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As those clients attending advice meetings over the last few months will be aware, I have been asking for ideas on how the service can be improved and listening for common concerns.

Three themes have emerged:

(i)You have found it hard to follow my explanations on how increasing and reducing asset allocations should increase or reduce risk.

(ii)You would like my client agreements to explain charges more clearly.

(iii)Some of you are worried about possibly needing long term care.

 (i) RISKS

Hopefully the following table will help explain what I am trying to do in using asset allocation to vary risk.

The underlying theory is an assumption that Equity assets are the highest risk,  cash deposits with Bank, Building Society and National Savings the lowest. The table gives my view on appropriate asset allocation e.g. cautious is currently 11% cash deposit, 44% bonds, 20% commercial property, and 25% equity. This will differ from other advisers. For example, I currently place more confidence in commercial property funds than many other advisers  and this is reflected in my model. Also please note many advisers advise on exchange traded funds(which I have written on previously on this blog).  I do not normally advise on exchange traded funds or derivatives. I know they can be used in each asset class but I do not believe they are suitable for the average retail investor.

Whereas in the last year many equity funds have risen 25%+ the table shows me where (with the clients agreement) that risks may have become unacceptable so it is a nice problem taking a profit perhaps as a tax free capital gain and reinvesting in a lower risk asset and/or increasing the money being taken out. 

 (ii) Explain charges more clearly

I have spent around three months  on refining my client agreements  which from 1st September 2010 will have the flexibility to allow annual advice meetings  or optional advice meetings on the one agreement. The charges are simple (I think).

Where I am retained ONLY to check and issue your personal financial statement once per year £40 per month charge. If there are commissions these are accounted for and following your review month an adjustment is made,  if commission more than £480 (£40 @12)  you are sent a refund,  if I have received less  than £480 you recieve  a bill for the balance.

When I am doing annual advice meetings with all the research, risk assessment, checking that your money is doing what you want for you and providing detailed written advice my  charge is 1% of the portfolio less any commissions or retainers received.  (Due to the time it takes I do have to apply minimum charge which I have now reduced from £2,500 per annum to £150 per month). People still can’t get their heads around that I am rebating 100% commissions but I do!

I will be asking our web designer to load the new agreement in the next few days. 

(iii) Long term Care.

I believe I have come up with a novel angle which I have put to an underwriter. When my idea has been considered and I also have had  a phone call  from an employee in the Southern Health Trust returned,  I hope to be in a position to publish this article  in September.

Seminar 31st August 2010

I am running an Investment Seminar on 31st August at £10 plus £5 if you wish to bring a friend  ie one person £10 , person and friend £15. If you wish to be considered for attendance please ring Anne to the office  02891826767. (No charge if you are an existing client).

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We have witnessed a British Prime Minister politicking to the last to stay in power. These are interesting times in which to live! Discontent about high food prices are breeding terrorists in countries such as Pakistan, Afghanistan, Ethiopia, Senegal, Mexico, Niger, and Madagasgar. In “the west” nations entire aeroplane fleets are being grounded without notice – due to volcano action. Europe has just announced their version of “quantative easing” to bolster Greece, Spain, Portugal, Ireland and Italy.  750bn Euro, is the “shock and horror” fund with which Europe is challenging any hedge fund that dares to short sell EU government bonds. This sounds a lot of money until the Financial Times in an editorial 11th May 2010 point out that the new borrowing requirements for European countries in the next 12 months alone are around 1000 bn.

UK consumer prices are rising at 3.4% (official inflation target 2%). We see car production increasing and raw materials rising from Brazil to China where the price of silk has doubled in the last year. Whilst UK interest rates have been on hold there is a growing suspicion that the Fed wants to raise rates for the first time in six years. The fear remains of current financial structures and society collapsing. California is paying bills in “IOUS”. Meanwhile in the last few weeks Portugal and Spain have had their credit rating downgraded by Standard and Poors from AA plus to AA.

In circumstances of such instability the priority of governments is to preserve the banking system – the method –  increased regulation and providing funds – printing money when required! Definite attempts to increase regulation are being applied so for example no funds under the 750bn euro deal are to be dispersed unless the recipients pursue strict IMF monitored fiscal adjustment and structural reform programmes. So on 30th April 2010 the Greek government agreed to change their state retirement age from 53 to 67, to impose a three year pay freeze/and to cease a Greek practice of 13th and 14th month salaries! The Greeks have responded by rioting on the streets. Wolfgang Munchau has written in the Financial Times that Greece will eventually default. In this scenario the EU guarantees I presume will come into play.

