In the world of investing, we all should consider a few things before picking where to park our hard-earned money. Questions about how much volatility you can stomach, how long you will invest, and the purpose behind the investment are common, but if you’re like most investors, some attention is given to performance. And so it should be!
But is past performance the best indicator of future performance? Based on research and experience, our vote is a big NO!
A Major Player in Fund Performance
It’s easy to be drawn to high performing funds. Who doesn’t want an impressive rate of return – which may or may not come with some bragging rights? Despite the appeal of double-digit earnings, a handful of studies show that past performance isn’t a real indicator of future reward. In fact, the biggest predictor of a fund’s performance is cost.
Every fund has a built-in cost of doing business, known as the expense ratio. Portfolio managers are paid to create and maintain a bundle of various investments within a single fund, making it easy for you as the investor to participate in a well-rounded, diversified investment. The expense ratio pays for that convenience by reducing your total return.
A recent study by Morningstar, the leading global research provider on investments, broke down the importance of costs when it comes to picking your investments. The data reveals that across all asset classes, the least expensive funds outperformed more costly options each and every time.
Staying in Control
So how do you make sure you stay in control of your investment portfolio’s overall cost and total performance? Start with your investment style. Active funds, or those which chase returns in an attempt to outperform the market, have higher costs than their passive counterparts. Despite the appeal in terms of performance, research shows that active funds do not consistently provide higher returns over time (that’s before and especially after costs!).
That’s because chasing performance is less about skill and more about uncontrollable luck.
Passive investments – those which track an index in an attempt to reflect the performance of a specific market – have far lower fees, leading to less drag on your total return. Investment managers who follow a passive management style don’t get caught up trying to beat the market, but instead, they focus on creating consistency and simplicity in their investment choices.
At Jones Hill, we understand that to reach your goals you need investments that perform well over time. Instead of focusing on the hype of outperformance, we help you construct investment portfolios that are low-cost, tax-efficient, and in line with your tolerance for risk – all which allow you to enjoy your life without wasting time chasing unicorn returns.
Contact us today for a discussion about your investment objectives and how we can lend a helping hand.
Financial advisers, are they worth it? It’s a challenging question for any professional, so here’s the how to guide to know if a financial adviser is right for you.
Free Financial Guidance
The Internet can tell you a lot about investment and retirement planning, and best of all it won’t charge you a thing!
Prefer a bit of human contact? Then get in touch with Pension Wise. Although strictly speaking they’re not advisers, they can provide you with some guidance and point you in the right direction free of charge.
Financial Adviser Charges
The other option is to get real financial advice. But be warned, the old days of ‘free’ financial advice are over. Nowadays fees must be expressed clearly and fairly. There are a number of different pricing models, but these essentially boil down to three main categories:
1. Hourly - typically around £200 per hour
2. Fixed fee – a flat fee which typically depends on the time, complexity and value of the
work involved
3. Percentage of assets under investment – typically around 4% of your assets
Cards on the table – at Jones Hill we offer fixed flat fees. We always disclose the fees you will pay (in a format you can understand!) and explain our charges fully before undertaking any work on your behalf. We prefer fixed fees as they give you the peace of mind by knowing exactly what you will pay and it means that you are not being penalised simply for having more money (as percentages do).
So how do the numbers stack up for a typical client who invests £150,000?
1. Hourly – a full financial plan is likely to take around 15 hours, so will set you back around
£3,000.
2. Fixed fee – typically range from £750 - £2,500
3. Percentage of assets under investment – around £4,500
Financial Adviser Value
Those are some pretty big numbers, so the real question is will a financial adviser improve returns enough to cover their own fees (and then some)?
In most instances, the answer is yes. A number of studies have shown that advisers help clients to reduce the ‘behaviour gap’, often to the tune of 1 – 2% per year. An adviser is more likely than you are to be able to see the big picture and take the long term view (remember Brexit?). They will be also able to improve your tax position and save you £££’s in otherwise paid tax.
