Published on: October 10, 2012
Categories – DIY Investment, Financial Advice
Many of you will have seen the interesting piece in last Saturday`s “Daily Telegraph” by Ian Cowie , in which he made a forceful argument against the National Employment Savings Trust (NEST) – even going so far as to suggest a more fitting acronym might be appropriate using his alternative proposal (the Centrally Regulated Authorised Pension).
Now, I happen to have a great deal of time for the views of the Consumer Affairs Journalist of the Year, but on this occasion believe his views were uncharacteristically wide of the mark.
Let`s examine what he said:
(1) “….the new scheme could lure millions into a false sense of security and, as things stand, will cause many low-paid people to deprive themselves of the means-tested benefits to which they are currently entitled.”
(2) “……let`s explode the cruel deception that saving 1 pc of employee`s earnings plus a matching contribution from the employer is enough to provide an adequate pension.”
(3) (Source: Fraser Smart) – “Someone aged 25 currently earning £30,000 per annum, for example, could expect to receive a pension, in today`s terms, of £5,000 from auto-enrolment. Assuming a basic state pension of £7,000, the total pension would be £12,000 a year, which would provide a post-tax income of less than £1,000 a month.”
(4) “The Government is relying on the hope that people will believe that saving at the minimum rate imposed by automatic enrolment will provide them with an adequate pension.”
(5) “….many will find that they gain no benefit from compulsory savings, which merely reduce their entitlement to means-tested benefits. That may be a good thing from the Government`s point of view, but it will be difficult to establish that auto-enrolment was in the financial best interests of the people affected.”
A catchy piece of journalism, Ian, but what about the compelling counter-arguments?
First, it could appear a bit condescending to suggest that the average worker really believes that modest contributions will result in stellar outcomes. As Kevin O`Donnell recently put it in FT Adviser: “You can`t make Ford Fiesta payments into your pension and expect to come out with a Rolls Royce at the end”. As an adviser, I have come across that type of realistic earthiness among blue and white collar workers alike over the last thirty years. They tend to know when they are getting bang for their buck.
Second, some financial advisers might become over-defensive about a central assault on their market by the State, but the truth is that (a) if they are relying on this sector as a core market segment, they will shortly be out of business and (b) the scale economies from which NEST benefits will, over time, produce better outcomes for this sector of the population than individually-sourced product propositions, despite preliminary pricing concerns over this initiative.
Third, NEST forecasts that there will be over 5 million new pension savers by 2018. How can this be a bad thing? As Joanne Segars of the National Association of Pension Funds recently said: “The U.K. is drifting towards an iceberg when it comes to paying for its old age.” One look at the U.K. savings ratio (where the Chinese are managing to squirrel away around seven times as much as we do every year) will demonstrate that we are dealing with a disillusioned generation which, unless led by the nose, will quite happily live by the “carpe diem” mantra indefinitely unless prodded into action.
But then there`s always the State to bail everyone out. Really? – let`s probe that statement a bit further.
According to the Centre for Policy Studies, 53.4% of households received more in benefits and public services last year than they paid in taxes (from a 43.1% figure in 1979). Indeed, just between 2000 and 2010, the number of households dependent on the State grew by 3 million. For how much longer will the richest 20% of families be willing or able to support this precarious system? Unless future generations are relying on fast food and sedentary lifestyles to reverse longevity expectations, someone somewhere is going to have take the lead in inculcating greater awareness and responsibility.
Fourth, why don`t we put everything off until we can be sure that means-tested benefits won`t be sacrificed? Given that means-tested benefits are currently unaffordable, and will become increasingly so unless arrested, anybody who defers action on the basis that the State will eventually be there to support them is, at best, misguided. Despite rumours to the contrary last month, Iain Duncan Smith has this week reaffirmed the Government`s commitment to introduce the single tier, flat rate pension. If he doesn`t manage it, someone else will, once they take another glance at the country`s burgeoning debt levels.
Fifth – lies, damn lies and statistics. So, an individual earning £30,000 gross will have to get by on around £12,000 net per annum in present day terms. Currently, that person will be taking home less than £23,000 and eventually emerging with a pension of more than 50% of salary. Seems like a result to me.
Further, these calculations are being carried out based on the lowest (QE-skewed) annuity rates in history. Some twenty years ago, annuitants were receiving twice as much when converting their funds to pensions. Is it really being suggested that we are going to be in this interest rate environment for the next three or four decades? Leaving rooms and switching off lights springs to mind.
Sorry, Ian, but to discourage participation in NEST among UK workers will only mean that many of your readers will be funnelling still more of their earnings into an unsustainable welfare system in the future.
