Financial Planning in the Middle Ages

Welcome to my Middle Age blogpost. No serfs here and hopefully with sensible financial planning in the early years there are no peasants. Maybe we are not all Lords of the Manor but we may be landowners (or a freeholder in any event). And the only plague like viruses are being killed by our software.

Following their previous informative video on the early years, Morningstar have followed up with the middle years [yes, my title is much better, isn’t it?!]

In this episode they discuss the fact that you're in a stage where you're perhaps coming senior in your job, you have children, you have a house, other responsibilities. You're starting to think a little bit more about coming into retirement and what the future might start to look like.

http://www.morningstar.co.uk/uk/news/articles/106999/Financial-Planning-in-Your-Middle-Years.aspx

Nick Cann, from the Institute of Financial Planning continues “… it's really important to get a handle on where you are in your personal balance sheet. If you’ve been successful, you've looked at your income and expenditure, you started saving monies, you had a variety of strategies I imagine in different areas to invest, and to save in pensions. You have various life insurances and everything there, but it's now starting to get really important to focus that down to a financial plan to understand fully where you are, how likely you are to be able to retire when you'd like to retire or to do other challenges in your life, where there's things around other important aspects of your family, and other areas are also taken care of.

So, middle years is really important to start making sure you really are on track to have the later years in good order. Because you don't all of a sudden want to panic around 55, 60, and think I really haven't got enough. I wish I had done more in earlier years.”

If this sounds like you, have a look at our ‘How much is Enough? page on the website http://www.iangreen.com/timeline.php

Some readers may be thinking surely I could just do this myself, why do I need a financial planner? Well, a few folks can do this themselves. But many of our clients engage us for a financial plan not through lack of capability, but through a lack of capacity (they just don’t have the time to learn how to do it all properly themselves) or through desire (they’d rather not spend their spare time pouring over numbers and graphs).

That said, if you love DIY finances, Go For It!

But in the same way that professional athletes have coaches and many people report greater results at the gym with a personal trainer, why not consider engaging a financial planner to power up your financial plan and make sure your money isn’t going to run out before you do.

Did you know?
The largest Mint in the middle ages was located in the Tower of London

There is an American website with interesting material on it called ‘Get Rich Slowly’ ( http://www.getrichslowly.org/guide-to-money/ ). The middle ages are covered by the middle three of the following list within the early and later years (see previous blog post http://greenfinancial.blogspot.co.uk/2012/06/are-you-aged-25-to-50.html )

The stages are:

Plan


Protect


Save


Spend


Invest


Live


Retire

If you need any financial help with any of those stages,
for you or your family,
please get in touch, we’d love to hear from you.

You must be KIIDding

You must be kidding. Not more documentation on funds…


What is a KIID?

Just kidding...

A Key Investor Information Document (KIID) is a new document which must be provided to anyone who invests in a fund which comes under the EU’s new regulatory directive, UCITS IV [Ed: snappy names, huh?]. These are funds such as OEICS or Unit Trusts which are held directly in an ISA or Collective Investment Account, but not funds which are held in bonds or pensions.

These regulatory and legislative changes have been driven by requirements introduced by the European parliament and the aim is to ensure investors are able to make fully informed investment choices. This means investment firms will be changing the format of the way they provide information.

On the plus side, the KIID must only be two pages long. Hooray!

[Ed: I can’t see anywhere in the regulations where it says how big a page is. Sorry to be cynical but I’d be buying shares in poster printers if I were you… ;-) ]

If you invest via a platform or a wrap you should know the KIID is produced by the fund manager, not the wrap or platform and shows you details of the fund you are thinking of investing in.

Implementation

KIIDs have been phased in from 1 July 2011 so you might not always receive one, but some fund managers started producing them straight away. Most will be launching during the first part of 2012.

If a new UCITS-regulated fund is launched before July 2012 a KIID must be provided from the outset. By July 2012 all fund managers must produce a KIID for all their UCITS-regulated funds.

It is likely Green Financial will have to change our processes, in the future asking clients to confirm they have read any KIID for a given fund before effecting a switch into that fund, for example when rebalancing portfolios.

