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SEVEN REASONS BPR INVESTMENT IS GROWING

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SEVEN REASONS BPR INVESTMENT IS GROWING

Business Property Relief is a statutory relief that provides 100% relief from Inheritance Tax for investors who are holding shares in qualifying businesses (and have done so for at least two years) upon their death. A number of investment managers offer consumers investment solutions that benefit from BPR.

Research carried out by Intelligent Partnerships’ for the forthcoming 2016/17 BPR Industry Report has found that advisers’’ use of BPR qualifying investments in estate planning strategies is on the rise with 77% of the advisers Intelligent Partnership surveyed expecting that their use of BPR will either increase or stay the same over the next two years.  Here are seven key drivers behind this trend:

  • The Housing Shortage

House price inflation is set to continue to increase IHT liabilities,in spite of the Residence Nil Rate Band (RNRB): From 2009 (when the nil rate band was frozen) to 2015/16, the House Price Index for the South East rose 30% and by 52% for London (ONS).  In the same period, the total CPI (which excludes house prices) increase was just 21%.  This has pushed up estate values so that many more are piercing BOTH the nil rate band AND the new residence nil rate band (to be introduced from 2017/18). The RNRB is likely to reduce the 45,000 death estates caught by IHT in 2016/17 by a third.  However, the reality is that any reduction is likely to be short-lived. Projections for IHT collection for the four year RNRB phasing in period, show the percentage of death estates liable dropping in the first year and then climbing again, whilst the monetary value continues to rise during the whole period. Moreover, after the phasing in period, the RNRB will only be increased by CPI. So, as housing shortages continue to drive up property values, estate values are likely to climb at a higher rate than CPI, thereby drawing more people back into the scope of IHT.

  • More Reforms

New rules set to come in in 2017 are likely to catch more estates in the IHT net:  From 2017, rule changes regarding non-doms will bring their UK residential property into the scope of IHT (no matter whether it is held directly or indirectly) and reduce the amount of time they can be resident in the UK before becoming liable to the tax.  Additionally, the five million UK ex-pats will need to re-check their inheritance tax status as tighter regulations governing their UK domiciliation for tax purposes will apply.

  • Pension Freedoms

Funds that go into drawdown  may increase the value of estates. Latest figures show that, since the implementation of pensions freedoms last year, £6bn has been withdrawn from pension funds.  IP’s provider survey shows that 79% of BPR investment managers see this as a positive, because they see BPR qualifying investments as the perfect home for some of those funds, where they can earn a better return whilst mitigating IHT.

  • Low Interest Rates

The low interest rates and low inflation levels look set to continue.  The low risk profile of capital preservation has historically resulted in BPR products offering relatively low returns.  This can be a problem if bank rates start to look more appealing, or if funds don’t grow in line with inflation. The good news for BPR investment providers is that in March 2016, the Office for Budget Responsibility concluded that, “the market now believes that Bank Rate is more likely to fall than to rise over the next two years and that it will only reach 1.1 per cent by the end of the forecast period [2020/21].”

  • New BPR qualification for Entrepreneurs Relief :  Many clients holding BPR-qualifying investments will hold them until death (at which point no CGT is chargeable) as required to meet the IHT relief criteria.  However, new rules allowing a 10% rate of capital gains tax on newly issued shares in unlisted companies (provided they are held for a minimum of three years) could increase demand for BPR products;  They will become more tax efficient when withdrawals are made, for example to pay for care costs.
  • Higher returns broadening the appeal of BPR Investment: In spite of the traditional focus on capital preservation, there is a now marked increase in the number of strategies available for BPR investment.  A new focus on growth and income in recently launched BPR products has raised the average target return from 3.97% to 4.26%, reflecting the demand for estate planning solutions that don’t sacrifice returns.
  • Increase in dementia:  This is set to double to 1.6 million by 2040, which represents over 30,000 people a year.  The lasting powers of attorney this is likely to generate are particularly obstructive to estate planning as they require that all but the smaller gifting decisions go through the court.  BPR investment decisions, on the other hand, can be made by the attorneys without court permission.

Although the short term effects of the RNRB and and the potential use of pensions as IHT-efficient vehicles following the abolition of the 55% pension death tax may present challenges, the outlook for the BPR industry looks very robust.

More details can be found in the 2016 BPR Industry Report.  The report follows up Intelligent Partnership’s 2015 Report which was the first of its kind to bring together BPR research, analysis and information for an adviser audience. The 2016 version looks at recent developments in the sector to give an overview of the BPR market that’s current, relevant and easy to read.

