Financial Planning: Should I do my own financial plan?

Should I do my own financial plan?

You are good at what you do for a living. You are successful by most standards and are keen to keep developing your own skills and capabilities so that you can drive your business or professionalism forward. You know your way around a spreadsheet and understand what a balance sheet is, in fact when it comes to the daily management accounts, you have got it licked. So its not unreasonable to assume that you can handle your own financial planning. After all, why spend money to get a financial planner to tell you what you already know?

Admittedly, this isn’t something I hear a lot, but that doesn’t mean that it isn’t being thought or said by those that don’t make a bee-line for my front door. Most people are capable of learning to do their own financial planning, in the same way that most people could learn to be their own physician. Most of the time we are perfectly able to self-diagnose and take over-the-counter medicine for minor ailments without need to bother the GP. However there are moments when we should seek qualified advice and sometimes that will result in being referred to a specialist. Financial planning is no different.

Most people are perfectly able to manage their day-to-day budget and build some savings. Many are quite comfortable with completing tax returns for the straight-forward stuff. However a financial plan is not about the ordinary day-to-day “stuff” it is about helping you get what you want from your life by assessing what you have, what you need to have and helping you get there as efficiently and effectively as possible. There are lots of moving parts to a financial plan and some come and go, depending on the legislation and rules of the day. We aren’t talking about a simple goal “I want £200,000 by the end of 2025” but a complex interaction between your values and reality.

In sport, even the top sportsmen and women have a coach. What does this tell us? that there is always room for improvement? a problem shared? someone to motivate? provide discipline? the list is probably fairly lengthy – but having a supportive “partner” critique and help improve is how I approach this. Because “money” is something we all handle, (for many of our clients at a very “high level”) we can often think that financial planning must be easy… a bit like painting by numbers. Select your own financial products that appear to be the right ones, pick the top performing or top selling funds and you’re done right?

I genuinely believe that most people are capable of doing their own financial planning, but with the caveat that they need to put in the hours of study acquiring the skills and knowledge required – like anything else. However even with these skills and knowledge, one vital ingredient is also required – experience. Take the example of being a surgeon – knowledge is one thing, but on-the-job experience is vital and indeed if you were having surgery, you’d want someone that did this pretty much all day, each day, each week, not someone that does the occassional surgery. Things that are important, that matter, need an expert hand.

Above is an image of some restoration work (on the right) carried out on an ancient mosaic (the left image is the original) held by the Hatay Archeological Museum in Turkey. This recently became widely reported in the media due to the obvious flaws in the “restoration”. Unfortunately, those doing the restoration are blaming others. The question for you – is it good enough?

Dominic

Financial Planning: Should I do my own financial plan?Dominic2025-01-28T14:35:51+00:00

Pensions: New Freedoms

Pensions Freedom

Have you heard about pensions freedom? Are you approaching retirement and thinking that this is excellent news, you can have your entire pension? Well you are right, but as ever there is a catch. You are free to self-destruct, it is your right to do so (and I’m not being patronising).

On the one hand freedom is good right? but with it comes responsibility (why do I sound like a Spiderman scriptwriter). By responsibility I mean, once you spend it, whether thats taking it as a lump sum or buyng an annuity or leaving it as a Flexible Access Drawdown pension, once it has gone – that’s it. Nothing left… except any other pension income you may have such as the State pension.

So this is all about knowing what you have and what you need. Something that no British Government has ever managed to get right for themselves, yet here we are, with new freedoms. So you have to figure out how long you will live to work out how much you can afford to take out each year. Actually rather more than that, you have to predict future inflation rates, mortality rates, investment returns and tax rates…. to name a few “elements”. Of course you could get a financial planner like me to help by doing some cashflow modelling and explaining the options and reviewing progress regularly or you could do it yourself.

Today I learned about a term called the IKEA effect. This is when we place a disproportianately high value on something that has been partially made us. Go on look it up. This is precisely what happens to DIY investors… that portfolio I built, its not bad. Actually the truth is rather different. I mean no disprect to IKEA or DIY investors. This is about a price-point in the market – what you can afford. Arguably you will have to live with both (furniture and your DIY portfolio) but your portfolio has to last your lifetime. I’m all for consumer empowerment and the removal of elist jargon and ivory towers, but information is not the same as experience or indeed knowledge. I wonder if you remember the John West tinned fish TV adverts? its the fish that John West rejects that make them the best. In other words, selection, some might call it curation – is vital.