Our clients value our service of helping them make the most of their money. Ultimately I believe it is possible that there will be a total financial collapse and this may be referred to in some of the biblical prophecies. In the meantime and because of the biblical references we can have a quiet faith in a Creator in control, e.g. Daniel 12.1 ” … everyone who is found written in the book will be rescued”.  In practical day to day terms, in selecting the right managers for my clients in current circumstances my assumption is that recovery in the west will be painfully slow and protracted. A world wide contraction of credit will favour cash rich companies. Inflation will be a growing problem in countries like India, yet as long as western central funds only provide enough money to prop up their borrowing governments and providing these governments stick with the rules deflation is a growing threat in the West. Perversely if governments continue to recklessly print money it is possible to have a Zimbabwe type inflation.

Whilst I check clients risk profile on a case by case basis, a very cautious/cautious portfolio is probably best suited to most people with a rolling investment time frame of up to four years. For those with a longer time frame cautious or moderate will probably be most appropriate. Those with a rolling time frame of one year are best in my “no risk” portfolio (that is no risks other than default and inflation). When building my clients portfolio where bonds are required I am selling previously advised direct inflation linked treasury holdings and switching to specialist bond managers who have a flexible mandate to respond to inflation or deflation and to invest on a world wide basis. Results have been very encouraging.

Over the next few months I hope to re-examine where my equity managers are investing to see if I can confirm patterns of investing in companies who can trade profitably without recourse to bank debt/and/or make money from energy/food. As I make manager changes these are explained and implemented at the client annual review meeting.

At a client level portfolios are delivering. Last month my recommended “predator property fund” London and Stamford has pulled off another significant deal to purchase prime property from HBOS at 8% per annum, these types of good news stories encourage me in my choices of investment manager being held in the client portfolios.

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After the elections I expect a tough budget. A few ideas are offered and should they work then perhaps you will not have to dig so deeply into your pockets. This article is not intended to be client specific “advice”. Each of my clients have agreed “advice reviews” on specified months. Taking into account preparation time, implementation, updating of each clients comprehensive financial plan a review normally takes days and for some of my clients, with complex issues, weeks.  However, aiming to go the extra mile, if one of the ideas appeals please in the first instance email my PA at anne.mcgibbon@forward.ie and after I check your individual file I will let you know if the idea that interests is appropriate for you.

For the casual reader (this site attracts numerous “hits”) if after taking a look through the web pages you are prepared to do business in Northern Ireland (we enjoy a private airport five minutes from the office if you have your own aeroplane) should you wish to consider the benefit to your family of becoming a client we can in the first instance send a number of free booklets from our professional body explaining in greater detail what financial planning is about, as opposed to commission only sales. Should the casual reader be a professional adviser please also see the PS below.

Consider you are a recently elected chancellor faced with the prospect of running an economy where the budget is not balanced, in a world where just about everybody does not appear to have enough money.  Could the following be four soft targets for the government to raise money?

ISA allowance – use it now and gain one years tax free income (probably) Nominal pension contribution, invest £2800 and the tax man adds a tax subsidy. Organise your tax to 0% to 18% instead of 50% by taking profits and making new and perhaps more suitable investments. 

Raising tax on consumer goods – buy that new car, lawnmower etc.

Using our ISA allowances is very “in” before the tax year end of April 5th, and then we forget about it. However, for the first time ever from April 6th 2010 ISA allowance is now £10,200 for all – it used to be £7,200. That means a “couple” can invest a further £20,400 or realign £20,400 within their portfolio.  In the recent “pre election budget”, a commitment was made to further inflation proof the allowance !!

Equity investments within an ISA are not able to reclaim advance corporation tax, however, bond investments can pay interest 100% tax free.  As my clients know I aim to include 10 managers (can be more) in each clients portfolio. The theory is that each manager is unlikely to hold more than 10% in any one investment so reducing exposure to no more than a few percentage points should two or three managers each hold the same investment.  Each manager will perform differently and I advise on an appropriate percentage of asset class types to regulate risk – see my previous blogg on this subject.