Complimentary copies of the Report are now available for download on Intelligent Partnership’s website intelligent-partnership.com

Key Findings:

  • Although the new Residence Nil Rate Band is set to reduce the number of estates caught by IHT from 2016/17, that reduction is expected to be short-lived and the number of families affected will be on the rise again by 2020.
  • Only 14% of adults know what the current IHT threshold is, and almost a third of homeowners aged 70+ haven’t considered IHT mitigation.
  • 77% of advisers think that use of BPR will either increase or stay the same over the next two years.
  • The average annual return BPR products target has increased to 4.26%, reflecting growing demand for estate planning solutions that don’t sacrifice returns.
  • The use of BPR is growing: the cost to Treasury rose by almost 100% to £415m from 2007 to 2014.

Benefits of Report:

  • Find out what recent rule changes mean for the BPR industry
  • Get in-depth analysis of new products in the market
  • Learn about crucial BPR due diligence questions that are often missed
  • Decide what represents good value for your clients using our key metrics data
  • Discover how to work with connections from other professional services firms to maximise opportunities for new business
  • Review case studies to see the potential uses of BPR investments

Investing

The benefits of automated pension plans

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The benefits of automated pension plans 1

While many people will prefer to speak to fellow human beings when discussing their investments, automation is already part of everyday life. Over the last few years we have seen introduction of robo-advisors, with many pension investment companies placing these new platforms front and centre of their future strategies. So, what are the benefits of automated pension plans and robo-advisors?

No-nonsense information gathering

KYC, or Know Your Client, is an integral part of the investment world. The wider your knowledge base on a particular client the more personalised the service you can offer. Failure to gather the correct information, and use it accordingly, is a breach of investment regulations in many countries. Therefore, the use of robo-advisors allows a no-nonsense and clear approach to information gathering.

These systems use an algorithm to choose the most appropriate investment strategy for your pension fund. The algorithm is based upon issues such as:-

  • Your attitude to risk
  • Your investment term
  • Your current investment goals

It is worth noting the variable “your current investment goals”. Due to the way that the system is set up, you can update your investment goals on a regular basis. This means that your portfolio would be automatically adapted to your new goals.

As pension-fund regulations continue to be tightened, information gathering is becoming even more important. This initial data gathering exercise will also incorporate a degree of guidance and thought provoking comments. For example, this could highlight the risk/return ratio and the suitability for pension fund investment. The concept of the robo-advisors platform is simple; participants have time to think about the consequences of their attitude to risk for example. The majority of platforms use a concept known as modern portfolio theory.

Source: Unsplash

What is modern portfolio theory?

As a sidenote, you will find that many robo-advisor platforms will mention the concept of modern portfolio theory. This is a Nobel Prize winning economic theory based on the use of data points to create a personalised portfolio of investments. Modern portfolio theory presumes that the majority of investors are risk averse. This means that those looking to take additional risk will expect additional rewards. As a consequence, their pension-fund portfolio would need to reflect this.

Using ETFs to create a personalised portfolio

Automated pension investment platforms (also known as robo investing) tend to use Exchange Traded Funds (ETFs) to create personalised investment portfolios. ETFs have been around for many years and they are an integral part of the investment scene. There are numerous benefits to using ETFs such as:-

Focus on a particular market/type of investment

ETFs are basically funds which are structured to mirror the make-up of a particular market, sector or type of investment such as a commodity or index. For example, the S&P/TSX Composite Index is recognised as the benchmark Canadian index. As a consequence, for those pension fund investors looking at a balanced risk/return, an ETF mirroring this index would be ideal for their portfolio. The funds are created by replicating components/weightings of a particular index with some ETFs also using futures and options

Continuous adjustments

Just as indices are rebalanced from time to time, it is important that your pension fund investments undertake the same process. Say for example the robo-advisor system created a personalised portfolio consisting of two index ETFs. If one index was to perform much better than the other, at some point this would need to be reweighted. The strategy behind this is simple; if the balance of your portfolio was tilted towards one particular ETF index then your future performance would also be tilted towards that index. This could lead to increased volatility and impact the balanced approach to investment.

Price visibility and trading

While many people view ETFs and mutual index tracking funds as one and the same, there are a number of differences. The main difference is liquidity, with ETFs constantly traded throughout the day and mutual fund prices set at the end of each trading day. As a consequence, robo-advisors can react to intra-day news flow, while those holding mutual funds will need to wait until the daily price has been set. You’ll often find that transaction costs associated with ETFs can be significantly less than mutual funds.

Risk profile criteria set by human experts

While the majority of the processes associated with automated pension plans have little or no human input, there is significant input with regard to risk profiles. This means that investment experts will allocate particular ETFs, and other exchange traded instruments such as futures, to various risk/reward profiles. When we talk of risk/reward in the context of pension investments, this does not indicate extreme risk – this isn’t advisable for long-term pension investments. Indeed, those pension advisors allocating funds to ETFs offering extreme risk/reward ratios may find themselves answering questions from the regulators.

