limited to couples, I would argue that anyone should benefit from “speaking out” what they think, feel and have experienced about money. To my mind self-awareness is vital for any financial planner operating in this way, ensuring that the discussion is about the couple or individual concerned, not their own projections.

Why is it important?

Saving relationships is simply not the domain of a financial planner, however anything that helps improve the lives of our clients – understanding their own truths and being able to reflect back the reality of things is invaluable. We all know that life can be messy, some relationships end, some very painfully, some can be improved… but we can all probably improve how we listen to one another. I have no doubt that having clarity about money (financial planning) will reduce financial stress for everyone, the real question is can you make the time to listen and be heard?

If you or someone you know are seeking therapy or couples counselling, I suggest visiting the websites of the BACP and Relate for couples.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Honesty Report2023-12-01T12:19:58+00:00

Dementia – Suppose I Lose It

Solomons-financial-advisor-wimbledon-bloggerDementia – Suppose I lose It

Radio 4 will be running a programme this evening at 8pm, which will be a highly personal view of dementia. It features a well-known married couple – Timothy West and Prunella Scales who are interviewed by their long-time friend Joan Bakewell. The preview this morning sounded enganging, expressing the very practical, personal and real problems that anyone suffering dementia can face.fawlty towers

Becoming infirm is not a topic that many people wish to talk about, yet it is, in my opinion a vital part of proper financial planning. After all, the job of a financial planner is the attempt to make your money last as long as you, ensuring that it doesn’t run out. Yet we all know that should we ever require care at home or in a residence, this can be incredibly expensive and is often referred to as a “ticking time bomb” within press and political circles. One of the scenarios that I model for clients is precisely this problem and of course there are implications for ensuring that not only your Will is up to date, but also that you have Lasting Power of Attorney in place.

The broadcast promises to be interesting and is on this evening at 8pm, Radio 4, called “Suppose I Lose It”. It will be available on the BBC i-player afterwards presumably for the usual time-limited period.

Dominic Thomas

Dementia – Suppose I Lose It2023-12-01T12:39:45+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

What’s Happened to the Co-Operative Bank?

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What’s Happened to the Co-Operative Bank?

You may well ask what has happened to the Co-Operative Bank? which has really come under fire of late. There is a very sad tale of Paul Flowers, the Chairman of the Bank since 2010. Mr Flowers has displayed some poor judgement, which he has admitted, but perhaps what is far more serious and telling of the problems within Banking and in particular the Co-Operative, is that it very difficult to see how he had the necessary skills and experience to run a large commercial Bank.

Experience from Inexperience?

Mr Flowers is a Methodist minister and for all I know he may be a wonderfully gifted one, however a 4 year job at NatWest when aged 19 (according to the BBC report) appears to be the sum total of his Banking experience. Now before everyone blows hot and cold on this, a Prime Minister has no experience of being one until they are elected, the same is true of pretty much any political position. There is certainly a case to be made for “you don’t get experience without starting without any” however it is more than surprising that in the months following the Credit Crunch he was appointed to such a significant position. I am not blaming Mr Flowers, but one has to question the wisdom of the Co-Operative Board and of course the regulatory approving body.

Biting off rather more than can be chewed

We all have off days and I’m sure have on occasion performed below expectations when “examined under the spot-light” and I can only hope that this explains his when questioned by the Treasury Select Committee on 6th November. This is shown on the BBC website and rather speaks for itself. Mr Flowers might be a thoroughly good man (my hope if he is a Methodist minister) however being a nice or decent bloke does not qualify you to run a multi-billion operation.

Blushes not SmilesSmile Bank logo

I am not suggesting that Mr Flowers is entirely responsible for the demise of the Co-op Bank, (which includes Smile and Britannia) but losses of £781m are hard to ignore. I wonder if you can read the figures held within the Group Interim Report 2013 any better. Turn to page 12 on see the Balance sheet. I can only assume that Mr Flowers was thinking of Consolidated Net Assets of £3.5bn rather than assets of the Bank.