Example of potential benefit using an ISA now rather than waiting to April 2011. One of the bond funds I am currently recommending as one of the ten within some of my portfolios is Henderson Strategic Bond income. This has been paying a dividend of 6.45% (according to figures on my own holding) plus my holding has appreciated 2.9% after charges since I invested on 31 December 2009.  In an ISA investing £20,400 that represents prospective tax free income of say £1200 (charges will effect) and perhaps a small capital uplift over the next twelve months.  As they say at “Tesco” every little helps. I do not consider this to be particularly high risk when combined with my other nine manager recommendations.

Another reason to act now is that there is no guarantee that ISA accounts will remain available for new investors.

Pension Tax allowance on £3500. At present part of a portfolio can often be transferred into a pension wrapper to attract a tax rebate. Example, a man pays £2880 for his daughter and his three grand-children, total investment £11520, tax added to investments £2880, a little more help ! With many “monied” people using this facility to claim back tax for their family – if you were a chancellor looking to balance the books would you allow this to continue ?

My clients know at reviews we consider “capture” of tax free profits.  Is it possible that the current favourable taxation on capital gains will  be reduced ?  I think it is likely. It is of course possible that the government make such a law retrospective if they do decide to introduce such measures. We can factor in the effects of tax at 18% on gains over the allowance v future tax at …..50%!! For this depth of work an extra review will be required and chargeable as per our terms of business.

Cars in my view are a waste of money, however, if you have considered a new car note the government may increase VAT – and the price of steel is rising. If a change is due perhaps make it sooner rather than later, money saved is money made.

Where can we make money ?

My clients know that past performance is no guarantee for the future but in the main their capital has been protected and is increasing.

Specifically my clients know pre the property crash they were encouraged to reduce property exposure, and having strongly promoted property portfolios in 2009 I am again urging caution with a higher emphasis on bonds. Today (13th April 2010) the Financial Times announced the sale of “Tower 42″ in London city for £300M at a yield of over 6.6%. A year ago I suspect he yield would have been closer to 8%.

Within my portfolios I have used three property funds one of which I describe as a predator fund “London and Stamford”. This company seeks to buy “distressed property” and for example purchased property from Legal & General on favourable terms in the depths of the recession – just last year! The share price spiked last summer with substantial new investors from overseas and I advised my clients to take some profits. The share price has not done well in the last six months while my other two property recommendations have “soared” to such an extent that I am currently not putting new money into one of them. I do not believe that the bank problems are fixed and that there will  be yet “foreclosures” as reality hits home after the elections and banks accept that some borrowers cannot repay. For that reason I am currently seeking to increase my personal investment in Londond and Stamford.

As stated above we can discuss ideas on a case by case basis with those interested.

PS  Lastly, and on a totally different but not unrelated subject. I am considering hiring the best paraplanner in Northern Ireland. I have very demanding standards for my clients. My motto “right just fair” is more than words. If you are casually reading this article and are that special person with the requisite professional qualifications, an eye for detail and aptitude for hard work, please feel free in the first instance to let me have a copy of your CV and your last years Continuous Professional Development work.

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This paper is aimed at my clients drawing income from “unsecured pension”, also known as “drawdown”, who may have not had a review for some time. By reinforcing some of the points which will have been individually made I highlight the need for the regular reviews I offer. The article should also inform any person expecting to shortly enter retirement.

- What is an unsecured pension ?

- What is the alternative to an unsecured pension ?

- Why I might recommend an “unsecured” pension?

- What could go wrong?

What is an unsecured pension?

An unsecured pension describes a regular income withdrawn from a pension fund where both the capital and future income are not guaranteed. As with any pension fund the capital value will rise or fall in value in line with the underlying investments. If the capital falls the future income will reduce, if the capital rises the future income can be increased.

The maximum income that can be withdrawn is governed by HMRC rates calculated on the capital sum and ages of the person(s) who receive the income. The minimum income is zero.

The regular income withdrawn must cease at age 75. At age 75 the capital sum must be totally sacrificed to purchase an annuity – see below.

What is the alternative to an unsecured pension ?

Prior to the introduction of “unsecured pensions” the traditional alternative was an annuity. An annuity describes a regular income withdrawn from a pension fund where the capital sum is totally sacrificed in exchange for future income which is totally guaranteed. The future income will be agreed at the commencement of the contract. The income may be paid for the life time of the pensioner or for the life time of the pensioner and spouse. The amount of pension may or may not reduce on the first death, ongoing pension may be level or there may be built in increases.