In the modern era, there is nothing to stop the process of opening a pension fund, right through to management of investments, from being fully automated. Whether we move closer to this alignment in the future remains to be seen. However, in the meantime the vast majority of investors prefer an element of human expert involvement, even if just to oversee any potential discrepancies.

Low-costs improve long-term returns

The cost of any service or product comes down to the components. Traditional active pension fund investment will involve an array of different people with different skill sets. The combined cost of these teams can be significant and is reflected in the fund’s management and ongoing charges. Therefore, the more elements of the system which can be automated the lower the management fees and ongoing charges. When you also consider that many robo-advisors will use ETFs, which simply track various assets or indices, the cost element is yet another competitive edge.

While there is certainly a place for active investment management, using expert investment advisors, very often automated pension plans will complement this alternative approach. Many people now choose to maintain a core element of their pension fund under a robo-advisor platform, as their pension-fund backbone. Allocating an element to a more active investment approach offers the opportunity to enhance returns, although there is an obvious element of risk.

Source: Unsplash

Easy-to-use investment platforms

The subject of pension investment can be complicated at the best of times. Therefore, the introduction of robo-advisor platforms, offering regulatory updates and guidance, has been extremely useful for many people. A growing number of people seem to prefer this plain talking approach to pension fund investment. You could argue that this removes any potential conflict-of-interest, the volatility of human nature making way for cold hard facts. Obviously, there will be advice and guidance available, as and when required, but this would likely come at an additional cost.

It is worth noting that before any robo-advisors platform is released to the market it will undergo stringent testing. This testing will take in both in-person testing and remote user testing which is unmoderated. As a consequence, those creating these platforms can help and assist those testing the systems in person. On the flipside, remote user testing is akin to releasing the platform into the mass market. These users are guided by the instructions and design of the platforms, giving invaluable feedback on any tweaks and changes required.

Removing human emotion

The removal of human emotion from investment decisions can be considered something of a double-edged sword. However, robo-advisors provide a no nonsense approach to pension fund investment. A relatively swift in-depth questionnaire will gather all of the information required, allowing algorithms to calculate the appropriate risk/reward ratio. The use of EFTs takes away day-to-day management of investments, in favour of index tracking funds. Auto rebalancing and opportunities to adjust your risk/reward ratio going forward creates a very flexible environment.

Those looking for a passive investment strategy will be attracted to robo-advisors. Those looking for a more active approach still have plenty of choice in the wider market. Then there are those looking for a mix of the two. In recent years we have seen huge advances in artificial intelligence, which already play a role in wider investment trading strategies. Will this technology become more commonplace in the future?

Summary

Robo-advisors have been around, in some shape or form, for some time. In many ways they do the time-consuming legwork that human advisors did in the past. This allows pension advice companies to focus their funding on areas where they can enhance their business. There is a general misconception that robo-advisors have total control over pension fund investments. This is wrong. There are human advisors and investment experts in the background tweaking the system, allocating EFTs to specific risk profiles and constantly enhancing their offering. 

While the current raft of robo-advisors make little or no use of artificial intelligence, the ability to learn, this must surely be an aspiration for the future. This is an area of the market which is constantly developing and changing. We already accept artificial intelligence in many areas of our life, so why not the world of investment? Would you trust an advisor who was able to learn from human mistakes?

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The Viral Return On Investment

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The Viral Return On Investment 2

By Sabine Saadeh Author of Trading Love

Investment Pitch

It was around August 2018 when a friend of mine approached me with an investment scheme that was remarkably enticing.  At first I hesitated because going into business with close friends is never a good idea for me, let alone have your money pooled into an investment fund. The business model was exceptionally thought through and I knew for a fact that it will generate value. Nonetheless, I declined the investment offer. A year later, the fund was generating income long before it had planned to, and I thought I had missed out. The return on investment from that fund in relation to the cost of the investment was outstanding.

A year later, I watched from afar as my friends began to squeeze each other out given their greedy excitement after the success of their fund. As more time went by, I watched them make the biggest mistake of their lives, and that was letting go of the creative element in that fund. Return on investment is the value created by the said investment that is closely tied to economic, financial, psychological and societal factors. However, creativity is their cornerstone.

Covid-19

Come 2020 and Covid-19 reshuffled the classic value mantras. The whole world experienced complete disruption. The path of the virus and the length of time the global economy will remain shuttered is still very much unknown. So what does this mean? This means that investment value will change. The risk of the investment does not have to do anymore with the amount of capital available for resiliency but with the amount of creativity available in the business.

