Tuesday, 11 October 2011

Is Junior ISA suitable for School Fees Planning?

JISA - A long term investment
The Junior ISA will launch on 1st November 2011 allowing an annual investment of £3,600.

I'm sure many parents will soon be asking whether the Junior ISA or JISA as it is being termed will be a suitable vehicle for school fees planning.

The short answer is no, because proceeds from a JISA investment are not accessible until the child reaches age 18. Of course what that does mean is that it could be used for University which given the increase in tuition fees could be extremely useful...

However, a parent looking to fund University fees would also need to consider that at 18 the child is entitled to the entire amount of funds accrued in their JISA. Parents may be concerned about their children having access to large sums of money when they have just headed off to University.

While I would suggest you always speak to your financial adviser before making decisions about how much and where to save your money I would more than likely suggest to my own clients that it is probably best to utilise their own ISA allowances before looking at their children's ISAs.

Because ISA managers cannot reclaim tax paid at source on UK stock dividends, ISAs and their junior equivalent are most efficient in either none income producing equities or fixed interest funds. This makes the topic of risk and time-scale really important.

JISA are available for children who do not have a Child Trust Fund account; children born before 1st September 2002 and after 2nd January 2011. Today that makes the child older than 9 or under 10 months old (as at October 2011).

The minimum investment time scale on JISAs is therefore currently 9 years or less or roughly 17 years plus. While 9 years is clearly still a reasonable time horizon for equity investment, (by helping to reduce market volatility) aiming to avoid equity income as an investment sector could cause a balanced portfolio to look a little like an egg timer, fat at either end and thin in the middle...

While this approach may well aggregate to an overall balance, a colleague of mine once said that type of portfolio is akin to having your feet in the freezer and head in a fire. Not a place many people would consider desirable.

By utilising your own allowance first (£10,680 for 2011/2012) you will retain control of the money even after your child has reached 18 so you keep greater control over their access to the funds...

For many families, saving more than £21,360 (both parents ISA allowances) each year is not something they have to worry about. Certainly, saving that amount each year from birth until children reach 18 should more than cover University costs for the average family.

Possibly where JISA will come into its own is for grandparents to save birthday and Christmas money...

Undoubtedly JISAs are a welcome addition to the tax advantaged savings family but need to be taking in context with what you are hoping to achieve with your investments.

There are many variants and options to consider before making any investment which is why it is so important to seek professional independent advice.

Wednesday, 14 September 2011

Fund Performance Data Tables - How not to pick Investment Funds

If you want to find the price of an investment fund you don't have to look very far. You can very quickly get performance data for pretty much whatever time frame you like.

With investment funds there are many many factors to consider yet a great majority of people look solely at the league table. They see a snap shot of past performance and make decisions on future returns and therefore where to invest their money based on only a very simple and flawed metric.

I think it is pretty well established that past performance is no guide to the future and the price of a fund and go down as well as up, and you may get back less than you invested No doubt you have seen something like this very very often. I couldn't imagine how many times I have written (copy and pasted) that in the last 10 years...

In addition we should also know that the price of units in the short term is volatile and nothing more than a reflection of a collective snap agreement on the price of a fund. Read my article on majority rules.

We talk about volatility in the short term however in reality volatility does not decrease the longer you have been invested; what does happen is that if your investment portfolio has increased in value then the effect of short term volatility has a reduced impact on your overall portfolio value.

A 10% fall in the market will no doubt feel much worse the day after you invested than years later (assuming the portfolio has grown in value) when the impact of the 10% reduction effects only previous growth, not your original capital.

So as almost all investors will have heard from their advisers, "sit tight as investing has to be a long term strategy". That said it is difficult not to take an interest in "the league table" to see where your investments are relative to all the others.

You may have heard stories about investment competitions between a professional money manager and a school girl: inevitably after 6 months the school girl outperformed the professional (remember of course that a folklore story carries much more credence if the outcome goes against the expected outcome). If the exercise was repeated lets say 100 times I wonder how often the school girl would win???

I have also heard many times things like, "only 1% of the top 100 performing unit trusts today will be in the top 100 in 3 or 5 years time..."

So short term volatility is to be avoided but then the best performing funds today will not be the best tomorrow. I was curious so about 6 months ago I decided to do some research of my own to see if and how badly misleading this stock table performance data can be.

I used performance data from www.trustnet.com published in Professional Adviser each week. From February 2011 I noted the top 20 performing investments based on their 3 year performance record.

Each week I noted the prices of the then current top 20 and also any members of previous top 20 funds so obviously as the weeks passed the list of funds which had once been top 20 increased - A LOT!!

Over 6 to 7 months of collecting the weekly data there emerged some interesting facts, for example:

  • Only 4 funds remained in the top 20 over the entire period &
  • The list of funds which had been in the top 20 ran to over 50
I then wondered, had I invested money in THE top 20 performing funds in February based on their three year performance what would have happened to my portfolio to date.