The KIID format is prescribed by the European investment regulator. Therefore, when you read a KIID alongside documentation that has been produced by someone else such as a research house or wrap provider (this information could be, for example, a Funds List or Fund Factsheet), you may notice that some information is presented differently. Some areas of difference could be:

Fund objectives & Special risk factors

The wording of the fund objective or special risk factors may differ slightly between documents, but the actual objective or risk factors remain the same. This is simply because different disclosure documents are produced by different entities.

Risk and reward profile

The documentation produced by other entities has historically often used a numerical scale to show the risk rating of a fund.

The KIID uses a scale of 7 risk bands. The scale will be known as the Synthetic Risk and reward Indicator (mercifully shortened to SRRI Acronym fans!). Funds rated at the lower end are typically lower risk with potentially lower rewards and lower volatility. Those at the upper end are typically higher risk with potentially higher rewards and higher volatility:

KIID risk bands

The calculation method is set down in the rules so as to ensure consistency between fund groups, and looks at 5 year volatility but with the ability to use benchmark data where there is not sufficient fund data. Fund managers must review the SRRIs on their funds regularly. The KIID must be updated annually shortly after the beginning of each year, but if the SRRI of the fund changes, more frequent updates may occur.

At Green Financial we will integrate the new KIID risk bands into our existing document that already compares five different grading scales. This is so that our clients can be aware how any given risk rating compares to others and how their own attitude to risk and volatility, along with their portfolio as a whole or individual funds, aligns with other scales. In this sense we feel we have been ahead of the curve and European legislation in helping our clients understand risk and reward profiles.

Fund charges

The charges shown in the KIID are in a format prescribed by the European investment regulator, which is appropriate for an investment directly through the relevant fund manager.

If you are investing through a wrap or platform, the charges you will actually pay for the fund are likely to be different, in most cases lower. This is because wraps and platforms in conjunction use scale and buying power to negotiate better deals with fund managers.

For accurate details of the actual charges you will pay please refer back to your original documentation, log on to your wrap or platform or contact Green Financial directly

To finish, a few FAQs kindly put together by Fidelity (www.fidelity.co.uk)

1: What is UCITS IV and why are the rules changing?

The UCITS Directive 85/611/EEC (entered into

force in 1988 as amended by UCITS III in 2002) has

been the key driver contributing to the significant

development and success of the European

investment fund industry over the last two

decades. However, with the rapid evolution of the

investment fund market, it was necessary to further

enhance the UCITS market and brand.

2: When does UCITS IV come into effect?

The UCITS IV Directive came into effect on 1 July

2011 however a “grandfathering period” will allow

existing funds and associated share classes to

continue to produce a Simplified Prospectus up

until 1 July 2012, when all UCITS funds must have

a KIID. New funds launched during this period must

have a KIID.

Fund groups can transition to KIIDs any time

between 1 July 2011 and 1 July 2012.

3: What is a KIID?

The KIID will replace the existing Simplified

Prospectus for all UCITS funds and will be a

synopsis of key information relating to a fund.

The KIID must be provided pre-sale at fund and

share class level, and is classified as a legal

document. The KIID will be the primary document

provided to investors and potential investors.

4: What information will be included in a KIID?

The KIID has prescribed content which includes:

- a short description of the objectives and

investment policy of the fund

- a risk and reward profile

- past performance data in graphical form and

- details on costs and associated charges.

5. How will funds be measured in terms of risk?

The risk and reward profile, or “Synthetic Risk and

Reward Indicator” (SRRI) is a new representation

of risk factors in the KIID. It is expressed on a

scale of 1 to 7, with 1 being the lowest risk and

potential lowest reward and 7 being the highest

risk and potential highest reward. It is based

upon a prescriptive calculation method to ensure

consistency between fund groups and looks at

five year volatility with the ability to use

benchmark data where there is not sufficient fund

data. It is supplemented with explanatory text,

including risk descriptions relevant to the share

class the KIID represents.

6: Does the FSA require any other


information to be provided with


the KIID?

The KIID will only replace the Simplified

Prospectus. All other documentation will still be

available to investors.

7: What will Green Financial as my

 adviser need to do differently now

that UCITS IV is effective?

An adviser will have a legal and regulatory

obligation to ensure that their client has received

the latest KIID (if available) before an investment

is made.