Building the right portfolio to last for life is a fairly daunting challenge, for a few this isn’t going to be much of a problem, but for the vast majority of people it will be. Most people do not pay attention to the holdings in their ISAs or pensions. Most are in the funds or more likely single fund, that the adviser put them in when they started their pension. Little attention has been paid to assessing the level of contributions needed, frankly its more like lucky dip… and who can blame them! the jargon is a huge barrier, statements are fairly unclear and the rules keep changing, little wonder people don’t spend much time looking after one of their largest assets. Yet suddenly at the point of retirement, they are expecting to become investment experts. Whilst the Government may say that people should be trusted with their own money, thats fine if it relates to the straight-forward stuff of running a budget and basic banking, but when it comes to understanding asset allocation, volatility, sequencing risk, safe withdrawal rates, reductions in yield… well frankly its taxing even for the experts. Your pension is not a shelving unit from IKEA, its more like fitting a pace-maker, one that has to keep you going.

My advice is to get advice – don’t get sucked into short-term thinking and getting some degree of satisfaction from raiding your pension to show your displeasure with the pension company. Certainly there are better pensions, but you really need to get sensible advice to explore your options properly. You wouldn’t build a house without architectural plans (I hope)… the same is true when it comes to designing a portfolio for life.

Dominic

Pensions: New FreedomsDominic2025-01-21T15:50:49+00:00

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?Dominic2025-01-27T16:09:57+00:00

Are you protected online?

Today has been a fairly frustrating day with a few IT problems. Thankfully nothing too serious, but I paused to reflect on how frustrating a slow computer can be…. yet I’m old enough to remember a time when getting onto the internet was a major event, when loading software was more or less hardware (floppy disk drives) or even a tape casette loading for what now would seem like eternity. So despite my morning blues, I ought to be a little more grateful of the progress that has been made by everyone concerned.

When your IT doesn’t do what its meant to do, I tend to think of how I might improve things. The ability to access information securely, pretty much anywhere, anytime. It reminded me of a conversation with someone recently who isn’t keen on financial protection. I have some sympathy with this perspective – after all who likes insurance? (other than insurance companies). However when or if you need to make a claim you are pretty glad you have it. So I tried to think of a useful analogy… we were meeting online… so I asked if he had virus protection? yes – Do you back up your computer? yes – Why? because the disruption, stress and chaos caused without it isn’t worth comtemplating.

Precisely the reason why you’d have any form of financial protection, except the consequences are rather more severe than data loss. As I outlined last week, there are various forms of financial protection, getting the right cover is rather like getting the right virus software…. something that perhaps Mr Stark (Iron Man) in the latest Avengers movie (Age of Ultron) might also want to remember… mind you, I suspect his cover might have a few extra clauses given his occupation.

Are you protected online?Dominic2025-01-21T15:44:01+00:00

Do You Need Financial Protection?

A question I’m often asked is do I need financial protection? frankly this is rarely the question… most people are really asking if insurance is worthwhile. Given the scandal of PPI, and a general mistrust of financial services, it is little wonder. Add in the reality that there is a general assumption that such contracts are designed to favour the insurer and the lawyer involved, many question whether the insurers would ever pay out.

OK, there is little I am going to be able to say to convince anyone that is suspicious about “the system”. All I can do is point you to data about claims paid and also relate my own experience. In all the years I have been advising clients, I have unfortunately had a number of claims. All of them were accepted, only one was not paid out at the full amount (they paid 73% citing non-disclosure of material health matters). We are currently considering whether to contest this or not, I can see both sides of the argument – but obviously represent my client, so will represent his interests.

In essence there are really only three types of financial protection I deal with for individuals. So let’s cover what these are.

1. Life assurance – you die, it pays out. Price is everything, there is pretty much nothing between providers on terms and conditions, however there are a myriad of types of life assurance policy and enormous differences in cost.

2. Critical Illness Cover – this is much more contentious. Terms and conditions are everything, quality is upmost, price is secondary – you pay for what you get. However cost still varies enormously. This cover pays out if you are diagnosed with a serious medical condition – it pays you. The main conditions are cancer, heart attack and stroke….all stuff that most of us would prefer not to think about, but probably know several people (depending on your age) that have experienced this.

3. Income Protection – this pays your income if you cannot work due to incapacity and an inability to return to work. Generally cover would pay until you are better and can return to work, or until the policy maturity date (invariably your retirement date). It isn’t so contentious, these days a lot of employers provide cover. Certainly terms are important – most basic being does it pay out if you cannot do your job or any job or any job for which you are suitably skilled/able. Cover is always less than your total income, as this provides an incentive for the claimant to “make a recovery” and also reduces fraud. Cost varies considerably. Generally cover is a percentage of income, up to a maximum and starts typically after 3, 6 or 12 months of “being unwell”… the longer this “deferred” period, the cheaper the cover. This isn’t accurate… but gives you an idea.

Which job would you prefer?

Job A: £60,000 per annum

Job B: £59,500 per annum plus £38,675 per annum until 65 if you have a long term illness.