The average return on February's top 20 at that point over 3 years averaged 79.6% That means an investment of £10,000 in those funds in February 2008 would in February 2011 be worth just under £18,000 approximately, certainly not to be sniffed at in only 3 years!!!!! Great, I am in...

In the 7 months since then how have those funds performed?  MINUS 8.53%

www.trustnet.com 13th September 2011

I appreciate we have had some pretty torrid times on the stock market in the last 6 months but only 4 of the top 20 are still there 6 months later!! which I could  You looked at 3 year performance data and selected the 20 best performing funds over that period and after 6 months are down nearly 10%...

Out of interest the top 20 funds over 6 months as at 13th September 2011 returned on average 15.2% so still very reasonable given the market conditions...

The top 20 funds over 3 years as at 13th September 2011 returned on average 91.8%. 12% higher than the top 20 of 7 months earlier... The current 3 year top 20 is dominated by the returns on gold - 3 year average 162% but in the last 6 months these same funds have returned only 5.1%. The returns on Gold have not therefore happened in the last 6 months but rather before this period. I would suggest that maybe buying into Gold based funds now is a little after the event; possibly these funds will now under perform... It really is just a guess so please don't base your investment decisions on what I say...

Only 4 of the funds in the 3 year top 20 in February 2011 are still in the top 20 in today (2 of which are in positions 1 and 2) however, 7 of the previous top 20, over a third, are not even in the 3 year top 100!!

There are many things to draw in conclusion of this data but the main one is, as I eluded to before, PAST PERFORMANCE REALLY IS NO INDICATOR OF FUTURE RETURNS.

So what should you do?
  1. Undertake research into the underlying metrics of each fund in the market, there are nearly 3,000 to go through so good luck with that one!!
  2. Through your financial adviser (or direct) employ the services of a discretionary fund manager (DFM) whom with research teams and experience does stand a better chance than many of making the right decisions at the right time, when and what to buy and sell. Unlike financial advisers who plan your financial lives a DFM looks almost solely at the money management side of things so the two working together can be a great combination.
  3. This is the clever one, instead of trying to pick certain funds and make timing decisions about when to buy and when to sell, change your own philosophy on investing. Prices will rise and prices will fall, accept it, but not investing is the only sure fire way to miss out on company growth (the underlying thing which determines long term fund value). If you buy a fund the strong likelihood is that it will not be one of the top performers, again you should accept that but through the right asset class strategy and the help of a firm such as Dimensional or Vanguard along with your financial adviser you may find a strategy which works for you; a long term broad mix strategy which avoids fad investing and top 20 lists and relies more upon basic investment principles. Speak to your adviser about this approach if you want more details.
I hope you have found this useful. If you have any comments, questions or points to make please get in touch or add them below...

Tuesday, 23 August 2011

Stock Market Returns - Majority Rules

One of the first practical things you learn as a financial adviser is that you have absolutely no control over "the market."

"The market" is a backward looking measure of valuations and in that sense, the market never actually "does" anything. You may hear on the news that "The market has done well" or more likely at present that it has done really badly but in reality it has done nothing...

We on the other hand, as investors have done everything. Every transaction has a buyer and a seller and as such they agree on a price for the stock. As individuals we simply make our decisions based on the news we hear, news I might add that everybody else has heard as well.

So this is where sentiment comes into play. Everyone, especially retail investors would be wise to understand the role sentiment plays in the determining the short term value of stocks. THE MARKET WILL 'DO' ONLY WHAT THE MAJORITY OF PEOPLE THINK IT WILL DO!

If the majority of traders feel a stock is going to take a tumble they will try to sell their holding. Basic supply and demand forces dictate that while supply (people trying to sell) outstrips demand (people willing to buy) a stock price will fall...

As the stock price falls it becomes more and more attractive. At the tipping point the majority of traders will switch from being sellers to buyers. The price will start to rise as more and more people try to get hold of the stock (demand outstrips supply). This is why a dramatic fall in the price of a stock is very often followed by a very steep rise; with some 'lucky' traders profiting from the stock price volatility...

Despite how it feels at the minute the majority of stock prices are usually relatively stable. The short term stock price really reflects only what the majority of people think that stock is worth rather than the actual value of the company...

As the stock price rarely accurately reflects the underlying value of a business it is a dangerous game to try and "play the market." Traders can react to news very quickly which is how we see dramatic alterations to stock prices. A retail investor, without having all the news available to the market and then having the ability to react correctly to and with the majority of other people is more than likely going to make the wrong decisions...