8: Will I still receive printed documents?

A paper copy of the KIID must be provided to

clients upon request. This will be provided

manually, following the same process employed

when a paper copy of the Simplified Prospectus

is requested currently. Braille and audio copies of

the KIID are also available on request.

Born in the USA (or just visiting) ?

Are you a Green Financial Client that was Born in the USA?

Are you a US citizen, or married to a US citizen.



Or are you a green card holder or temporarily resident in the country or even just own a holiday home in the US!


If you are one of the above and a Green Financial client we may need to talk soon.

Chewing the FATCA
"The US-instigated FATCA (Foreign Account Tax Compliance Act) threatens to be a costly administrative headache for financial institutions in the UK",
says Cherry Reynard on www.adviser-hub.co.uk ,
 
It brings responsibilities for advisers such as Green Financial too.
And for added responsibility, read added cost :(
 
AdviserHub reports:
"As government coffers weaken around the developed world, policymakers have been implementing increasingly draconian legislation to generate revenue and the Foreign Account Tax Compliance Act (FATCA), introduced by the US tax authorities in March 2010, is one of the more far-reaching examples.


Some commentators, including Robin Stoakley, managing director of Schroders’ UK intermediary business, have even gone so far as to suggest that the impact of FATCA could be as significant as that of the Retail Distribution Review (RDR) (see other Green Financial Blog Posts).
It certainly threatens to be a costly administrative headache for UK-based financial institutions.
The legislation is designed to crack down on offshore tax avoidance on ‘US accounts’ of more than $50,000 (£32,000). Crucially, this is not limited to US citizens but may include other individuals potentially subject to US tax, such as those with a holiday home in the US, green card holders or those who are temporarily resident in the country.


The US authorities’ aim is to ensure that tax is paid on individuals’ worldwide income where appropriate. One of the thorniest areas of FATCA may be where US citizens are married to non-US citizens. The legislation is not yet clear on whether the income of the non-US spouse potentially falls within its scope.


This would seem to present few problems for UK-based fund managers, advisers and administration platforms were it not for the requirement that any investor holding US assets effectively ‘prove’ that they are not US citizens. This means that UK financial institutions will have to undertake a significant data-gathering exercise to ensure their clients do not fall within the remit of the legislation.
Compliance process


According to a report by KPMG, FATCA and the funds industry the data that is required for FATCA compliance in the investment funds industry is, in most cases, not held by one person. As such, advisers like Green Financial will also form an important part of the compliance process in that they will need to provide details of clients. Problems could also arise where nominee structures are held.
The KPMG report suggests as many as 32% of investment fund managers expect to have to adapt their product range to comply with FATCA. Fund of funds have a particular problem with only around 10% saying they can determine the amount of US-sourced investments.


Research by Schroders suggests the legislation may cost as much £400m for the financial services industry, potentially raising administration costs for advisers.
The full details of the legislation have yet to be finalised, with further guidance expected shortly, but Foreign Financial Institutions (FFIs) will have to register with the US’s Internal Revenue Service (IRS) by 30 June 2013 under the new rules. The deadline for full implementation of the legislation was originally January 2013, but some parts have now been moved back to 2014 and beyond.


Once registered, FFIs are expected to work with the IRS to attain ‘Participating FFI’ status. This will include demonstrating they have procedures in place to pick up US accounts among their existing clients and to implement proper account opening procedures in future.


Draconian penalties


The penalties for non-compliance are draconian. Withholding tax of 30% on income and asset disposals is payable for so-called ‘recalcitrant account holders’ – in other words, those that do not provide reasonable disclosure – and for non-participating Foreign Financial Institutions (NPFFIs).


These are called ‘Passthru’ payments and, according to RBS Dexia, may include US-sourced interest, dividends and gross proceeds on disposition of assets as well as non US-sourced interest, dividends and gross proceeds on disposition of assets multiplied by the pro-rata ratio of US to non-US assets.


Some groups are defined as ‘deemed compliant’. These are accounts the IRS views as exempt from FATCA’s rules and include certain holding companies, start-up companies, hedging/financing centres of a non-financial group and certain insurance companies. Pensions are currently under review. In practice the IRS has been tight in its definition and relatively few institutions are deemed compliant."