Carpe diem cras.
Published on: September 24, 2012
Categories – DIY Investment, Financial Advice
I took delivery of a new car last year – and, all things considered, I`m fairly pleased with it. As is customary these days, it arrived with a handbook thick enough to facilitate light bulb changing, which I deliberately placed next to the television so that my conscience would be pricked and I might one day discover the intricacies of Bavarian engineering.
One year on, the handbook has been disturbed only by feather dusters and a labrador (as indeed has the BlackBerry “Safety and Product Information”, which has just been spotted at the edge of my desk).
Apathy has, however, brought with it a few problems. During the first month, I discovered I was unable to re-tune the “in car entertainment” from my daughter`s preferred Radio Tinnitus without threatening the longevity of cyclists and pedestrians. On more than one occasion, I found myself thinking wistfully back to the six- buttoned radio selector of my 1990s Volvo and craving greater simplicity.
All of which rather leads me to the point. Have we in the investment world become a bit too clever for our own good and, somewhere along the way, left the audience behind? The eyes of investment advisers may light up when analysing alpha, beta, Sharpe and Information ratios but, realistically, I cannot help believing that many mainstream investors would be happier if financial solutions were not quite so over-engineered.
Take fund switching. For much of this century, we have been regaled with the message that astute equity investing is no longer about “buy and hold”. Clever investors dart in and out of markets and pocket their gains ahead of the pack, often supported by expert technical analysts who minimise portfolio volatility.
This belief, alluring as it is, does not seem to be reconcilable with the evidence.
As Philip Coggan once said in “The Economist”, “…too often technical analysis, when used for private investors, simply results in a lot of trading costs that diminish returns.”
The founder of Vanguard, John Bogle recently observed that, in the sixty years since he entered the market, U.S stock trading volumes have increased from an average of 2 million a day to 8.8 billion. During that period, the holding period for stocks has shrunk from 12 to 3 years (and often to less than one year). More worryingly, derivative trades were valued at a notional $580 trillion in 2011 – four times the actual value of all equity and bond markets.
For whose benefit?
If Warren Buffet`s philosophy is embodied in the phrase: “Our favourite holding time is forever”, I remain unsure why the current paradigm for investing should seek to depart too far from this sound practice (unless brokerage fees and adviser delusion can count as relevant considerations).
Thanks to a piece written by “Motley Fool” last week, I was reminded that, despite the apparently hostile stock markets of the last ten years, an investor would have almost doubled his money in the S&P 500 from 2002 to the present day, after re-investment of dividends. In fact, 7% per annum compound has tended to be a fairly reliable market average over the long term.
John Authers penned an interesting article in the F.T. last year, in which, drawing on two decades of research in the field of experimental psychology, he examined the importance of self-control to an investor`s life. The conclusion was that intelligent people were unable to control their emotions, stating: “The market is difficult to time and so the more you trade, the less likely you are to make money. Trading appears to be troublesomely addictive.” Indeed.
Further evidence of human fallibility came with the study carried out on the NYSE by the University of Michigan over the lengthy period between 1926 and 2002. In this, “dollar-weighted” returns (reflecting the tendency of investors to plunge into markets as they are just about to turn bearish) were lower than the “buy and hold” returns by about 1.3% p.a. (8.6% versus 9.9%). In the words of Professor John Kay: “Professional doomsters continually predict market crashes and, like stopped clocks, are occasionally right.”
Of all the folksy anecdotes, I think my favourite is that of the “The Coffee Can Investor” – related by Paul Farrow during his days at “The Daily Telegraph”. An American adviser in the Fifties advised a lady to buy and sell investments in accordance with his firm`s guidelines. Unbeknown to anyone else, her husband implemented an identical portfolio but did not touch it and, when he died, his investments were significantly higher than those of his wife. Conclusion: “A portfolio with negligible costs can outperform a portfolio that is constantly tinkered with. Active strategies often lead investors to buy at the top and sell at the bottom of markets or share price cycles, motivated by fear and greed.”
The asset management industry is commonly portrayed as an uncontrollable creature that devours too much of investors` returns (around 3% per annum). If prospective returns are set to remain in low single digits, then the spotlight on intermediary charges is not going to go away until clearer tangible value is added. I would respectfully suggest that such added value is more likely to emerge in the form of highly-developed financial planning, rather than in attempts to time and beat markets.
While acknowledging that there will undoubtedly be exceptions amongst the highest echelons of wealth, most mainstream investors will probably prefer to pay for a dependable vehicle with a limited number of buttons to press, and which does not have too many shocks when it comes to performance or servicing. In the world of investment, less can certainly be more.