As I say, its not accurate, lots of if’s but’s and maybe’s…. but hopefully I am conveying the concept.

So how much cover do you need?

That depends entirely on your circumstances, the cost of your lifestyle, your age and your level of debt and if you have anyone that is relying on you. It is generally true that the more you need cover, the less you can afford it… think of a young family who have a tight budget…precisely because they have a tight budget they need cover. Some people don’t need any cover (because they have ample resources). In essence they are self-insuring, however some of these people would prefer to pay for insurance so that they pass the risk to the insurer rather than bear it themselves, so using funds for other, more enjoyable purposes.

Reviewing Cover

So you have a load of old policies. You have some cover. Sometimes it isn’t a good idea to change the cover – the policies where terms and conditions matter generally are weaker and more vague these days than they once were. However some can be reviewed. Don’t forget on the whole your debt should be reducing and you and your family, if you have one are older, less dependent.

Financial Times (FT) Financial Adviser Awards 2015

Yesterday I attended the FT Financial Adviser Awards – having been nominated for “Protection Adviser of the Year”. I’m pleased to say that it was a podium finish (2nd)… which isn’t bad (the winner is a thoroughly good adviser that I respect – genuine congratulations). Of course I would have preferred to win – but hey, out of 24,000 advisers in the UK… I, like Nico Rosberg need to keep improving. However I don’t really know the exact reason why I came second (unlike F1 there isn’t a final lap chequered flag. I assume it cannot be based on the amount of protection business I arranged over the last year (consider the big networks of advisers or Bank employees), so I presume it is the quality of the advice process, perhaps also because I have always removed commission from protection policies (reducing the cost for clients) which is still unusual and not a regulatory requirement of “adviser charging rules”. Perhaps it was the case study, business model or interview that revealed the quality rather than the quantity of our protection advice. At this stage I don’t know, but what I do know is that if you find yourself in a nightmare scenario – the inability to earn, or life threatening illness or worse – suddenly bereaved, having cover in place that removes financial stress makes all the difference in the world. Because sometimes in life stuff happens that we don’t like.

Dominic Thomas

Do You Need Financial Protection?Dominic2025-01-27T16:11:46+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 InvestingDominic2025-01-27T16:13:05+00:00

Is It All About Money?

I came across this short video which I’d like to share. It isn’t very complimentary to those within the financial services industry (which includes me). So why share it? well…. because I agree with a lot of what is being said. I have met hundreds, perhaps thousands of people all with different financial concerns. Twenty years ago I wouldn’t have trusted most people that held themselves out as financial advisers, today in 2015 there are still quite a few bad apples, but most of the people I meet are genuinely trying to help their clients… sure, like me they are also trying to run a profitable business and it seems to me that profit is a word that needs reclaiming here in the UK – without it, you dont get to play again next year.

The American dream suggests that you can have it all, you simply need the discipline to get there. This is true for some, but certainly not for all – and yes I am aware that there will always be exceptions… the classic Cinderella story of rags to riches. However most people aren’t interested in making a fortune, what they tend to want is the ablity to maintain their lifestyle, have options to travel and to bring up their children (if they have any) in a healthy, safe and encouraging environment. Only this weekend I had an email from someone saying that they don’t care about money… most people don’t. What they care about is their life. Money simply provides choices, it doesn’t provide guarantees and can offer some security but most of this is illusion. Don’t believe me? imagine an invading alien army (I know -daft right!) landing in London… the value of your home, size of your bank balance or ISA is suddenly rather irrelevant. Yes, I know its unlikely… I’m merely making a point.

Financial planning is not really about money. Thats why I don’t have tabs on the website telling you about all the products we “sell”. However I will admit that sometimes I think it would be a better marketing strategy, as that is what people actually look for, not financial plans. Financial planning is about you. Your life plan. As the financial planner, my job is to ask decent questions and explore the answers (or range of answers) together. I am meant to represent your interests, helping you to make better decisions and trying to ensure that your money doesn’t run out before you do.

For the record, we are further ahead in this regard than those in the US – and I for one am grateful for our NHS and not having US healthcare costs. If you follow me, then you’ll know that since formation in 1999 we have charged fees for advice rather than commissions. Our clients know what they pay us. Fiduciary is absolutely the right term. Anyway, here is the video:

https://youtu.be/b-Ad4JIfao4

Any questions? please share. If the video doesn’t work try this link: https://youtu.be/b-Ad4JIfao4

Dominic Thomas

Is It All About Money?Dominic2025-01-28T14:35:51+00:00

Weekend Papers Impressions of Persistence

It has been another busy week, quite a bit of last minute end of tax year planning and some horrific stories. The markets have had another set of wobbles.. perhaps a sell-off in response to high valuations, or problems in

[fill in the gap!] or of course people doing their end of year capital gains tax planning. If you are invested, then it probably doesn’t really matter, unless you planned to withdraw from markets this week, last would have been better… such is life. The truth is that most people are long-term (life-long) investors, so current trouble (which is ever present) is simply something that we live with and plan for. My job is to keep you focused on what is actually important and not get distracted by the noise that fills our daily experiences.