Adviser Hub concludes:
"Broadly speaking, fund and wealth managers have gone one of two ways in tackling the legislation. Some are moving towards full compliance, whereas others are moving out of the market altogether. In practice the latter may not be easy, given the spread of the legislation although, in July, HSBC said it planned to sever its ties with wealthy US customers who bank offshore to aid FATCA compliance. Some groups are making a virtue of necessity, setting up US tax-compliant investment vehicles through which US citizens can invest."

We at Green Financial will be working with our UK based clients to ensure full compliance with any new rules. If you think this may apply to you in any way, please do contact us to discuss.

On an Island with who?

I was recently interviewed for Blue & Green Tomorrow Magazine on my approach to ethical investing.

You can read the whole interview here:
http://www.blueandgreentomorrow.com/features/2011/12/9/green-by-name-green-by-nature-helping-people-do-what-they-ca.html

As well as a few facts about Putney, where the office is located, the interview also asked that old favourite about who I'd like to be stranded on a desert island with.

Rather than give a fascinating insight into my psychological make-up, as the interviewer hoped, I gave a practical and logical answer, hopefully in keeping with my approach to ethical investing.
(Or was that a fascinating insight into my psychological make-up?)

Who was it? Have a read and find out...

Beware Greeks Rejecting Gifts

Time for another update on market movements and happenings.


Those clients that I have met face to face with recently will be aware that my general thoughts on imminent future market movements are that we are unlikely to see major upwards gains in the markets in general in the near and medium future but that during that time I expect high volatility – ie lots of ups and downs.

This is good for those saving regularly as it enables the effect of ‘pound cost averaging’ to take effect - see http://greenfinancial.blogspot.com/2011/02/pound-cost-averaging.html

However for those already invested it probably represents more of a roller coaster ride.

Do remember, that the lower risk (or volatility) portfolio content you have, the lower the exposure you have to equities and the markets, so the lesser effect any drops (or rises) have on your investments.

For those in the lower numbered portfolios it is actually more like just a bumpy road than a roller coaster!

As ever, if you have any concerns, please do contact me.

Onto the commentary…

Just when the situation in the Eurozone appeared to be moving in the right direction with the agreement last week (has anyone else noticed every time I leave the country markets seem to rise…? Perhaps I should operate from abroad?) on a further bailout package and a voluntary 50% haircut on Greek sovereign debt, we had the unexpected announcement this week that the Greek government has decided to hold a referendum on the latest euro-zone package, probably in December or January.

In reality, the Greek government is simply trying to foster public support as it provides the Greek population with the decision between continuing austerity and membership of the single currency. Some might call it a gamble.

Data from opinion polls suggest that although 60% are opposed to the new Eurozone package (and continuing austerity), approximately 70% want to remain in the Euro. And let’s be clear about it… if Greece want to remain in the single currency then it will have to take the medicine prescribed by the Eurozone governments (primarily Germany and France). The alternative is for Greece to leave the Euro but this route is not (publically at least) on the table for Greece or the other sixteen members of the Eurozone.

I felt that the global market reaction to last Thursday’s announcement was overdone (again) as we had only seen headlines from the Eurozone governments with little detail on how these packages and targets would be achieved. Certainty is a crucial factor for global investment markets and the re-emergence of uncertainty has led to the significant falls in global equity markets yesterday and today (writing at 9:30 am Weds).

As I have said in the past, in my role as Advisor / Manager of your portfolio(s), part of my job is to read, research, analyse and assimilate as much information as possible to inform and then blend the asset allocation models and investment strategy. It is far from a rosy picture for the global economy at present but, as I have stated in the past, ‘investors’ or ‘the markets’ do have a tendency to overreact to “news”, either on the upside or downside, and I believe that this is the case today. Investor sentiment, rather than economic data is the key driver of global investment markets in the very short term.

Although it is far from easy, I continue to believe that patience is important, ultimately economic fundamentals will win out and the vast majority of clients should remain invested in line with the diversified Model Portfolios.