But there are other sources of adviser value that are just as real but won’t necessarily show up in your bank account. You might call this lifestyle value.
Consider the time, knowledge and inclination required for self-managing your own investment and retirement plans. If you’re the type of person who doesn’t find reading personal finance particularly interesting, or has more exciting things to do with your life, then you likely would benefit from having a financial adviser. By being able to hand off your financial affairs to a professional, qualified expert you will gain the time and peace of mind to do the things you enjoy most.
The bottom line is this, financial advisers aren’t right for everyone. For many people, a bit of Internet research, topped up by a visit to Pension Wise is likely to be just fine. But if you’re financial affairs are complex and you value spending the time on the things you enjoy, then you will likely to benefit from having a financial adviser.
Remember, money comes and goes, time only goes.
It’s all over the media – press, radio, TV, Facebook & Twitter - Brad Pitt and Angelina Jolie are to divorce! The questions many are asking are “who cheated?” and “with whom?” but more practical considerations arise.
When there’s a split, how do you disentangle your financial and lifestyle plans from those of your partner?
Sometimes life serves you lemons …
The typical Jones Hill client may not have the finances and lifestyle of Brad & Angelina (possibly a rash assumption on our part!), but they’d be wise to involve a financial adviser in the separation negotiations. In the absence of a pre-nuptial agreement (Apparently Brad & Angelina didn’t have one, so you’re in good company!) you would be foolhardy not to take specialist advice before agreeing on the terms of a split.
It’s true that a financial adviser will add to the costs of the separation, but the arguments for consulting a financial adviser regarding a divorce are similar to the arguments for consulting one at all – please also see our blog post “Are financial advisers worth it?”
In a separation there may be investments, pensions, property (eg a family home, holiday home) and financial liabilities (eg a mortgage) to be split. Pensions can be split on value (for younger clients) or on income (for more mature clients). It may be prudent to balance a pension against other assets to avoid having to cash-in and start afresh (offsetting) or it may be possible to have a portion of a pension paid to another party (earmarking) rather than start new separate pensions (splitting).
Market conditions or other reasons may make it undesirable to sell property, and in that case, a balance will have to be achieved using other assets. The division of mortgage liabilities will likewise need careful consideration according to the age, employment situation and other liabilities of the parties.
The tax efficiency of any financial arrangements should not be overlooked. Whilst gifts between married couples or civil partners are tax-free, the transfer of assets may give rise to Capital Gains Tax liabilities, and the post-split tax situation of the parties may be very different from each other.
Whether you’re married, in a civil partnership or co-habiting, if separation is on the cards, don’t forget to contact your financial adviser as well as your divorce lawyer.
PS – Brad/Angelina – remember, if you’re calling Jones Hill from outside the UK, add +44 in front of our telephone number!
OK Brad, we can understand that if Angelina has just announced she’s divorcing you, then making lemonade won’t be high on your list of priorities.
Nothing feels better than accomplishing a goal you’ve set for yourself. Maybe you’ve been burning the midnight oil at the office and finally got that big promotion, or maybe you’ve put in countless hours of sweat into a home renovation. Regardless of your objective, seeing the end result is a beautiful thing.
It’s no different with goals related to your money, but for some reason, for a lot of people financial objectives seem a bit more challenging.
Goals that Work – and Ones that Don’t
Would you set off on a cross-country road trip without some idea of where you were headed or when you wanted to arrive? Most of us would avoid that disaster by having some sort of plan in place. Your financial goals should follow the same thought process: what do I want and when do I want it? In other words, they should be SMART: specific, measurable, achievable, relevant, and trackable.
You can work hard and set aside a few pounds here and there, but without setting specific goals, you are likely to feel a bit lost. Setting objectives for your financial life starts with understanding the specific “thing” you’re aiming for and then defining what success means in the context of that objective.
For example, your objective of wanting to retire by age 60 with enough assets to draw 75% of current income is a specific, measurable goal that you can track periodically. Simply stating you want to retire one day is lofty at best and sets no parameters for measuring your progress. Knowing where you want to go is great, but if you have little to no idea where you’re starting from, you’re in trouble!