Now, don’t get me wrong, I am a fan of co-operatives and any organisation that attempts to apply ethics to business practice as the Co-Operative have claimed over the years….Heaven knows we could all do with a competitive retail banking sector that has some decency! So the plight of Co-Op is all rather saddening. I hope that they can be “fixed” but now run by Hedge Fund Managers, not known for their ethics, but for their asset stripping results.  To my mind this appears to be the point at which the Co-Op Bank’s core values will either shine or fizzle out, consigned to history.

Dominic Thomas: Solomons IFA

What’s Happened to the Co-Operative Bank?2023-12-01T12:38:37+00:00

It happened on the way to Essex (warning: dangerous information)

 I was in the car, on the way to a client listening to the radio. Possibly I should have stuck with my own music, but decided to listen to some “news”. It was Thursday (yesterday) and the media was agitated about pension charges. The panel discussion was about as badly informed as it gets and if this was designed to reduce or remove confusion about pensions, then it failed spectacularly even on explaining the difference between a Defined Benefit and a Defined Contribution pension and proving the adage “a little knowledge is a dangerous thing”. Why a sensible IFA wasn’t asked to speak I have no dangerous-to-knowidea. So I had better explain.

Firstly there are broadly two types of pension. A Defined Benefit, so called because it defines what you will get. More commonly known as a final salary scheme. This sort of pension is based entirely on your service and your final salary. Each year of service in such a scheme is built up at the rate of a fraction each each. So take a doctor or nurse, 1/80th each year. So a doctor or teacher that works for 30 years, the sum is 30/80ths (37.5%) of their final salary = annual pension (for life). Ok these schemes are changing, but the principles are remaining pretty much the same.

The other type of pension is an investment based pension. If you are employed and in such a scheme it is often called a defined contribution scheme… it won’t surprise you to learn that it is aptly named, because the contribution (the amount paid in by you and/or the employer)  is defined – eg 5% of salary. However as its just an investment, the value of the pot will change… daily. So the value you end up with is based on what the pot is worth.

The row is over the charges applied to investment based schemes and whether they actually offer value for money as a result. A lot of hot air on the radio resulted in my exasperation fogging my windscreen, not a good idea on the M25 when it is grey and wet. There were a lot of inaccurate statements and very little placed into a context. So at the risk of boring you, I will attempt to do so.

Back in the 1980’s investment based pensions began to take the place of final salary schemes. Why? because of the liberated stock market (big bang) and a desire for people like you and I to capitalise on capitalism. There was also a growing (albeit muted) appreciation that people are living longer and therefore the old style final salary pensions were going to have to pay out for longer, costing employers a lot more money. Divorce rates were also rising, meaning that the spouses (and ex-spouses benefits) might also last a very long time. The rise of retail investment funds (Unit Trusts) which only began life in 1931 (thanks to M&G)  became more widely available. Pension companies (a considerable number back then) ran their own investment funds using their own fund managers. Financial advisers were largely sales people that worked for pension providers. They were paid to sell pensions (and other products) from commission in the same way that pretty much every other type of selling works… the more you sell the more you earn (as a salesman/person)

Now you and I might think it a pretty bad idea that people are paid a commission to sell financial products. The advantage of hindsight is a wonderful thing isn’t it. However, most people, even in 2013, do not wake up and think that they should start a pension, or take out life assurance and sadly some people (most) need to be “sold” the wisdom of doing so (unless it isn’t appropriate for them = very few people). So “advisers” needed an incentive to incentivise the public. Yes it was a silly system, but in January it all changed. Every adviser must charge fees – properly. Surprisingly people are not jumping up and down with enthusiasm about this (on both “sides”).

