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.
James Anderson recently became England’s most successful bowler as he took his as he took his 384th wicket, that belonging to Denesh Ramdin and overtaking Ian Botham in the process. This is of course an incredible achievement in International cricket – congratulations Mr Anderson. So I was surprised to see an item on the BBC sports website that attempted to work out who really was/is the best bowler England have ever had.
Sport as you will know has become increasingly dominated by statistics – attempts on target, completed passes, distance run, speed of delivery the list is very long and naturally varies from sport to sport. When winning any sport tournament, many rather dull teams/individuals have argued that its not the manner of the victory, just that there was a victory. I cannot help but think of the time Greece won the 2004 European Football championship (sorry Greece)… or for that matter many Champions League finals, where one team essentially set up camp in their own penalty area hoping to counter attack and steal a victory.
Cricket is not new to adopting statisitical analysis – arguably starting the statistical obsession with John Wisden’s annual almanac started in 1864. So anyone wishing to pour over cricket statistics has had plenty of opportunity to do so. Anyway the BBC asked its pundits to assess England’s top 10 bowlers and ascribe a value to the wicket taken. In short a batsman that averages 50 runs is worth more than one that averages 5. Recompiling the data provides a different twist with Matthew Hoggard topping the list (248 wickets). Whilst this is “all very interesting” sport, like life cannot be metered into a nice, neat formula. There is always a context, which even with a lengthy span of statistical data is flawed. For example – the quality of the opposition is a key ingredient, the prevailing rules, TV replays and so on, let alone the context of the pressure of the moment. Statistics are cold, unrepentent and have no context other than a time period.
Investment returns and the charts that you see plastered on advertising boards or in any media are similarly misleading. Most investors probably know that this is the case, but few behave as if it is. Most investors are tempted to invest once returns are good, most sell when they have been poor, on average chasing returns, receiving below-average market returns at above market cost. Sadly the equivalent best investment “gongs” or awards also measure historic data (there is no other) and the context of this is against peers. Who is the best fund manager? well it rather depends on which sector, what timeframe, what measure of risk is used, and what luck was involved. In short, its an impossible task, yet many play the game and attempt to quantify who is “best”.
In practice, the only investment returns that matter are the ones that you actually get. Cricket, motor racing, football, tennis, golf…are all enjoyable escapes, but again the only best that any sportsman/woman can be is their own best, in the context of their sport, time, team and luck. I have nothing against awards for best this or that, (they can be a lot of fun – especially if you win one or two) but as ever, context is everything. I can only be the best financial planner that I can be, constantly striving to improve and be better than I was last year, last month, last week… and of course our service (like most) is not for everyone, but for those that want and need it… well we try to make it the best possible.
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.
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.
Dark October Days
There is something about October that makes me feel somewhat downbeat. Perhaps it is waking up in the dark and then coming home in the dark. The weather is generally pretty grey and miserable, autumn, for all its glorious colours is truning into winter and the summer feels like a distant memory. I also find walking the dog much more of an effort – wellies and avoiding the rutting stag in Richmond Park. This is cold-catching time and to say that markets tend to catch a cold in October would be an understatement.
Most will remember the more infamous “Black Monday” market crash of October 1987 with the FTSE100 falling 12.22% in a single day. More recently October 2008 provided some of the most terrifying and largest single day falls (in percentage terms) ever on 6th falling 7.85%, 10th falling 8.85% and 15th falling 7.16%. Today as I write, the markets are once again “in a state of turmoil” depending on what you read and who you listen to, as news is digested and responded to.
However, despite this “evidence” on 16 October 2008 the FTSE100 stood at 4,377.30 yesterday it closed at 6,211.64. Despite the news, markets have been rising and opened at the start of this month at 6,211.60 Looking at short-term statistics is very unhelpful, add in the occassional image of a stockbroker clutching a phone, peering at a monitor or holding his head in in hands and the scene is set for the appearance of further market chaos and sentiments of “you simply cannot trust the markets”. Well, in practice, despite October having what appears to be an unusually larger than fair share of bad days hostorically, it isnt actually much different from other months. Markets rise and fall, reflecting sentiment about the state of the world, which invariably has little to do with reality. This is partly due to several European countries still struggling to generate economic growth and the US finding life harder going. This is not really a new phenomena is it?
Keep to the long-term principles of investing, if you are keen to make a short-term play then a market fall is essentially a discount, some would argue “a more accurate value” but either way, sitting on the sidelines waiting for the markets to rise again before getting back in is the wrong choice. So stay the course, keep to the game plan.
Skandia Close Former Woodford Funds
Its all change at Skandia – soon to be renamed Old Mutual Wealth. On Friday they (OMW) took action which is rather unusual. Funds (INVESCO High Income and INVESCO Income) that had been previously run by one of the most successful fund managers (Neil Woodford) were closed. This follows the exit by Neil Woodford from INVESCO Perpetual who then formed his own investment company (Woodford)… genius name right? Anyhow, Skandia have argued that a lot of investors and advisers are following him getting out of his old funds at INVESCO and moving to his new ones….well his new one (Woodford Equity Income Fund). This is undeniably true. There are costs involved in running the new funds (naturally) and keeping the old ones running (also… naturally). What is exposed in practice is the lack of extra juice squeezed from the annual management charge from INVESCO by Skandia.
The CEO of Old Mutual Wealth (Paul Feeney) believes that they “have been between a rock and a hard place with regards to how we manage Neil Woodford’s resignation from these funds and the demand we have seen to move investors into his new offering. We have discretion over these assets being in our life book and therefore have a fiduciary duty to do what we believe is the right thing”. He goes on to state “Whilst theoretically we could have kept the funds open, the demand we have seen from advisers for Woodford would have resulted in even greater redemptions from the INVESCO Perpetual funds. This would have resulted in the TER of the funds increasing and ultimately the Skandia funds becoming untenable”.
(TER is the Total Expense Ratio…or charges in plain English).
Well, the wisdom of this action will only be seen in hindsight (not a great comfort) and my main objection is the lack of notice. Those that have been happily using the INVESCO Funds concerned (not all INVESCO funds) are being forced to change. This does rather create the impression of selling at a low point and perhaps buying at a high point. The truth is we won’t know until much later. However, what it does expose once again is the problem with “Star Managers” who are a rarity. The only UK Fund Manager more well-known is probably Anthony Bolton, who ran the Fidelity Special Situations Fund very successfully for many years then retired, only to find retirement somewhat unsatisfactory, (I presume) so launched a Chinese fund… which has, not met with the same success. Unlike Mr Bolton, Neil Woodford is sticking with what he knows and can avoid blaming the Chinese for their lack of corporate governance*. This all stems from the belief that investment out-performance is repeatable and sustainable. I don’t subscribe to such a belief when it comes to the long-term (which is the only worthwhile measure of “repeatable” or “sustainable”).
In practice this has exposed the problem of chasing the curve, hoping that because of the past, the future will yield similar results. It is pretty difficult to dissuade most investors from this sort of “top of the pops” behaviour given the tide of marketing and “evidence” of out-performance (by which I mean rather meaningless charts, designed to show certain events in their best possible light).
Is this the best way to invest? Yes if you are in first and out first…but to do that requires courage, conviction and perhaps some inside knowledge, most lack the first two sufficiently and the last is illegal. For those impacted by this move, we will be in touch (as will Skandia… sorry I mean Old Mutual Wealth).
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