Earlier this month Money Box, the BBC Radio 4 programme decided to find out how easy it was for a complete novice to do their own investing. He has a sum of £5,000 representing his life savings, which is otherwise held on deposit in his bank earning less than 1% interest.
Financial Planning Basics
It is true to say that basic financial planning is straight-forward, yet most people fail to do the most basic tasks. Financial advisers may therefore spend considerable time, helping clients to get the basics in place. This was touched on in the programme, but very briefly. In essence, ensuring that your finances are under control, knowing what you spend and what you earn, having suitable reserves (3-6 months of spending). Having a Will, adequate financial protection and clearing debt etc.
As a result the starting premise of the show is how to invest £5,000. In truth the vast majority of financial advisers are not really interested in this level of work. Its not financially worthwhile and its not satisfying work. A good planner will take investors through a risk assessment, invariably a questionnaire which helps start the process of explaining and understanding investment “risk”. In truth this ought to be a straight-forward process, but it often isn’t. DIY investing is fine for low levels of funds, but when the sums get bigger, so does the complexity.
How much is a pint of milk?
Sadly Wesley didn’t really do DIY investing. He asked for advice and then went to the investment company to find that they required £100,000 as a minimum to invest directly through them. Alternatively he could access the fund through a platform. He then asked a very good chap Mark Polson, who assesses platforms for people like me, about which platform to use. This is an art and science. However, Mark rightly points out that using a platform will cost typically 0.25%-0.35% for using their administration. That’s £12.50 – £17.50 for a £5,000 investment. I’d call that peanuts, though I’m sure Money Box would disagree.
Investing is not gambling. Gambling is gambling.
I was also disappointed to hear the description of investing as a “gamble” from someone in the know (Candid Money). It carries risk but it is not gambling. Thankfully ludicrous questions were kicked into touch and Mark also pointed out that “best” and “cheapest” are two different things. Paul Lewis also seems to think that charges are a loss. They are a cost of investing, not a loss (and free banking isn’t free, its cross subsidized by loans etc).
The DIY Investor
I have lots of sympathy with people that find financial planning expensive and also have had bad experiences. I recently met with a potential client who is a DIY investor, but really wanted to know how to minimise capital gains tax. He was a bright guy, but fairly unusual, holding shares in just two companies worth a good six-figure sum. Whilst he seemed to appreciate the risk he was taking, I had serious doubts. He had no clear idea of the returns achieved and not kept any good records. For all I know he may be a genius investor (unlikely) but my suspicion is that his approach was born out of an understandable mistrust and fear of being ripped off, yet in practice he was (and is) in serious problems should his two shares take a turn for the worse. The main winners will be HMRC as he has not used any capital gains tax or ISA allowances over the last 20 years (use it or lose it).
DIY is spending time to save money, yours.
DIY investing is not something to be undertaken lightly. I am learning new stuff almost each day and I’ve been doing this for over 20 years. Frankly, any professional skill can be learned by most people. Yes I could even learn to be a brain surgeon… but do I want to? am I actually playing to my natural interests and skills? if time is short, why would I waste it learning about stuff an expert can do for me? (and with whom I have a professional relationship). I tend to find people tend to fall in one of two camps – spend time to save money, or spend money to save time. DIY investors are the former (by doing it themselves) but beware it takes a lot of time, whereas you could focus on the things that actually improve your employed skills and therefore your income, or simply spending time on doing the things you love. Oh and Money Box – “ad valorem” is a fee based on the value of a portfolio, in short a percentage. There is definitely a need and place for DIY investing, but check where you are really coming from before you embark on this rather lonely and arduous venture. You don’t want to find that all is lost…
Moneybox and the Diamond Scam
This 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
We’re not selling, we offer an opportunity to buy… eh?
I had to laugh, sorry. I was listening to an item on Radio 4 about how temporary workers are being sold insurance that they either don’t need or won’t pay out. Now we’ve all heard this stuff before… PPI springs to mind for starters. I admit that I know nothing about this sort of insurance (accident cover, for temporary workers) but of course I do have a pretty good handle on financial protection. Anyway I was amused to listen to the defence that to the effect that “it is not being sold…. it is being offered” the “offering” techniques seem to be the same as any sales technique, but I hadn’t heard this excuse before. The important issue being that insurance being sold is a regulated activity and therefore needs proper disclosures etc to meet standards set by the regulator.
Admittedly, I am have witnessed the process reported. Indeed I am reliant upon the information provided by the reporter, but frankly, the way it looks… if it walks like a dog, smells like a dog, barks like a dog, looks like a dog…. it probably is a dog. if not, then I think the regulator is in for some testing times ahead… what would stop all advisers simply saying that they are offering pensions, investments etc… and therefore not selling them (arranging may be a more palatable term). I imagine that the regulator would have something to say and demand compliance and payment of their fees. So I assume and hope that the FCA apply similar logic to those merely making such “offerings” or “opportunities to buy”.
Everyone sells, but there are still lots of grubby sales techniques
It seems that many people don’t like the term “selling” yet we all do it. Yes all of us. Selling is merely persuading someone to make a choice. Ethical or good or “proper” selling is therefore persuading people to make choices to their personal or collective advantage. We all do this a lot of the time as Daniel Pink illustrates so well in his book “To Sell Is Human”. Without actual “selling” nothing much would happen and we certainly wouldn’t have a recognisable economy. However clearly there are many that sell (or try to) unethically. I was disappointed to receive an email this week offering to sell me names, addresses and full contact details of people that may have had PPI “second use PPI hot key leads” . In fact it made me cringe (ok perhaps range)… I can buy (anyone can) 100,000 for £6,500. I don’t buy leads, but of course what arrives in my email box (initially) is open season. If you are anything like me, you are fed up with the banks that sold it and the claims companies that keep texting, emailing or phoning. They are an utter nuisance and ought to be banned.
Dominic Thomas: Solomons IFA