The terms are fully agreed at commencement and the insurance company is contractually obligated to meet whatever has been offered and accepted. If the insurance company was to become insolvent the pensioner would be entitled to claim future income under the investors compensation scheme – a significant protection that is not provided under an unsecured pension. The annuity market is competitive and it is always advisable to obtain quote from various insurance companies.

There are a variety of further “hybrid” pensions combining aspects of an annuity and unsecured pension which I am not dealing with in this paper.

Why I might recommend an “unsecured” pension

Potential to increase income

It is possible to achieve a higher income under an “unsecured pension” for the following reasons.

The amount of income paid from an annuity is calculated on the basis of average life expectation and expected rates of interest.

If someone is retiring at a young age and in good health the insurance company will expect to pay the income for a longer number of years than to another older person therefore annuity rates have tended to be better as we grow older.

The higher the expected rate of interest the higher income the insurance company can earn therefore the higher interest rates are the better the annuity rate. Interest rates in 1991 were higher than in 2009. Annuity income purchased by £100,000 of capital in 1991 for a male aged 65 was £14,430 per annum. Annuity income purchased by £100,000 of capital in 2009 was £7,028 per annum.

As a result of the above staggering reduction in annuity rates

From around 2003 it has been possible to obtain a higher income from an unsecured pension than from annuity. I trust the reader can follow the logic that if in the next 10 years interest rates rise/and people get older it is quite possible that with good performance an unsecured pension can provide the client with a significantly improved overall income in the near term and providing the option of transferring to a conventional annuity should long term interest rates and annuity rates rise.

Lump sum in the event of death

Under some annuity plans it is not possible to have the annuity continue in full after the annuitant dies, perhaps reducing to 50% payable to the spouse for their lifetime. This for example often occurs in teachers pension schemes.

If protection for the family in the event of death of the annuitant is a high priority the preservation of a lump sum is often perceived to be more valuable than the prospect of a future income being reduced  to half in value.

Under an “unsecured pension” when the pensioner dies the lump sum remains intact so providing valuable choices to the widow(er). The bereaved spouse can therefore continue to receive the same annuity as before the death and until the time when the deceased would have achieved age 75 had he (she) lived or the lump sum can be physically paid into the survivors personal bank account after a tax deduction.

Unsecured pensions – what could go wrong?

All financial planning is subject to unforeseen events. Whilst there are real potential advantages to unsecured pensions the following pitfalls may arise.

There is a real possibility of drawing income more quickly than the capital grows. This would result in future income being reduced to perhaps less than would have been payable under a traditional annuity taken at inception. Under a worse case scenario the capital could reduce to nil so that there would be no future income.

If due to improved medical care people live longer then future annuity rates may have to be further reduced by the insurer. This would not affect existing annuitants who would win at the expense of the insuance company but would result in any future annuity being offered by the insurance companies being lower than are currently available.

Interest rates may not rise and remain very low for a considerable number of years so making the deferring of annuity purchase whilst waiting for interest rates to rise a futile exercise.

Personal professional advice is essential before taking decisions.

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A solicitor telephoned me recently asking if he should invest in a First Trust account paying 6% interest.  I realised the solicitor did not understand the account and that there may be other clients who would benefit from further clarity.  Only yesterday another client who is an accountant described this type of investment as a “supermarket type sale” using one product as a “loss leader” competitively priced to sell another product.

First Trust are one of many banks selling this type of product and as a courtesy to First Trust I have advised their marketing team of this article so that they can respond, make any corrections if I have misunderstood anything and in good faith any response they (or any other bank) make before 16 March 2010 will be printed in my March update.

6% per annum!  Is this a fantastic product? or is the product “smoke and mirrors”? I hope this article and any response the bank choose to make will help you make up your mind. I do not recommend the product.

Secure Reserve 5 from First Trust Bank divides the investment into two sub accounts.

6% gross AER on half the investment and up to 5.39% gross AER for five years on the other half

(AER - stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. As every advertisement for a savings product which quotes an interest rate will contain an AER, you will be able to compare more easily what return you can expect from your savings over time).

If, for example, you invest £10,000 and you get £300 interest after one year (before tax deducted) have you received 6% or 3%? You will see £300 is not 6% of £10,000 but 3%.

