Expert Lawyers Advise On Diversification Of Assets Following ONS Survey Results
Specialist lawyers at Irwin Mitchell Private Wealth are warning of the dangers that come with a lack of diversity in asset management, following the recent publication of the Office of National Statistics’ Wealth and Assets survey revealing property to be the number one form of investing for the future.
The survey, published on the 27th June, detailed a sample group of under 40 respondents’ attitudes towards savings, retirement and investments. One notable statistic was that 49% of respondents considered property to be the most effective way of planning for later life and making a solid return on their original investment, up 3% from the previous survey’s results covering July 2014 – June 2016.Employer pension schemes remained in second place but fell in popularity from 24% to 20%.
Stocks and shares trailed behind in third place at 9%, while premium bonds remained in final place with 1% believing them to make the most of their private wealth. ISAs, savings accounts and personal pensions were also viewed as relatively ineffective when it came to saving for retirement, with single-digit percentages on the survey.
The survey’s findings reflect a trend of relying on one form of asset investment as other avenues of managing private wealth, often managed by the government, have failed to capture the imagination of the British public as trustworthy and reliable ways to both save for retirement and reap a good investment during later life.
Nick Rucker, private wealth expert and Head of the London team at Irwin Mitchell Private Wealth, said: “The Assets and Wealth Survey reflects the unwavering, even growing optimism that the public has in the housing market over other traditional forms of saving.
“However, the 2008 financial crisis should serve as a reminder that no market is ever safe.This, paired with the recent stagnation in house prices across the country, should only highlight the need to invest in multiple asset classes rather than relying on one which has traditionally been robust.
“When it comes to retirement and investing for the future, it is important to be aware of any overexposure to one asset class and maintaining a diverse portfolio of assets. While property is a perennial favourite of the British, as reflected by the ONS’ recent findings, there are several other areas of investment that will serve well for later life such as personal pensions, stocks and shares.
“Irwin Mitchell Private Wealth advises that in order to ensure a comfortable and safe retirement, clients should have a complete wealth, tax and legal plan in place in order to ensure their plans for later life come to fruition rather than placing ‘all eggs in one basket’ and risking exposure to losing wealth or assets.”
Why investing should be treated like healthcare
By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut
For many people, the process of investing can seem opaque and impenetrable, and filled with jargon.
They can see the potential benefits, but they can also see the Financial Conduct Authority (FCA) risk warnings.
Despite – or perhaps because of – this, the long-term trend suggests that more individuals are open to investing. One set of statistics suggests the percentage of individuals investing in stocks and shares in the UK grew nearly three per cent between 2010 and 2018.
Here are four steps for sensible investing:
1. Figure out why you invest, ahead of everything else
The key here is knowing what the overall goal is.
It is a constant source of amazement that when it comes to investing, few people stop to consider why they are actually doing it. Whether they have £100 or £100,000, many do not think about how their approach should be dictated by their overall goals.
For instance, someone looking to buy a house in the next 12 to 24 months should not be looking to dive into the world of bonds and equities, because they have a short-term target which requires reasonably fast access to cash. Tying their resources up in different funds and stocks will not only limit how quickly they can get their hands on their money when it comes to putting down a deposit, but they will not see the return that they would expect due to the short term price fluctuation of these assets. They would be better using a Cash ISA and enjoying the tax-free allowance.
On the other hand, if they have spare cash lying around that they won’t need for the next 3-5 years or longer, or they want to get a headstart on earning their retirement or long-term financial freedom, investing into financial markets is the way to generate compound return. That will give them a chance to beat inflation and, in all likelihood, it will give them a higher return than real estate would.
It is like any big project – determining the overall goal informs the strategy, which dictates the tactics. In the world of investment, this means management. Yet even deciding what goals they are working towards can be challenging for some people – they might have overinflated ideas or be too conservative.
This is where independent, objective, and knowledgeable financial planning comes in. By giving an individual’s finances a thorough check-up – much like visiting a GP – a qualified and experienced financial planner can consider circumstances, wishes and constraints. Only when this has been completed can they assess how feasible a client’s goals are, and the client can start considering how they should invest.
It needs to be a bespoke diagnostic and prescription process, in much the same way that a trip to the doctor requires the practitioner to have an understanding of any contributing factors and your medical history.
2. Seek professional help
If you were going to buy a property, you would look for a capable and qualified property lawyer instead of reading legal textbooks and undertaking training. The same logic applies to other professional advice, such as accounting, medical treatment and tax. Strangely, though, when it comes to investing, many people attempt to teach themselves.
While this approach is to be applauded, and there is certainly a huge amount of information readily available within a couple of clicks, the intricacies and vagaries of asset classes and funds, opposing investment styles, individual savings accounts and a hundred and one other terms can be overwhelming.