As I say at the outset of this post, I expect an extended period of volatility in global investment markets – and this will no doubt be magnified in the run up to the proposed Greek referendum, and I will continue my regular dialogue to ensure that client portfolios are positioned to meet the dual mandate of creating and preserving wealth based upon our your attitude to risk and volatility.

Client Market Update October 3 2011

Well, I suppose it had to happen sometime, didn’t it…?


This is the first time, since early 2009, that I have had a minus figure of any note to report to clients on a quarter.


That said, given the magnitude of the numbers you will no doubt have heard on the news (‘markets down 12% in quarter’), a reduction that is ‘only’ 4-5% seems OK.

It is important to note that as always, these figures have to be produced at a point on a day – it is just a snapshot in time.


With the current volatility in the markets, had I run the reports a day or two earlier or later, it could easily have shown a small positive or a larger negative.

Perhaps most important of all is to remember that whilst it is always frustrating to see a minus figure over a quarter, that is a short term piece of data, and your portfolio is managed over the long term to match your life & lifestyle / income requirements.

Looking at the major markets like the FTSE100 and S&P500 – even though as I write the FTSE sits just above the 5,000 mark on news of Greece’s deficit, they are up around 50% since the lows of 2009.

So again, whilst I appreciate seeing the funds go down is never nice, I see no long term concern at all.

In fact this very process of rebalancing now means you’ll be buying into equities when they are low and will therefore see the commensurate gains in future when markets rise again, as they always do.

I hope you read (and enjoy – or at least find of interest) the various investment updates I send out, whether the regular monthly market commentary (MMC – next edition due within a week) or the ad hoc blog posts and emails such as this one.

If you do I am sure you’ll have read my thoughts on what is going on.

As you know, what worries me, is that much of what is reported is ‘selling newspapers’ – For example, when I was in the USA just over a week ago, when markets dropped by 5 points in a day the UK headlines I read online were along the lines of ‘crash’, ‘plummet’, ‘billions wiped off values’ etc

When markets went up by 5% last week, headlines were nowhere near using the opposite language and were quite muted – ‘markets up’, ‘rebound’, ‘rally’ etc

No talk of ‘billions added overnight!’

So that is the first thing, ‘don’t believe (all) the hype’!

And much of what is written then drives markets via investor sentiment – not facts.

I have written a number of times about market movements just because of investor sentiment when an announcement is made but actually there was no new news.

This is why I, as a professional, can take these more rational views when markets move in irrational ways.

But I am not pretending it is sunny when it is raining.

The volatility in markets is real, the problems around the world are real, and I assure you the way we manage the portfolios reflects all this.

In fact this very process of rebalancing now means you’ll be buying into more equities when they are low and will therefore see the commensurate gains in future when markets rise again, as they always do.

That is the very essence of the ‘triangle’ rebalancing process we manage for you. And as I always say, it needs ‘Time’. Those clients who, by their own defined investing timelines, have less time until the money is needed (one example would be approaching encashing a tax free lump sum in a pension), have less exposure to the markets. Those with a longer time horizon (one example would be those starting to save regularly in a pension) can afford to have greater exposure to the markets (see also http://greenfinancial.blogspot.com/2011/02/pound-cost-averaging.html
 for the benefits of long term investing regularly in volatile market conditions)

What if you sold everything and went into cash now? If you sold into cash now, you would be doing the opposite of what everyone wants to do, which is “buy low, sell high”.

You’d be “buying high and selling low” – so I really can’t endorse that action.

However, if you fear that markets will continue to fall for the lifetime of your portfolio (ie until retirement and beyond) then of course you may wish to sell – but to repeat myself, that is not something I would professionally recommend in any way.

At the risk of repeating what I have written in the MMC a number of times, it is COUNTRIES that are making the headlines but it is COMPANIES that we/you invest in.

Corporate earnings are high, many companies (certainly outside the financial sector) have cash on their books and the outlook for mergers and acquisitions is positive.

The overwhelming message from leading economists at the conference I spoke at in the USA at the end of September was that markets look cheap at present (as long as you have the time to wait until they rise again)

Looking at earnings compared to equity prices (the oft mentioned p/e ratio) equities actually look cheap.

If anything, arguably now is the time to buy. And you don’t have to believe me, you can look at who many call the world’s greatest living investor, Warren Buffet, for evidence of that.