Retail investors are rarely in a position to react to news quickly enough to protect themselves from short term volatility. In the week or so it takes to sell or transfer an ISA investment for example "the market" will no doubt have moved on, it's possible that the retail investor will be selling at just the point where the majority of traders are starting to buy again.

Instead of playing the short term game, which is very difficult if not impossible, the vast majority of people need to avoid the sentiment driven market reactions and instead opt for a long term strategy. If the majority of traders swing from buy buy buy to sell sell sell the likelihood is at some point they / you are going to get it wrong. If you take a step back and understand that the real value in the UK stock market is in the dividends and long term solid understandable company growth then all the bluster about short term prices should be less of a worry for you.

Companies tend to grow, that is what capitalism is about, so in the longer term you will receive a much happier investment experience if you understand that short term sentiment rarely effects long term profitability, only short term volatility.

So in my humble opinion the way to achieve the most successful investment experience is to avoid getting caught up in the sentiment driven reactions to short term media driven news, maintain a long term strategy that you stick to not just when things are on the up and try not to panic when all around seems to be negative and suggesting you should start to sell... By the time you have got that news it is already too late, just ride it through.

Monday, 15 August 2011

Do what you can to avoid the 50p tax rate

In an article (Osborne seeks Revenue check on 50p tax rate) published today on IFA Online there is a strong hint from the Chancellor that the 50p tax rate will not make it past the next budget.

I never assumed this upper tax limit would be something a Conservative lead Government would be keen on keeping so it has been no surprise that this sort of pre-emptive suggestion of it's abolition is no doubt a subtle way of saying to the wealthier part of society, don't worry things will be back to normal soon.

I am certainly not one of the many masses who constantly bemoan the wealthy and the privilege that wealth brings. I spend most of my days talking to parents who are in the fortunate position of being able to consider sending their children to private school and a great deal of what we discuss is how we can save tax in order to help fund it... I have no doubt in my mind that this is the right thing to do...

Some people, (most of my clients would not mind me saying that they consider themselves far from "wealthy") make a choice to send their children to private school and therefore do not burden the state with the cost of another school place. That saves the Government thousands of pounds per year so why shouldn't those helpful parents try to reduce their tax bill to compensate for their extra costs. Until roughly 15 years ago you could get direct tax relief for sending your children to private school through the use of a children's educational Trust. I see no reason why this type of arrangement should not be in use today.

The Government has set up the Free Schools initiative which helps parents provide a better education for their children by setting up state funded schools run partly by the parents of the children who will be attendees. If the Government is prepared to fund this, by way of an annual payment for each pupil in attendance at the school then why not allow transparent tax relief for sending your children to a private school... Maybe once we are properly beyond these austere times this is something for a future budget, hint hint Mr Chancellor!!!

Getting back to the 50p tax rate, HMRC will provide results by the 2012 budget on exactly how much tax has actually been raised as a result of the 50p tax rate. It appears (I consider this another hint) that Mr Osborne believes that due to tax avoidance measures the amount of tax actually raised by the extra high rate of income tax will not be as sizeable as assumed and therefore it should be scrapped.

HERE IS THE MESSAGE: There are perfectly legitimate ways of avoiding tax, pensions, EIS and VCT investments for example, not to mention actual tax avoidance structures themselves. If you are earning income above the 50p tax rate, in fact if you are earning income of around £100k or above then you need to speak to someone about reducing the amount of tax you pay.

The more people subscribe to avoiding the top rate of income tax the better, MR OSBORNE IS LISTENING and in my opinion has said clearly although not outright, that if more people avoid the 50p tax his decision to scrap it (assuming that is what will happen of course) will be easier to justify.

If you want help with tax mitigation then speak to your financial adviser or you can get in touch with me if you like...

Friday, 22 July 2011

School Fees Inflation 2011

The latest ISC census is out and figures within it show amongst other things the level of increase in the cost of private education.

Last year saw on average the cost of private school fees increase by roughly 4.6%

In monetary terms that means the average cost of a year at private school is now for the first time over £13,000 per year.

To make those figures a little more meaningful here is the breakdown of the variant fees from boarding schools and days schools etc.

The last two years have seen inflation much lower than the long term average. The average annual increase in school fees between 2000 and 2010 was around 6.24% whereas last year saw a 4% increase and this year 4.6%.

Looks as though inflation for school fees may well be on the rise again!!!

Generally the largest annual expense a school has is its wages bill and in the past I have explained to people looking to send their children to private school that the reason private school fees inflation is so high, is partly down to inflation within National Average Earnings.

Interestingly the Office for National Statistics suggests that to for the year April 2011 wage inflation was 1.8%. I appreciate that a national average, given the current austerity measures sweeping public sector jobs will weigh heavily on this figure but even so, this is nowhere near the majority of a schools inflationary increases... So why the increase I wonder.