Taking a step back in time, commission was paid based on the products type, the premium and the term of the “policy”… more for more. Then factor in some pension companies thought that they could offer a bit more for the “same thing” .  This led to bias (you are not surprised). Bias between financial product and also financial provider. Simple example… you have £300 a  month to invest. You could do so into a variety of “products” a pension, an endowment or a PEP (old form of ISA). The commission might range from £5,000 to £9 for a PEP.

Eh? well endowments paid very large commissions, they were generally 25 year policies and if I recall paid more than a pension. A pension though has tax relief but couldn’t be touched until 50 (back then) most though retired at 65, an extra 15 years on the policy term (commission is related to policy term too). A PEP, well it doesn’t have a term, its not a policy. It was a single investment of £300 that happened to recur. 3% of £300 is £9… each month. Not many advisers were going to advise a PEP not because they thought it was bad, but you would have to sell a lot of them to make a living. Other products though were “contracts” so you were agreeing to pay for 25 years. The product provider (names you know and possibly loathe for a variety of reasons) had a separate agreement with the adviser (well the adviser firm). Rather than pay £9 a month, they paid it upfront (£9x12monthsx25years = £2,700) for example. How? (with only £300 a month going into the pot)… it would surely take 9 months before £2,700 was even in the pot right? Well thats where some very “clever” accounting and charges and types of units comes into play. The details varied from provider to provider, making it hard for even good advisers to accurately compare one with another. In short, the commission was really a loan, if the investor (you) reduced or stopped paying, the commission loan would have to be back in full or in part.

This approach led to two key things. Firstly, people took out policies that they didn’t need or couldn’t afford. As a result advisers had to pay back commissions, invariably leading to a very high rate of staff turnover. Secondly there was an obvious pressure to sell, sell, sell… which meant a focus on new business and not servicing existing clients. The regulation at the time was as divided as the industry, independent advisers regulated by FIMBRA and Tied advisers by LAUTRO. The latter working for the insurance company, the former doing your shopping. However, even being independent did not prevent bias between solution (product) and provider selected. So in 1995… that’s 18 years ago!  commission disclosure was introduced and at around the same time a single regulator was introduced (the Personal Investment Authority – PIA). You (and the adviser) could both see what the adviser would be paid. However both relied on standard projected rates of returns to work out which provider was cheaper than the other. Still smoke and mirrors, but in all honesty, nothing to do with the advisers.

Stay, with me…if you can. The regulator then decided that advisers should write proper reports, “reasons why letters” and also provide better data about who they were placing business with. The profession of advice began to evolve (slowly catching up with the IFP Institute of Financial Planning, born in the UK in 1984).  The PIA became the FSA in 2001 and with it decided to end polarisation (tied/IFA) and added a third option “multi-tied” which confused things even more and enabled certain high street Banks to give the impression that they weren’t only peddling their own stuff. However to be independent, you had to at least offer clients the option of paying a fee rather than a commission. In January 2013, advisers were to be defined as either Independent or restricted and with both options, if you are arranging any form of investment, a fee must be agreed and paid – not a commission. Hooray, we finally got there and with another version of regulation – the FCA. In practice the regulator has said, your advice must not be biased and your client must agree the amount they pay for it. The results are yet to be seen, but in reality, most people cannot or will not pay for financial advice, because most people’s experience has been bad, sold duff products, that didn’t deliver and weren’t serviced.

The role of the adviser has altered dramatically, for all but the dinosaurs or stupid. A financial adviser is ADVISING you what you should do. A good adviser will be doing proper cash-flow planning, working with you on your actual goals and figuring out what you need to do to get there. A great adviser will also be helping you to assess risk and the returns you need, adjusting your portfolio and minimising the number of bad decisions you would otherwise make. A brilliant adviser will also keep you disciplined and focussed on what your goals are and help you avoid the 98% of the financial media that is a complete red-herring to your goals and life story. These people tend to call themselves financial planners, wanting to emphasise the planning work and disassociate themselves from selling products.