Action is Everything
Your ’retire by age 60, drawing 75% of your current income’ objective only works when you figure out what’s needed to get there. To frame your goal, you will need to ask intelligent questions, such as:
- How much do you need to save now in order to reach the right account balance?
- Which investment vehicles do you need to set up to save in a tax efficient way?
Answer these questions and you’ll be on your way to sketching an actionable financial plan.
But if you’ve struggled with major financial goals, you’re not alone. Working toward something as far off as retirement, buying a second property or funding your children’s education can be overwhelming to think about, let alone plan for. These goals seem too big and too distant, but breaking down your financial goals into smaller, manageable chunks can help.
Let’s go back to our retirement goal – start with the big picture. If your lifestyle in retirement involves expensive hobbies, you’ll probably need more than someone who plans to just potter ‘round the garden.
Focus on understanding the big number first, and then break that down into smaller pieces that fit into your everyday life right now. Establish milestones for yourself that are realistic (i.e. savings X amount by the end of next year) so you don’t set yourself up for missing the mark.
Accountability Along the Way
If you’re like most people, setting a goal is not where the problem lies. Of course, you want to retire, or buy a beach home, or send the kids off to school without the burden of tuition – these goals are not uncommon. Unfortunately, reaching them without too many hiccups is. If you are struggling with reaching financial objectives, it’s time to get SMART about what you want.
Being accountable to another person who understands what you are trying to achieve is a powerful step in actually reaching your goals. At Jones Hill we know what it takes to get to the next level of your plan, and we bring a perspective that is both unbiased and proactive. We will boost your level of understanding about different methods to achieve your goals, leading to an ongoing relationship that helps you build, achieve and maintain your best financial life.
Unlike “the answer to life, the universe and everything” in the Hitchhiker’s Guide to the Galaxy, this question has no simple answer. However, just as a journey of a thousand miles starts with but a single step, here are three questions that will help to get your relationship with your adviser off on a sound footing.
1. What’s my investment philosophy?
There are several investment ‘styles’. To some extent the styles available will depend on your own and your adviser’s investment philosophy. This is why it’s important to choose an adviser who is sympathetic to your needs and objectives and doesn’t try and shoehorn you into something you don’t understand.
At Jones Hill, we see it as our job to work with you to achieve outstanding outcomes. An important aspect is whether you want to limit investments to companies trying to achieve certain moral or ethical standards, for example by specifically excluding companies that invest in tobacco or weapons.
Whatever you decide, flexibility is key so that if events – whether market or personal – take an unexpected turn, you are not stuck with an unsuitable plan.
2. What’s my risk profile?
Before making a single investment your adviser needs to assess your attitude to risk. In a nutshell, the higher the risk, potentially (not always!) the better the return, but also the greater the risk of failure. How much risk can you stand without it keeping you awake at night?
Well, younger people can generally afford to be a little more adventurous as they have longer to recover from any market setbacks. But for those of us who are a little older, we may want to settle for something a bit safer, which provides more stable and predictable returns. Boring as this may sound, it can be an effective strategy.
No conversation about risk is complete without mentioning Diversification, the golden goose of finance! In essence, diversification means not having all your eggs in one basket, whether that be stocks, bonds or property.
The reason being that sometimes one asset class is hot and sometimes it’s not, but it’s unlikely that all asset classes (property, bonds or equities) will all be swinging the same way at any one time.
3. When can I retire?
The £64,000 question! Why? Because it might be today, in 5 years or 25 years. The problem is, if you don’t know, then you’ll likely just keep plodding on aimlessly when you could have hung your boots up years ago.
The most significant factor in investments is time. The longer you save, the more your “retirement pot” is likely to contain. Whilst this may seem like a statement of the bleeding obvious, the fact is that most people leave it too late to start serious saving. Get ahead of the curve by knowing where you’re heading and when you need to be there.