The reality of the First Trust product is that after one year you are only guaranteed 3% on your TOTAL investment and you are only entitled to lift half your capital. The other half is tied up for a further 4 years.

As explained above there are two sub accounts in your investment. The first sub account is paying 6% for one year, but the second component pays 0% in the first year. No interest is added to the second component after the first year and the second component does not pay out any interest after the first year. The overall return after one year is only 3%.

The facts are:-

• the actual interest rate the investor is getting after one year is 3%
• half their capital is returned after one year
• the investor is forced to tie the other half up for a further 4 years

What is the chance the investor can earn up to 5.39% AER for the full five years the remainder of capital is tied up in sub account 2 ? There are four points I wish to make:-

• no interest is added to sub account two in the first four and half years and in the last six months a calculation is made on the percentage rise (if any) in the FTSE 100 Index over five years
• it would be necessary for the bank to share the arithmetic on which the potential 5.39% AER is calculated – I will be happy to publish if the bank provide this
• there is a FTSE 100 Index based solely on “capital return”. This means that it does not take into account any dividends from the companies whose performance the Index tracks. FTSE also compiles a separate “FTSE 100 Index” based on “total return” which does take dividends into account. This probably equates to around 3.5% per annum, I suspect the bank are taking the dividends for themselves – they can correct me if I am wrong.
• the FTSE 100 Index as I write this (12 February 2010) is at 5134 but on 30th December 1999 it was at 6930. During the period it was significantly lower in March 2003 and March 2009. So even though the index is lower now than it was in 1999 my clients have been able to profit by a degree of timing about when to be in the market and when not.  The First Trust product removes this flexibility, i.e. if the market performs strongly for the next 4.5 years but slumps in the following six months the investors do not have the opportunity to come out of the product at the end of year 4.  His product may mature at a very bad time and there is no option to wait for a potential recovery.

Having been advising clients for over 30 years I am convinced that investments should be made in an appropriate portfolio that allows flexibility on encashment date.

I have developed six portfolio models built around financial plans personalised for every client. These portfolios can be regularly reviewed and changes made to meet the client circumstances. If the plan shows that the client can invest some of the portfolio in a higher risk fashion the plan will show the client has sufficient readily accessible cash to wait if necessary for markets to recover.

This high level of personal service is possible under my fee paying proposition where 100% of any commission is rebated and I get paid fairly and regularly on an ongoing basis to look after my client.

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Lifestyle is a measure of what we do. Quality of life is a measure of who we are. Money connects to both.  I have written this  month about financial planning software I have purchased and which demonstrates using money as a tool in your hands and how this will help your money grow.

Money will rob you of quality of life if your life depends solely on your money. When you depend on your money you are actually despising God. The natural oucome of depending on your money is worry. You will worry that you will not have enough for your future, so you will horde and take “short cuts” – you might even play the lottery to try and get more. Your quality of life is eroded as you tend to mortgage “today” for a “tomorrow” you cannot be sure of. Your sleep may be disturbed, your health may be affected.

Money will rob you when your lifestyle causes you to be careless about your use of money. To live for the now without some form of structure in  your financial planning is like leaving your money lying around so that someone could steal it. The outcome is stress when you do not have enough to pay your bills.

Such is our human condition that we all fall into either camp from time to time letting our money (or lack of it) rob us. I am reporting to you how after consideration, investment and training, I can better apply my financial planning skills to help you improve your quality of life.  This will take combining my new technology, time invested in training to use this very sophisticated piece of software, and our mutual time to get your personal financial plan on computer and to keep your plan regularly current to your life. I am confident you will find this well worth the effort. I believe this puts you (and me) ahead of anybody in terms of being on top of financial planning.

Historically, I obtained a “fact find” then using my calculator and knowledge of financial products gained over 30 years to give advice followed by a formal “reason why” letter which seeks to cover any of a number of assumptions I will have discussed.  Life moves on and keeping planning current is very labour intensive as I seek to repeat the process in depth.

In 2009 I have subscribed and taken extensive training on financial planning software, designed by Paul Ethridge who has receive an “MBE” for this his lifetime work. This software has the ability to update investments in “real time” and to be applied face to face with you my client. The plan becomes truly your plan, allows a variety of scenarios selected by you to be outworked for you to see  instantly at our review meeting. This gives you an immediate “snapshot” and possible consequences of any financial decision you are considering.  Based on the programme “reporting” I can advise you at the meeting if for example you can afford to help your daughter buy her first house, take your wife on that promised break, allow for working a day less  a week to do something that has been on your mind for years.