Published on: September 21, 2012
Categories – DIY Investment, Financial Advice
This week`s “FT Adviser” and its sister publication, “Financial Adviser” took up the theme of Money-Guidance`s latest blog post. The following article continues the discussion which I am seeking to provoke, as well as including some feedback.
IFA urges firms not to forget less-wealthy clients
Advisers will not need to ditch low-value clients after the retail distribution review if they adopt better business models and use technology more efficiently, Philip Dodd has said.
By Julia Bradshaw | Published Sep 20, 2012 | 2 comments
Mr Dodd, a self-employed adviser and founder of the Money Guidance website, said it could be in advisers’ interests to develop different types of service propositions for different clients, rather than casting aside unprofitable clients altogether in the run-up to RDR implementation.
He said: “I cannot accept the argument of jettisoning unprofitable clients and to focus exclusively on those who add most value to the business.
“It could be they are unprofitable because of the way that the advisory business is configured.”
Mr Dodd said IFAs can service lower-value clients and still deliver profits by adapting their business models to changing demand and using technology to cut costs.
He added: “It should not be beyond the wit of good advisory firms to listen to what clients now want from a financial planning service and to create a number of profitable service propositions to meet these revised demands, with much more emphasis on using technology.
“It’s all too easy to take one’s top 50 clients and give them a bespoke service and disregard the remaining 250. My concern is for those clients in the crowded heartland who want a service approximating to something in between full and execution only.”
If clients do not need to be seen face-to-face, Mr Dodd said the adviser can contact them on the telephone or by email which would save time and petrol costs.
Research by organisations such as Deloitte and YouGov have previously shown mass-market clients often want to dip in and out of specialist fee-based advice when they feel out of their depth.
Mr Dodd said: “There is profit to be made if advisers don’t over-deliver their service.”
He also warned it could be short-sighted of IFAs to ignore mass-market clients as competition for high net-worth clients is likely to increase in 2013.
Mr Dodd added: “Advisers who have decided to move towards their best clients are perhaps neglecting segments that could one day be profitable. There is too much short-termism.”
Gordon Bowden, director of Buckinghamshire-based Quainton Hills Financial Planning, said: “We have a small number of clients to who we give a full service, so we are not geared up to take on a lot of clients paying less money.
“Firms that do decide to service low-grade clients will find it difficult. The problem is there is a fixed cost to things such as compliance and risk, regardless of the type of client, so a lesser service doesn’t necessarily mean a lesser cost.
Published on: September 14, 2012
Categories – DIY Investment, Financial Advice
@PhilipSDodd good piece. There aren’t enough HNWs to go round. What are the other advisers and their LNW and MNW clients going to do?
Sometimes 140 characters just isn`t quite enough. In answer to your question, from an adviser`s perspective many are in for a hard time (I know – I can hear the sobs from here).
With only about three thousand Chartered Financial Planners (albeit with plenty of alleged aspirants), I take the view that many will not be to change their game in time to survive – the consumer is slowly getting smarter whilst the financial adviser is stoically clinging to the belief that, “we`ve always managed to survive and adapt in the past”. Although the official figures point to a 10% attrition rate, others have projected that up to 50% of advisers will be relinquishing their briefcases and engaging in full-time labrador walking over the next few years.
Those who remain in the middle of the road will probably not manage to avoid the oncoming headlights for too long. They will have to find a specialism and stick to it (e.g. IHT, Long Term Care, low-cost Index-tracking, etc.) – anything that will allow them to differentiate themselves and create some sort of brand value. Alternatively, if they are up to it, they can try to become technically proficient holistic financial planners and charge fees accordingly in return for this knowledge. Those left without an angle, and there are currently still quite a few around, will find that many retail consumers will be looking to take advantage of the free sources of web-based financial guidance, thereby marginalising the commercial viability of their businesses. As with Term Assurance, what can be mechanised will be mechanised.
Probably like you, I am still coming across many advisers who have relied on the fact that they can “pick winners” and “beat the market”. Sadly, that belongs in a betting shop not a so-called professional practice, and doesn`t represent valuable financial advice that will provide a competitive advantage in this new world of easy comparisons and greater access to information. The DIY market will probably carry on doing well, supported by a growing DWG (Done With Guidance) sector.
This time it is different, and I suspect the potential impact of this political intervention is dawning a bit late – hence the adviser rush for the exit with unappetisingly-priced business disposals.