In summary, make sure that you prepare for your first meeting with your adviser by thinking through the questions and topics you want to discuss, it will enrich the conversation and allow you to discuss the things that are most important to you.
Helping the Children onto the Property Ladder
It’s common for youngsters to want a place to call their own, but getting to the first rung of the property ladder can seem out of reach for most. If you’re a parent, you probably feel a bit obligated to give them a financial boost.
A number of schemes are out there that might be looking into to make getting your children into their own home – and out of yours – less of a stretch.
Help to Buy ISA
First-time homebuyers – those who have never owned property in or outside the UK – have an opportunity to save within a Help to Buy ISA.
The account offers a tax-benefited way to set aside funds specifically for the mortgage completion deposit with the potential to gain up to a 25% bonus on savings from the Government.
Account owners can save up to £200 on a monthly basis, with an initial deposit of up to £1200 in the first month.
Setting your kids up with a Help to Buy ISA lessens the financial blow of buying a home because the Government pays a bonus of up to £3,000 at the time the sale is complete.
So long as your children aren’t purchasing a home that costs more than £250,000 (£450,000 in London), the extra cash is theirs for the taking. While a Help to Buy ISA scheme can be helpful for your as parents, there are some things to watch out for.
The tax-free bonus is only applied to the first £12,000 saved, and a minimum of £1,600 must have been put away to receive any bonus at all. Additionally, the bonus is not applied until mortgage completion, meaning funds cannot be used for an exchange deposit.
The Help to Buy ISA must be held in cash, no investments, which means that due to low interest rates, you will only receive an interest rate of a couple of percent at best.
It is also important to note that Help to Buy ISAs must be used for properties purchased with a mortgage, not cash, and there is currently no assistance for prospective homebuyers who wish to rent the purchased home.
Account owners must also meet the following requirements: be a resident of the UK 16 years or older, and not have another active cash ISA established within the same tax year.
Savings and Investment Alternatives
In addition to the Help to Buy ISA, conventional savings and investment accounts can work to the make your children’s home buying dreams a reality. Regular savings accounts pay minimal interest but do allow for an easy way to shore up a mortgage or exchange deposit well before funds are needed.
Importantly, some of these accounts have restrictions on how many withdrawals can be made in a given time frame, while others require funds to be locked in for a set period of time prior to opening.
Investments also offer a method to save toward home buying goals without the contribution limits tied to ISAs. And while some investments provide a higher rate of return than conventional savings or Help to Buy ISAs, the risk of loss of capital is real.
In order to get your children out of your home and into their own, your upfront financial assistance may be a necessary factor. Help to Buy ISAs are a smart way to earn a bonus on funds without the tax burden, but it's important to understand the limitations.
Savings and investments also help towards reaching a certain amount of savings for a home purchase, but only when risk is balanced with potential reward.
To successfully get your children onto the property ladder, consider which methods or combination of accounts fit your circumstances best.
If you’re a woman, you’re statistically more likely to experience financial and emotional hardship throughout the process of divorce, especially if you are on the brink of retirement. One of the main challenges you may face at the moment is trying to pick your way through pension sharing, knowing that if it goes wrong you could be left short of money in later years.
What is Pension Sharing?
Pension sharing is the process of splitting pension schemes built up during working years. Any one of your ex-partner's personal or work-related pensions can be shared based on a percentage dictated by the financial settlement agreed during the divorce process. Pension sharing effectively awards a partner with a transferable credit for sticking it out in the relationship, creating a way to use funds that would have been available to both parties should the marriage have remained intact.
Considerations for Divorcing Women
If you are considering a pension sharing order, special care should be given to certain aspects of the process. First, pension sharing is based on a percentage of your partner’s pension valuation – not a hard and fast amount. This creates complexity due to the length of time that passes between agreement on that percentage and when the transfer credit takes place. Pension values fluctuate over time, especially when underlying investments are relatively high-risk. If markets take a turn for the worse, you may be left with far less than anticipated.