To put this information on paper it comes to over 100 pages – I printed out one plan to see! The computer as in so many aspects of life enables added value for you. After our meeting the “reason why” lettter I am required to send you can be relatiavely short, we have jointly agreed the assumptions so I can print those on one page, we will have “modelled” the various scenarios that had interested you so you will not need these in writing (although you can have them printed if required for your accountant or solicitor).

Your “reason why” letter is therefore more meaningful and will accurately record my relevant advice for your file. (I have recently been congratulated on my new format – I am excited about this because I know I previously sent out “epistles” which sent people to sleep !)

At subsequent reviews a record of your current client outlays can be quickly updated onto the plan by my personal assistant, live data on your investments applied and my input can be as an ever more valuable ”coach” helping your quality of life.  Our meetings can focus on “your dreams”, your “if only” moments and lessons can be learned from these.  I believe this is one of the greatest advancements I have made in many years and look forward to applying the technology to increase the quality of my client relationships.  As each client approaches their next review date they will have the opportunity to put their plan “on record”. If there are further new clients who  may benefit it is already possible to start a plan by applying from this web site.

Looking forward, I am investigating how my existing client financial plans can be remotely accessed so that by use of “skype” (or equivalent) the client will at any time be able to lift the phone for some coaching!! The vision is exciting and I plan to continue to keep you posted.

Next month I hope to write about my concerns about banks appearing to offer 6% on deposits, I intend to put my concerns to the banks in question and if they are prepared to make counter arguments I will publish these on this site.  Could be fun !

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This article explains how risks can be reduced by asset allocation,  in January I hope to explain how applying new software on which I have been trained in 2009 will help you appraise and be ever more comfortable with your financial plan.

“Share with seven, yes with eight, for you never know what disaaster may occur on earth”.

“Keep watching the wind and you will never sow, stare at the clouds and you will never reap”.

“In the morning sow your seed, do not let your hands lie idle in the evening”.

(Ecclesiastes 11)

Asset assocation is not a new idea as the above ancient scripture records. Today I apply the principle in constructing six asset allocation models for my  clients. These are titled “No risk”  … “Very cautious” … “Cautious” … “Moderate” … “Aggressive” … and “Very aggressive”.

The principal asset classes that may be included are Cash, Fixed interest Bonds, Equities, Commercial Property and Commodities.

Asset Classes Explained

If you invest £100 in a bank account you expect that there will be £100 plus possible interest when you subsequently withdraw. Perception is that this is “No risk” and this is the term I therefore use to describe a portfolio of Bank and/or Building Society / National Savings products. There are however still some risks – the Bank may not be able to repay the £100 and/or the rate of inflation may erode the real value of the £100.

Fixed interest bonds are investments for a fixed term at a fixed rate of interest.  The investments are transacted as loans to governments and companies. It should be noted that if a company share value rises or falls this does not affect the rate of interest agreed on any bonds and so bonds are perceived to be lower risk than equity investments. Fund managers will offer a wide spread of investments to various governments and/or companies resulting in an amalgam of various bonds with different interest rates and/or currency and duration. This fund type is NOT risk free and will normally reduce in value when Central Banks increase interest rates because in such  circumstances a fixed rate will not change. There can also be a currency risk where an investment is made with a non UK domiciled company.

An equity investor becomes a part owner of a company. The value of his stake is what someone else will pay for his/her holding when the investor wishes to sell. This is therefore much more risky than a bond investment discussed above as in effect the price of the share will be influenced by the anticipated share of the profits payable by any future dividend.

A Commercial Property investor becomes part owner in a commercial property. The value of the investment is what someone else will pay for his/her holding. The value will be determined by the amount of rent payable, the future security of the rent (the lease duration) and the amounts of any mortgage on the property. Liquidity can be a major worry because even though an attractive rent may be payable should you want your money out there may not be any other investor interested in buying your share. Should this circumstance persist and others also want to disinvest it would be necessary for the manager to sell the property which could be a protracted process. Property investors therefore need to be prepared to be patient.

Commodity investments are holdings in assets such as gold or land. The price is determined by what someone else is prepared to pay. Commodity prices can fluctuate sharply.