He is even buying banks!

It is always good to measure your portfolio (ie your pension and ISA etc) against what you want it to do, when you want it to do it (for example: provide a lifetime of income when you retire) rather than match it against an arbitrary index.

Boiler Room Guidance

Last week, three people were jailed for their part in a boiler room scam dating back to 2007
http://www.fsa.gov.uk/pages/Library/Communication/PR/2011/073.shtml

I thought it worth reminding clients that as part of our service Green Financial have long offered: “The Second Opinion Service” – this is where we make ourselves available to consider new ideas, wherever they may originate from

Over the years clients have utilised this service in many ways, from having us check the ‘small print’ on accounts offered by banks (we’ve helped clients avoid tie-ins, falling rates and hidden high charges)

Other times clients may have read in the press of an investment fund and want to know if we are aware of it and have considered it (usually the answer is yes)

TOO GOOD TO BE TRUE

More often than not it is a client’s friend or colleague who has heard of a tax wheeze, scheme or investment that seems too good to be true (and it usually is!)

One such example was a client who called up recently informing us of a ‘share opportunity’ they had been telephoned about out of the blue. They were wary and my alarm bell immediately rang. A little swift research on my part indicated the company offering the shares were not FSA (Financial Services Authority) registered and that the company appeared to only have a PO Box communication address. I warned the client off the venture and they agreed. When the company called back, the client told them they had discussed the matter with their IFA, did not wish to hear from them again, and if they did call back would pass their details to me and the FSA to deal with. There were no further calls.

BOILER ROOMS

As mentioned at the start of this post, three people were jailed last week, for a total of 19 years for a £27.5m boiler room scam.

Tomas Wilmot was sentenced to nine years in prison while his sons Kevin and Christopher were given five years each.

The trio were convicted of conspiracy to defraud. The Wilmots had a syndicate of boiler rooms that defrauded around 1,700 investors out of a total of £27.5m. Like so many boiler room scams of the past, many of the victims were elderly and often suffering from serious illness.

SO WHAT IS A BOILER ROOM?

As with the Wilmots, a boiler room is typically a ‘fly by night’ business but these days are usually well organised, well funded and seem plausible. They typically use high pressure sales techniques to sell ‘sure-thing’ (in my language, too good to be true) investments with a promise of massive returns. What they are normally selling is either worthless stock in unquoted companies or often stock in companies that don’t exist at all.

The more complex boiler rooms, rather than lasting for a while, then suddenly disappearing (only for the same people to pop up elsewhere under a different name) sometimes migrate to actually giving back a few returns initially, thus lulling the purchaser into a falso sense of security. These are then known as ‘Ponzi’ schemes , made more famous recently by Bernie Madoff.

HOW DO THEY WORK?

It is normally a telephone ‘cold-call’, using phone numbers easily obtainable from publicly available lists. Think how often you are asked for your details and how many organisations have your number. The UK actually has laws against this type of cold calling but it doesn’t stop the fraudsters. They simply base the callers abroad. It could be as near as mainland Spain, continental Europe, the US and even as far afield as India these days. This means they are beyond the jurisdiction of the FSA and can approach, anyone, anywhere, anytime.

Boiler rooms look and sound genuine. As I’ve already said they can seem perfectly legitimate and have many ways of putting this across. They may name drop companies you have heard of, have a genuine looking UK address or phone number and of course a professional looking website. The sales staff are VERY persistent and may continue to call for months in the hope of wearing down the recipient or catching them off guard.

Even those that consider themselves experienced investors may get caught out.

The FSA say that they reckon the average victim of a boiler room scam loses £20,000

I’ve said it before and I’ll say it again, if it seems to good to be true, it probably is.

WHAT IF YOU ARE CONTACTED?

If you are a client of Green Financial and you are ever approached, remember to take advantage of The Second Opinion Service before committing.

The FSA say if anyone ever telephones you univited offering shares for sale, don’t worry about being polite or offending the caller, just hang up.

You can also call the FSA on 0845 606 1234

The FSA also have more information on their website :
http://www.fsa.gov.uk/Pages/consumerinformation/scamsandswindles/investment_scams/boiler_room/index.shtml