In short the skill set has evolved. You wouldn’t believe the level of research that is done these days. This is possible because of better technology and frankly better skills and a much better context. The truth, as painful and sad as it may be is that we have all messed this up at some point. Investors in believing in “free advice” and advisers in not being clear that it wasn’t, perhaps afraid to be. The product providers are guilty of making highly complex charging structures in order to pay for sales, and they have also effectively bought and bribed business. The fund management industry has overcharged and underperformed, manipulated data and set in motion a system that rewards big bets. The regulator has invariably focussed on the wrong things and hasn’t evolved as quickly to cope with some very complex financial instruments. In fairness though, it has had to take on more and more – now it is also taking on regulation of consumer credit – everything from a washing machines to a Ferrari (or Aston to Zanussi). However, the myth that is still perpetuated is that investing is easy and it is cheap. It is neither. I don’t care what massive “discount brokers” say or “money saving experts” they have all come from the same place and are focussing on the wrong things.

So (if you are still with me) back to the radio show. Statements about charges on pensions are very flawed, as flawed and silly as the charging structures themselves. Old style pensions were very pricey by today’s standards. Sometimes it is worth getting out of them, sometimes it isn’t. This needs careful consideration. Suggesting that 25% of a fund will be wiped out by charges is a foolish thing to say. It won’t, because you cannot invest for free. The charges are projections about a future that will not even happen. Returns are unknown. You are unlikely to have the same investment in 30 years time that you have now. The real menaces to investors are these:

1. Not reviewing your portfolio at least annually (and not being disciplined)

2. Not having clearly defined goals and objectives

3. Not assessing your attitude to risk and ability to cope with market volatility and therefore figuring out what returns you can accept and therefore what it will produce.

4. Running out of time, or money.

5. Not having a proper financial plan, that tells you when you have reached your goal and have “enough” (by your definition of “enough”)

6. The utter rubbish talked,written, recorded,filmed about money and investing

7. What the FTSE does is largely irrelevant to you

8. Government policy that messes with and creates a tax regime so complex that you need to pay an expert’s expert to decipher it.

9. Inflation, inflation, inflation, inflation…

10. The myth that you can get something for nothing, falling for the latest investment fad or fear.

You can have a successful investing experience, but you also need to be realistic. There are, and always have been some good advisers, some good fund managers, some good product providers and some good regulation. Life is not as binary as many would like to suggest. Over the years I have met some thoroughly decent people from all these camps. I have met advisers that I would trust with my own money – or my widows/children’s.

What’s more, this is not new. I set up my firm 14 years ago. I created a product neutral playing field, charging the same fee structure for investing in any form, in any product. I removed commission from new protection policies (which by the way is still available to advisers). I began to develop a proper investment philosophy and service and gradually began to use proper cash-flow planning. I have evolved, grown and learned. I made mistakes along the way, taking too long to improve in some areas and doing others too soon. That’s life. However I have remained consistent to the notion that my job is to improve my clients position, not make it worse. My long-term interests are best served by serving yours. Yes the financial services industry has a lot to answer for, it is miles from perfect.

One final point, here in Britain we seem to think that someone else will pay, that things are actually without cost. The very real and difficult truth is that we don’t really want to acknowledge that things have a price. Whether this is social security, care of the elderly, good education, quality teachers, good government, protecting children on the internet, a watchdog for the police, media, government, NHS, utility companies, stock market, financial advisers…or helping refugees and decommissioning weapons. Everything has a price and pretending that it doesn’t or it can be cheap is… well its like that big river in Egypt…. denial.

Footnote: By the way, the regulator does not think investors are capable of working out charges in a percentage format. They want charges expressed in monetary terms. So what hope do we have if people cannot even calculate what 1% is?

Dominic Thomas – Solomons IFA

It happened on the way to Essex (warning: dangerous information)2023-12-01T12:23:53+00:00
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