Sabine Saadeh

The viral return on investment should change people’s economic narrative. Businesses should focus on liquidity, contingency plans, multiple supply chains and CREATIVITY. After all a business’ local resilience will be highly priced in the value of the investment rather than what the market views as efficient. Taking my friends’ fund as an example, if they had retained their creative element, their business would have proved to be resilient, despite the high debt incurred by the fund to continue operating during lockdown. This high debt increased the risk of their business collapsing and in turn weighed in on their capacity for growth.

The Investor

After all, an investor is looking for an investment that will preserve his/her purchasing power without undermining their wealth. If I had invested in that fund, I would have lost the capital invested and spent the income generated during the lockdown period. So what was the point of the capital without the talent in that fund? Covid-19 is not the only threat; climate change is even a bigger threat. It is therefore imperative for us to respect and nourish interdependence, and especially in business environments.

Sabine Saadeh

Sabine Saadeh

We cannot act like the virus anymore, latch on to a person with creativity and sup them dry just because we invested in them. We need the creative more than the creative needs us, it is their talent that is going to generate income for us. Our capital opens the path for the creative to generate income for us. The smart people of the world already set their bets on that, through ESG investment schemes, which is the most sustainable form of investing. ESG which means environmental, social and governance investing; seeks positive return on investment while taking into consideration the long-term impact of the said investment on society, environment and the performance of the business.

ESG

The year 2020, is when the world went up in flames and ESG established itself as the mainstream way for investors to make profits. Although the investment preference had already began to change over the last five years, the inflow was still very mediocre in ESG.

It was after the wildfires and the social issues erupting everywhere in the world and the corruption stories of the businesses that are too big to fail, that it became a no brainer that the inflow in ESG would increase massively. Then The DWS Group’s ESG funds according to CNBC began to outpace the S&P 500 this year, and Blackrock highlighted ESG as the most sustainable form of investing.

Businesses that are taking into consideration empathy and creativity while operating are better equipped for future sustainability, even though they are sacrificing return on investment in this present time.

What are we waiting for then? If Covid-19 didn’t help us see clearly that we all intertwined in nature for our future’s sustainability, then what will?

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European market responds to second wave of infections

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European market responds to second wave of infections 3

By Rupert Thompson, Chief Investment Officer at Kingswood

Global equities ended last week on a negative note and were down around 4.5% from their all-time high in early September. This morning, European markets have fallen back a further 3%.

The initial catalyst for the correction was a sharp run-up in the mega cap tech names which had left them looking extended and ripe for some profit taking. The FAANGs are now down over 10% from their highs and the froth looks like it has been blown off. While they may well remain volatile, there is no obvious reason for them to be at the forefront of any further sell-off. The fundamentals behind the tech sector remain strong and valuations are once again looking more reasonable.

However, the correction also clearly had its roots in the sheer scale of the rebound from March with global equities up some 50% from their low. This inevitably left markets vulnerable to a set-back, particularly with valuations at twenty-year highs.

The rebound in turn was in good part a result of the massive policy stimulus. The weakness late last week was triggered by disappointment that the US Fed had not extended its QE program. Even so, the Fed is still buying $120bn of bonds a month and remains a major support for equities. Indeed, it made it clear that it has no intention of raising rates for at least another three years.

The Bank of England also decided to leave policy unchanged last week. However, it kept open the possibility of cutting rates into negative territory next year if it should be necessary. An extension of its QE program later this year also remains quite possible.

All the same, the fact of the matter is that central banks have now spent most of their ammunition. Going forward, changes to fiscal policy will be much more important than any tweaks to monetary policy in shaping the economic recovery. And on this front, the news is not particularly encouraging as the markets may now be appreciating.

The US has failed to agree on an extension of the fiscal stimulus measures which expired in July and may now not be able to before the November elections. As for the UK, Rishi Sunak is still resisting calls to extend the furlough scheme beyond October.

Just as important for markets will of course be Covid-related developments. This morning’s declines are a response to the second wave of infections now being seen in the UK and across much of Europe and fears that renewed social distancing measures/localised lockdowns could disrupt the economic recovery.

While the latest wave of infections is clearly a major cause for concern near term, it shouldn’t be forgotten that the longer term outlook regarding Covid is not all bad. Several late stage vaccine trials are now underway and a vaccine could quite possibly become available within a few months.  Some countries, most notably China, also seem to have avoided a major secondary spike despite the reopening of their economies.

In short, the outlook remains quite uncertain. We believe it remains prudent at this juncture to maintain a broadly neutral stance on equities until some of these unknowns are cleared up – one way or another.

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