Reducing risk by assset allocation

Based on the above assumptions on the character of asset types I determine asset target allocations. The actual investing is delegated to fund managers who I then monitor. Where a cautious portfolio is appropriate, typically around 45% to 50% will be invested in fixed interest bonds, no more than 25% in equities with the balance in commercial property. A moderate portfolio will typically have a higher percentage in equities and lower percentage in fixed interest bonds.

Product Types used

Product types include ISAs, Unit Trusts, OEIC, Investment Trusts, some direct specialist holdings and VCT EIS or pension accounts if appropriate for tax planning reasons. Both “passive” and “active” managers are used.

Investment Managers

As a whole of market adviser I have no “marketing deals” and any commissions received are 100% rebated to my client. Whilst I can use any Manager the investment managers currently being used include Aberdeen Asset Management, AXA, Assura, British Assets, Electric and General, Foreign & Colonial, Henderson, Fidelity, Franklin Templeton, Gartmore, Independent Investment Trust, HIRCO, KSK Energy Ventures, Landkom, Invesco Perpetual, IRP Property, Jupiter, JP Morgan, London & Stamford, New India Investment Trust, PME Africa, UBS, UK Commercial Property, Shires , Trading Emissions/Sunbiofuels and Vanguard.

Other managers may also be substituted on a case by case basis where there is a special reason to do so, e.g. policy written under an insurance company trust coming to maturity and being reinvested on special enhanced terms for the client.

Application to your portfolio

The stock market has risen very strongly in 2009 providing capital appreciation to any of your equity based funds. As the shares could fall in value at a review I will therefore be currently reassessing your attitude to risk and possibly sugggesting taking profits. Any profits can be captured and reinvested in a lower risk asset, used for special holidays/treats (life is not a rehearsal) and/or giving to support widows, orphans, others less fortunate.

Applying the above principles going forward

Although the Bank of England has said their programme of “quantative easing” (printing money) has ceased I remain concerned how the consequences of non performing loans will impact in 2010 and whether there could be a resumption of the “quantative easing” policy. However, as we are warned in Ecclesiastes “keep watching the wind and you will never sow, stare at the clouds and you will never reap, in the morning sow your seed, do not let your hands lie idle in the evening”.

Future growth is not guaranteed and whilst past performance is not a guarantee of future performance, history has shown that long term investments in managed portfolios have in many instances preserved and grown capital values.

Next month I hope to write an article expanding on my video clip (on this website) to explain why I have invested in the purchase and training in one of the leading financial planning software systems available, and how applying this to your circumstance will help your forward financial planning.

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Better than Exchange Traded funds?

It was reported in October 2009 that NDF administration has £24bn of clients money at risk although hopefully clients may be covered by investor compensation schemes. The NDF investment product was built around the use of derivatives. The attraction was investment exposure to rises in the stock market but provision of capital guarantees at future specified dates and on certain assumptions. I stopped recommending this type of product when the promoters of similar products introduced the use of third party “counterparties” to provide the “guarantees” The products had introduced an additional “unknown” into how my client’s money could be guaranteed safe so I was not going to recommend.

Exchange Traded Funds (ETFs) are a relatively new investment option that have been receiving much attention recently. It should be noted that ETFs do not normally make day to day trading decisions regarding the shares they hold – they are “passive” eg tracking the top 100 shares in a market, although they may make decisions to “lend” their holdings to third parties, example for the purposes of “short selling”.

ETFs are created based on two alternative structures. With a Cash Based ETF the provider owns the physical securities that comprise the index they are tracking, whereas a Swap Based ETF is built by financial institutions using traded derivatives contracts. The advantage of an exchange traded fund is that it allows investment in an asset class at very low costs.

I am not using exchange traded funds because although when buying a TRADED derivative the price of the derivative will in practice be the underlying value of the investments it holds, there is no guarantee that the selling price will be the underlying value of the investment. This is because an ETF resembles an investment trust in that the selling price is what some-one is prepared to pay. An investment trust share price can trade above or below the net asset value, the same applies to an ETF. I believe this is an acceptable risk in certain carefully selected investment trusts where the intention is to hold on a long term basis for income but I am uncomfortable in a product built on derivatives. Further facts are that a bank creating the derivative will require a “counterparty” which can often be provided in a separate division of the same bank, and the counterparty can normally “lend” the asset . If the bank is unable to get its loan back or even worse if the bank goes into liquidation what price would a new investor be prepared to pay my client to get his money back? . The additional “unknown” is that client’s money is not guaranteed to reflect a mathematical relationship to the net asset value but is the price another investor is prepared to pay.