And what of Low Net Worth and Medium Net Worth clients? Well, 84% of the U.K. consumers still haven`t heard about the riveting topic that is the Retail Distribution Review. The significant proportion who do not have the propensity to save, and who spend most of their time worrying about how to keep afloat, will continue to seek guidance from the Citizen`s Advice Bureau and may, just may, find that the soon-to-be-imposed NEST discipline will create a building block over Duncan Smith`s State Pension initiative – that is if they don`t opt out.
Those with some capacity to put money aside will either fall prey to the sales forces of banks (HSBC and Barclays are smelling pay dirt and galvanising themselves into action) and Insurance Companies (who are actively seeking to gain ownership over the orphan clients of departing advisers), or they can lose some time but gain some money by improving their own financial knowledge – supported by people like you and me and a whole host of free information and tools available on the internet. Yes, I know, don`t hold your breath.
So, there we have it – it`s not pretty, but it`s sure going to be interesting.
Published on: September 13, 2012
Categories – DIY Investment, Financial Advice
At what point do clients become dispensable for financial advisers? ” It depends on their business model” would be the easy response – but does it?
An (optimistic) 10% expected reduction in adviser numbers would still leave far too many seeking to earn their keep from 550,000 or so U.K. “High Net Worth” individuals alone (i.e. those with more than £0.5 million of investable assets). Gone will be the days when organisations such as The Institute of Financial Planning simply urge members to calculate hourly rates by reference to their own overheads and desired profitability levels. The financial services sector will have to eschew unilateral solutions and join the rest of UK plc, engaging clients in the matter of acceptable pricing levels – the same dangerous clients who are becoming more savvy about free financial tools, performance-tracking, competitor pricing and costs.
It has been widely reported of late that the private banks are “culling” or “managing out” their impecunious clients with only £50 – 500,000 available to invest, and that these individuals are often beating a path to the doors of IFAs and retail banks – so perhaps the salvation of advisers lies here?
Possibly, though it`s unlikely, unless current business models are adapted. It would seem, according to the research company, MDRC UK, that price “stickiness” is not too much an issue for investors with £500,000 to £1 million to invest – these people tend not to balk at handing over £150 to £200 per hour. And £200 to £250 per hour is a mere bagatelle for those with over £2 million at their disposal. No, the scramble is among the half million or so prime U.K. investors who will have a very clear mandate to seek value for money.
I commend those few astute planners who are already well ahead of the game with their highly profitable fifty or so clients (and the future generations thereof). My concern is not so much about the black and white extremes of full service and execution-only propositions, but for those clients in the crowded heartland who want a service approximating to something in between – the Thrifty Shades of Grey, if you like. These people have already let their feelings be known – if Deloitte, Legal & General and YouGov surveys are to be believed – they will want to do as much as they can themselves and call on fee-based expertise only when they feel out of their depth.
According to L&G, 95% of IFAs believe their clients are increasingly experimenting with “d.i.y. investing”. Alongside this, there is a grudging acknowledgment that retail financial consumers are becoming more financially knowledgeable – in 2011, 79% of IFAs thought this increase in d.i.y. investing would lead to unsuitable investments but, by this year, the figure had fallen to 68%. Such a trend is unlikely to disappear conveniently.
So what, if anything, needs to be done?
First of all, I cannot accept the argument that seems to be gaining more currency at the moment – that being to jettison unprofitable clients and to focus exclusively on those who add most value to the business. Could it be that they are unprofitable because of the way that the advisory business is currently configured? Is an exclusive focus on larger clients dangerous in the absence of supporting market segments which can provide a contribution to profits at the margins? I do not see insurance companies passing up the opportunity to play the numbers game and make it work for them, not to mention a couple of banks (HSBC and Barclays). By adapting their business models to changing client demand, advisers can do the same.
For instance, a recent survey by Prudential found that one quarter of customers would be interested in an online or telephone service in return for a fee reduction of at least 50%. Nearly two out of five would be willing to complete their own fact finds online if this resulted in a lower-priced service. If customers` attitudes to face-to-face advice are changing, financial planning firms should in turn be re-designing their pricing model to reflect the savings in time and travel associated with a remote service.
Technology, be it in the form of portfolio and risk assessment tools or transactional software, has irrevocably changed the external environment – but not necessarily for the worse. It is to be welcomed that the “asymmetric information” gulf between advisers and consumers is at last being narrowed – with this should come greater comprehension and therefore fewer complaints. Given that the marginal cost of anything digital is currently falling by 50% per annum, it should not be beyond the wit of good advisory firms to listen to what clients now want from a financial planning service and to create a number of profitable service propositions to meet these revised demands.
Come January 2013, it really will be a case of adapt or die.
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