In any case, with school fees doubling over the last 10 years it is imperative for those considering sending their children to private school that they consider the overall cost of private education over the full 15 or so years rather than just what the fees are today...

Thursday, 23 June 2011

Panorama - Can you trust your bank?

A recent episode of Panorama focussed on financial advice mis-selling cases predominantly around older customers who had gone straight to their bank at retirement with a lump sum of money to invest.

Although the focus of the show was on bad advice and "dodgy" practices of some banks' advisers it was so obviously apparent that product transaction and payment for such was inherently the cause of the advisers focus on the sale and themselves rather than the needs of the client.

I have never strongly opposed RDR and only ever in the early days been mildly sceptical of the changes that were coming. Most people tend to dislike change so I forgive myself for that one... As time has passed and both the gravity and detail of the changes RDR will bring has it become so clear that this is the best thing that could possibly happen for our industry.

While a product sale sits at the heart of an adviser's remuneration the cloud of prejudiced selling will remain, whether it is actually there or not. In some cases, as it appeared with certain bank advisers its live and kicking and may well remain post RDR given the arena in which the banks are likely to sit.

Getting paid to GIVE ADVICE will be a fantastic step forward rather than trying to "sell products". I personally cannot wait but the Panorama program made me wonder two things.

1) would the people that appeared in the program be willing to pay for advice regardless of the outcome. My suspicion is that they would not. Shopping around, which one of the mystery shoppers mentioned to the bank adviser as their course of action will become an expensive exercise when you are paying for the advice, not just on the final purchase of a product.

This is likely to effect IFAs more than the Banks which means Banks may well look more attractive to thrifty investors but will more than likely lead many to receiving advice which may otherwise have been more holistic and less focussed again on the sale of a product.

2) The people who claimed to have received bad advice did so because their investment "lost" money. At least one of the investors then committed the cardinal sin for retail investors and cashed in, crystallising the loss and concluding her investment experience at the worst possible time. The actual product variant was not mentioned in the show so there may well have been reasons other than sentiment for why she cashed in but as we have all seen at one time of another, clients do the strangest things!!!

So getting to my second point, would paying for advice stop a client from complaining for "bad advice" or is the only way to avoid that type of complaint to put their money somewhere where it only ever goes in an upward direction.... Cash??? (Lets not even get embroiled in the effects of inflation)!!!!

So while I don't see RDR making retail investors any less quick to complain when their portfolios stumble I do think the move will mean the advice client receive, from IFAs at least will be far better because the ADVICE is paid for, not the product which may or may not be at the end of the process...

Wednesday, 1 June 2011

Why School Fees Advice is so unique

The first question many new and prospective clients ask is, what is school fees advice, how does it differ from any other type of financial advice?

The reason people ask this question is obviously to understand "what it is" but of course also, because they have certain assumptions that they want clarification on. Many people back up or clarify their first question with, is it some sort of savings product.

That always causes me to smile a little mainly because the reference to "it" is so less product related when it comes to school fees than many other generic forms of financial advice. The "it" I say, is purely a service which helps you to manage the cost burden of school fees through to completion.

There is no "it" in terms of product simply because every person comes with a different situation and requirements.

In a previous life, as an investment adviser people would come to you with broadly the same circumstances, they had some money, be that recently acquired or an existing portfolio. They wanted me to look after, give them advice about how best to manage these funds which broadly speaking ends in a closely similar vein of advice. Assuming they have the suitable time frame, disposable income and attitude to risk I would invest the money.

The key difference is in the importance of the possible outcomes. While nobody wants to lose money very few investors properly understand the relationship between the fundamental process of investing and possible outcome. As a result, many many investors (retail investors) achieve what they perceive to be a poor investment experience.

When investment values are going up and up individual investors can all to often pay only lip service to the folly of a sentiment driven market. When that sentiment drives prices values down that is when they start jumping up and down, even though they new that it CAN happen.

So as an investment adviser the service you are providing is much harder to define given that you are mainly just investing money and then explaining each year why you think values have gone up or down...

Fortunately it is many years since I became a school fees adviser so my focus is now much less on the underlying investments themselves. I outsource the investment to either a discretionary fund manager or to a asset class manager (sometimes incorrectly referred to as passive manager).

The service I provide to clients is firstly to help them understand the likely total cost of their children's' school fees, secondly to help them identify without any intervention from me how close they are to realistically achieving the school fees ambitions and finally to show them the areas on which we can focus to improve the management and payment of their school fees long term.

This has nothing to do with next years ISA or the value of their pension (Both of which will potentially be important later in the advice process) but rather will they have enough money to pay their school fees?

That is why I find the job so interesting and why it is so much more than "where do I investment Great Grandmother's inheritance?"

Once you understand the path of achieving their school fees commitments then as a financial adviser you consider the specific elements of savings, investments, pensions, mortgages, insurance etc.