I understand that regulators are currently looking at exchange traded funds and if I receive assurances that remove the additional unknown I will be prepared to re-evaluate my position. However, I have an alternative simpler, also low cost, but safer solution.

In October 2009 “Vanguard” became available to my clients . Like exchange traded funds their products use a “passive ” investment style. For example their FTSE UK Equity Income Index fund’s investment strategy is to buy and sell equities in direct relation to the FTSE UK Equity Income Index. The Vanguard Portfolio Managers do not seek to second guess the Index, rather they simply hold the constituents of the Index (Of course the fund is not guaranteed and the performance should rise and fall in line with the underlying index). In respect of the FTSE UK Equity Income Index, it is comprised of those stocks that are in the top 50% of stocks from the FTSE 350 Index forecast to pay dividends over the following 12 months, but excluding all closed end funds, all investment trusts and real estate investment trusts.(REITS) Then it ranks the remaining stocks by forecast dividend yield from highest to lowest. (This is a summary of a very specific procedure).

Unlike an exchange traded fund the Vanguard product does not use derivatives, it owns the real assets, and selling is always a mathematical calculation of the underlying assets which are held by an independent custodian -there is no additional unknown.

Like an Exchange Traded fund Vanguard can lend their stock to others. I have discussed this factor with Joe Mahmood (a senior manager with Vanguard) and he has confirmed that any loans are backed by either 102% cash deposit if in the same currency or 105% if in another currency. In addition Vanguard receive a premium for this loan, which is fully added back into the fund to enhance the fund’s return.

Why take the risks of investment spreads? In a doomsday scenario the price can still go down but there is no possibility of a further discount below the net asset value. The bottom line is that the current “running yield” (not guaranteed because it depends on forecast dividends) is 5.39% after an annual management charge of 0.25%. (There is also a one off 0.5% purchase tax). Vanguard have traded in USA for the last 10 years and are taking a significant percentage of the market.

For “income generation” I continue to recommend quality investment trusts such as Neil Woodford’s Edinburgh Investment trust (quoting a dividend yield of 5.6%) and currently at a discount to net asset value of around 4% to 5% but the above Vanguard fund discussed in this update is only one in a stable of very impressive and low cost products which I plan to build into my ongoing portfolios.

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I have written a reflection on a visit to Africa I made just over a year ago.

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Financial strength in your adviser is important, enabling him to be paid to provide you with the right advice rather than a dependance on commission from implementation of a sale. Our financial strength has enabled us to carry out the transition from commission to fees, so under no pressure to make investments I advised clients to hold relatively larger sums in cash in 2008 – the right advice! The Financial Services Authority are correct in their aim that all independent finanical advisers must hold higher capital reserves and be “professionals” paid by fee by 2012.

In 2009 you will experience valuable personal financial guidance to a more detailed level as I work closely with my client with a mutual objective of preserving your capital by improving the quality of income and reducing your overall costs. I have invested in a leading financial modelling technology and incorporated an objective risk analysis. You may view my improved Client Agreement service proposition by a video summary on this website.

The initial charge and previous 3% investment charges are waived for existing clients who wish to upgrade at the time their statements are issued. Where new clients paperwork is in good order and/or professionally presented by their accountant or solicitor and this reduces our “set up” work I am prepared to look at reducing my initial charges on a case by case basis. Our ongoing work and costs are covered by my annual charge of 1% but being freed from the need to make commission I am able to offer larger reductions in third party charges – thus I believe I am providing higher quality annual advice at lower overall costs!

In response to the Madoff alleged $50bn fraud I aim to revisit all managers we are recommending to check their due diligence!

In 2008 I was sorry to lose Dorothy and David but welcome Catriona, Lynsey, Julie and Fiona (standing in for Catriona who has just delivered a beautiful daughter). The change of the guard has not been without “teething problems” and I do apologise where service levels dropped. Re-training and upgrading procedures will continue to be a high priority in 2009.

Thank you to those who give me the opportunity to continue to provide independent financial advice, I take this very seriously. My investment theme for 2009! -”quality of income, at lower costs!”

David Jebb (Chartered Financial Planner)

Forward Financial Planning Plc

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