Persistence is a key aspect of a good investment experience. Something that I was reminded of by the art dealer Paul Durand-Ruel, who was a long-term advocate or champion of impressionist artists like Monet, Pissarro, Degas, Manet and Renoir. The National Gallery put forward the argument that we wouldn’t have the impressionist art that we now know without Durand-Ruel, who was a very persistent advocate, his quotes are a great compliement to the works. Its a really good, well curated show, tucked away off Trafalgar Square in the National Gallery – called “Inventing Impressionism – The Man Who Sold A Thousand Monets” and lasts until the end of May – well worth a trip.

https://youtube.com/watch?v=6FqgsfVCF44%3Ffeature%3Dplayer_embeddedframeborder%3D0allowfullscreen

So I will persist, much like Mr Durand-Ruel and keep pushing the idea that markets rise and fall, attempting to time the market is a loosers game and a long term plan that is reviewed regularly is vital. We, like Mr Durand-Ruel, curate the content of a portfolio and the things that are of true value. If this is something you think someone else may need to hear or experience, then do pass on my details or perhaps point them to this weekend’s Sunday Telegraph where we will apparently feature as one of the UK’s top advisers… hopefully it will be good coverage, but if not, my belief in our approach isn’t about to change. So do look out for the 8-page supplement from VouchedFor in the Sunday Telegraph.

Dominic Thomas

Weekend Papers Impressions of PersistenceDominic2025-01-28T14:35:52+00:00

Professional Adviser Awards 2015

Last week I attended the Professional Adviser Awards held in London a stone’s throw from the Barbican. We had been short-listed, for the second time in succession for “Firm of the Year” for London. Given our size it is highly unlikely that we will ever win when competing with much larger firms in the financial capital, frankly it is a a bit of a coup that we get short-listed. However on the back of our submitted work and the judges having a look at the firm I’m delighted to say that whilst we didn’t win, we were a close second with a “highly commended”.

Those that know me will appreciate that I am constantly seeking ways to improve what we do for our clients. I am all too aware of short-comings and work hard to reduce or remove them wherever possible. So not winning, in this instance, feels absolutely right and yet still highly satisfying.

As it is awards season, it is customary to thank various people. So I would like to thank our clients, the staff, those within the industry that have assisted us to provide a great service, various peers that inspire and encourage me, friends and family that have been hugely supportive over the years and my wife and daughters for their support and understanding.

So in the spirit of improvement…. I’m more than willing to listen to ways that we can convey concepts to clients, produce easy to understand high quality material and promote independent financial advice within a proper financial planning context. Please get in touch if you have suggestions about how we may improve.

Dominic Thomas

Professional Adviser Awards 2015Dominic2025-01-28T14:36:16+00:00

Commission – I Don’t Understand it either!

Commission – I don’t understand it either!

If you know anything about me and the firm, you will know that from inception (1999) we removed commission from all financial products that we arranged. This was due to wanting to remove bias between financial products and provide better arrangements for our clients. Admittedly ahead of our time and it wasn’t until January 2013 that commission had to be removed from investments as a result of the regulator’s review of the market.

Yet only this month (January 2015) I am wrestling to understand commission on a tiny life assurance policy that I have arranged for a client. Long story short we asked to remove the commission as usual (reducing the monthly premiums by about 30%). However it appears that in this instance, the insurer only removed “initial commission” and when the terms came through, the renewal commission of £1.06 per month would be paid to us from month 49… until the policy matures in 10 years time. In short we would potentially receive commission of £1.06 a month for 95 months…. not exactly a lot of money, but not what we promised! So I request that this commission be removed, only to find that the monthly premium is reduced by just one pennny a month… rather than passed directly onto the client as I had assumed. In this scenario, the insurer merely keeps £1.05 a month extra as pure profit. Bonkers! OK I know its not a massive sum, but then that’s just because this was a small policy, the cheapest from the market, but multiply it by millions of customers…

So, it would seem to me that I should take this extra commission (not payable for 4 years) and either pass it all to the client or offset it against his fees, but to my mind this merely demonstrates how behind the times some product providers are and why I believe that so few of them have the remotest chance of surviving another thirty years. As for the regulator, in their infinite wisdom, the commission ban only applies to retail investment products… not insurance… no, I dont understand it either!

Dominic Thomas

Commission – I Don’t Understand it either!Dominic2025-01-28T14:55:30+00:00

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