As an example, let’s say Mary is set to receive 50 per cent of Tom’s personal pension, currently valued at £250,000. Four months pass between the time a pension sharing order is granted and when the transfer credit is implemented, and Tom’s pension valuation has dropped to £170,000. Instead of receiving half the initial valuation, Mary is left with half of the current pension value - a difference of £40,000!
Managing the Time Risk
Remedies that lessen the blow of the moving target of pension valuation are scarce, but you can work quickly when pension sharing orders are in play to ease concerns. Overarching rules provide that pension sharing orders are required to be completed within four months, and pension providers must act swiftly to deliver the transfer credit. Also, asking for a pension valuation near the start of the implementation process is a sound strategy to safeguard yourself from drastically lower valuations.
Additionally, knowing where the pension credit is to be transferred well before the transfer credit is implemented is a critical step. It is rare that you are eligible to take ownership of a transfer credit under the same work or personal pension scheme already in place by your partner. Instead, transfer credits are applied to pensions in your name. If you do not have a pension prior to a pension sharing order being granted, you should work with a professional to create one.
Speed and planning ahead are not the only means to a successful end with pension sharing orders; you have the opportunity to protect yourself from lower valuations and transfer credits by building some flexibility into financial settlement documents. For instance, if other marital assets – cash, property, collectibles etc. – are available, these can be offered up to make up for any delay between the initial valuation and the actual transfer credit.
The Bottom Line
Pension sharing can be a viable method to achieve financial stability long after your divorce is finalised, but only when expectations are realistically set. Be proactive when it comes to obtaining the valuation and determining where the transfer credit will ultimately land, and make sure that you know your options if a shortage surfaces. The financial aspects of divorce are far more manageable when you remember the process of pension sharing requires equal parts time and patience, with a pinch of flexibility thrown in for good measure.
Achieving a degree of financial stability throughout retirement years does not happen on a wink and prayer alone. Without a respectable amount of effort put into planning for sustainable income prior to leaving the workforce, your dream retirement years could quickly turn into a far different, rather dreary reality.
Fortunately, minding the retirement income gap – that is, making sure you do not outlive your assets – can be achieved by focusing on two crucial components of income planning: longevity and investment performance.
The Challenges
Part of the struggle in planning for the appropriate amount of income in retirement is the unpredictability of life expectancy. Although research provides data on average lifespan for males and females born in certain years, pinpointing the exact moment income is no longer needed is an impossible task. You may initially base retirement income needs on a 20-year retirement, but should health or other circumstances change, you may be forced to stretch your assets an additional five, 10 or even 15 years.
Similarly, adverse health diagnoses may mean an increase of income for a shorter period of time. If you selected an annuity as the sole vehicle for generating retirement income, shifting cash-flow to meet changing needs is not an option. When flexibility is not infused into your retirement income plan from the start, specifically through diversification of income sources, minding that gap may be out of the question.
Mr Market
Market performance lends a hand in retirement income planning as well. In an ideal plan, underlying investments are able to generate a return high enough to sustain a selected withdrawal rate. For instance, following the conventional rule of thumb suggesting one take no more than a 4% withdrawal from assets each year typically allows retirees the ability to survive the worst of what the broad market has to offer in terms of performance, all while sustaining an adequate level of income.
Managing Drawdown
However, research has found that maintaining a 4% withdrawal rate throughout retirement years actually results in excess funds – more than double initial asset worth for 2/3 of individuals. The traditional school of thought surrounding the 4% rule is a safe place to start when it comes to not outliving assets, but money is left on the table for a large number of retirees who do not include some degree of flexibility within their overarching plan.
Sound income planning is paramount for individuals if they want to ensure the hard-earned money set aside specifically for retirement is able to satisfy cash flow needs over time. However, the unpredictability of market performance and longevity make creating a concrete income plan a true challenge. To mind the retirement income gap, it is necessary for individuals to create a plan that carries a degree of flexibility, not only in terms of the source of retirement income but also as it relates to the amount withdrawn each year.
01225 775923