Forging ahead without professional guidance is a bit like having a pain in your hand and deciding to do a bit of exploratory surgery based on watching medical documentaries – there is only a slim possibility everything will turn out fine. This is why 99% of people have lost money by DIY-ing their own investments. It is a risky learning curve that, frankly, is better outsourced. Learning how to find a good investment provider can be a more efficient and less risky use of your time.
3. Do not trade
In the report quoted above, there is an alarming line: “Investors are now holding onto their shares for 0.8 years on average before selling them. In 1980, the average was 9.7 years, representing a decline of 91.75%.”
The proliferation of trading apps brings convenience and lowers barriers, helping people to access financial products, but the user friendliness of the technology often encourages over engagement at a real financial cost.
On an individual basis, each time you buy and sell any financial product (not just shares, but funds too) you lose a tiny slice of your capital, even if you can trade for free – this is due to “spread” which, put simply, is the price difference between purchase price and sale price. As you trade, this quickly adds up and eats into your principal, which you need to earn back before seeing any profit. This is a direct cost, in addition to the time you invest, checking the share price several times a day, the sleep you lose during volatile days, and the potential for developing an addiction, which is a common result of trading. Take a look at your work pension investment report if you have any – there is a reason why professional investors don’t buy and sell frequently.
On a collective basis, crowd trading behaviour drives more “boom and bust” cycles of financial markets, which has happened many times before and will continue to happen in the future. It is a more pronounced characteristic of less developed financial markets where there are fewer professional/institutional investors to stabilise the market for everyone’s benefit.
4. Diversify globally, meaningfully
Sensible investing requires a skillset that is the opposite of most professional careers or entrepreneurship. In the latter, one strives to become an expert in a chosen arena in order to command the highest possible pay or profit margin. A wise investor, meanwhile, needs to be a generalist rather than a specialist, and investing is about hedging all possible risks before seeking a return. One of the biggest principles to reduce risk is to diversify on various levels:
- Your holding currency – for example, GBP has lost more than 15% in value against USD compared to the pre-Brexit high of five years ago, so it is a bad idea to hold all your assets in GBP only
- Your country/geography exposure – for example, you can buy GBP priced US assets, or USD priced US assets, such as S&P 500 tracker, to have a slice of US economy growth. We strongly encourage people to consider a globally diversified portfolio, for the reason that different economies go through business cycles and are at different stages at any given point of time. With a globally diversified portfolio, you can always benefit from the growth of some country, somewhere, at any given point of time
- Asset classes – If all your money is in London real estate, for example, you are likely to have felt some value depreciation since 2014. You take a risk if you tie your financial future to a single city’s economic cycle and potential rise and fall.
- Industry allocation – as a former banker I never bought banking stocks or bonds, simply because my job and salary were already tied to the UK banking sector, and owning a piece of banks is like doubling down in a casino – not wise for risk mitigation. This is an often overlooked risk – people like to invest into companies and sectors they know well, typically from professional exposure and “inside knowledge” but this leads to blind spots and concentration risk.
Investing should be part of one’s long term financial strategy hence there is no one size fits all recommendation that I could give here. A simple step by step guide is:
1. Save a good portion of your monthly income, that allows you to enjoy your current life but also prepare for the future
2. Shortlist 3 financial planners (include Rosecut as one option) and pick one that you feel you can trust and who is cost effective to lay out your big picture and future plan
3. Invest regularly into a globally diversified, professionally managed portfolio that fits with your future goal and then make minimal changes. Ideally you should only even consider changing on an annual basis
4. Learn from this loop, iterate and optimise, ask many questions along the way!
Rosecut is a financial planning partner and investment manager, giving access to the knowledge you need to plan for the future you want. Start your free financial health check today at https://app.rosecut.com/ or download the app.
Are clients truly getting value from their BR solution?
By Matt Dickens, Senior Business Development Director at Ingenious
Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?
1. Total fees and charges
Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.
Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.
2. Real investment returns
Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment. Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.
While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.
3. The relationship between fees and risk
Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.
Annual performance target, net of fees: 3%
Annual fees: 3%
Gross performance target: 6%
Annual performance target, net of fees: 4%
Annual fees: 1%
Gross performance target: 5%
Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.
In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.
Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions
Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.
This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.
The Energy Transition team report an industry leading speaker faculty for 2020, including:
- Eileen Murray, Chair, Finra
- Philip Lane, Chief Economist, European Central Bank
- Gregory Davis, Chief Investment Officer, Vanguard
- Hanneke Smits, CEO, BNY Mellon Investment Management
- Pascal Blanque, Chief Investment Officer, Amundi
- Desiree Fixler, Group Chief Sustainability Officer, DWS
- Joe Lubin, CEO, Consensys
- Bahren Shaari, CEO, Bank of Singapore
- Mark Machin, CEO, Canada Pension Plan Investment Board
The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.
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