Industry Figures from the FSA – Less is More

The FSA published its annual report for 2008/09 last month, the second half of the tax year reflecting the problems resulting from the credit crunch and recession. According to the report the number of regulated firms decreased to 27,340 and the number of approved persons (people able to provide financial advice at all levels) shrank to 166,420. If we assume that there are 60m people living in the UK, this equates to an average of 1 “adviser” per 360 people.

The most significant rise in figures was the level of fines levied by the FSA which rose from £4.4m in the previous year to £27.3m with 58 advisers struck off (less than 0.03% of “advisers”). These figures include the Banking sector. Ironically, the FSA did not raise enough income in fees to cover their own costs of regulation (£335m), which were short by £14m, so fees are likely to continue to rise for IFAs partly to cover the shortfall and partly due to the reduction in the number of individuals and firms. So it would appear that IFAs will continue to pay the price for regulation.

It will not help that according to some recent research conducted by MetLife, 1 in 7 of IFAs (about 15%) are seeking to sell their businesses this year. I can reassure our clients that we have no plans to sell the business.

Another irony is that the FSA’s Final Salary Scheme which is now closed to new members of staff (since June 1998) had 495 members, who may be somewhat to concerned that the scheme is still in deficit by a whopping £88.9m, but they remain committed to clearing the deficit by 2019.

I will make no comment.

What Makes a Market?

I was at an investment seminar yesterday and an off the cuff remark stuck with me.

“Different opinions make a market”

Obvious, simple, accurate, yet something we all forget. It provides some comfort, when even at the same seminar there are conflicting views which imply taking rather different investment approaches. This is something that we all need to remember.

The masses will always seek out the most popular approach (herd mentality); the shrewd invariably take the opposite position or more accurately sell to these buyers or buy from these sellers. Buyers and Sellers make a market, not one or the other but both.

This is precisely why a diversified portfolio with a long-term perspective is vital.

What’s in a Name? A&L Mixed Messages

As if to prove my point from my last post, I received further correspondence from a client that I took on this week in today’s snail mail (aptly named as it was well past 1.00pm before it was delivered). The 74 year old client in question had been advised to move all of her savings into an ISA and the Bank’s 5-year Bond. The “adviser’s” card states that he is a “Financial Protection Advisor” at Alliance & Leicester. Irrespective of the quality of A&L products I am staggered that they permit a protection adviser to arrange investments.

Is it any wonder that people are confused, the FSA spend huge amounts of energy focusing on IFAs yet the vast majority of trouble is created by “advisers” from banks?

Paying the Price

There’s a story in Money Mail today that is interesting for a number of reasons. In a nutshell, Mr Price, a pensioner aged 89 and living in a care home was visited by his Barclay Bank “financial adviser”. Mr Price was concerned about the rising cost of care fees, and wanted to ensure they could be paid. Barclays set up a portfolio for him using just two funds (according to the Mail) both of which performed badly, although it has to be said that the timing of the investment and economic crisis clearly did not help. The Mail reports that he won £200,000 for the mis-selling by Barclays, who the Mail persuaded to reverse their previous decision that the advice was sound.

I have every sympathy for Mr Price who was clearly not informed of the risks of investing, but there are some other interesting points to this story.

1.The Mail’s headline implies that Mr Price received a £200,000 settlement. In fact, he received his original investment (£200,000) plus interest, less income taken and less the remaining value of the investment. In other words Barclays returned him to his original position. I dare say that creative headline “journalism” could learn a lesson or two as well as Barclays! Indeed inaccurate reporting does not aid stress reduction. One could view the power of the media to alter the outcome of a deliberated decision in various ways.

2.The “adviser” at Barclays, if the story is in any way accurate, would have been very foolish to split a £200,000 between just two funds (irrespective of which ones). A proper assessment of Mr Price’s attitude towards risk seems to be completely lacking, let alone the implementation of a sensible portfolio.

3.The adviser must have been under significant pressure to even consider investing Mr Price’s entire life savings, although I suspect the story lacks rather vital detail - the idea of someone aged 89 investing all of their money in the stock market is plainly folly. This is exactly the point that IFAs have been arguing for some time, where the FSA appear to take a far more punitive approach to IFAs rather than the “advisers” at Banks.

4.I doubt the “adviser” calculated the income required for the fees and what was already available, merely seeing the opportunity to invest funds and received a fairly significant commission on £200,000. So probably no financial planning was done, though I admit this is pure speculation on my part.

5.Barclays appear to have thought, however momentarily, that investing Mr Price’s £200,000 in this way was perfectly acceptable. It certainly isn’t.

6.Mr Price’s portfolio fell by nearly 40% - pretty much like most stockmarkets. It has recovered mildly since then but neither the Mail, Barclays or Mr Price have really paid heed to the reality of investing, and the need to take a long-term view. This is plainly Barclay’s fault for failing to properly advise Mr Price of this important factor. The reality is that stockmarkets, property, interest rates and virtually all types of asset have fallen in value following the credit crunch, which affects everyone.

7.The FSA, IFAP and IFAs in general continue to fail to communicate the message that getting independent advice is far superior than going to your Bank. The assumption that a Bank, who “look after” your cash, has the ability or wisdom to provide advice about what to do with your money is grossly misplaced. This merely proves that Banks profit from inertia and a false understanding of trust.

8.I also note that family members are no more qualified to understand investments or provide reassurance when it comes to financial planning. Unfortunately Mr Price was accompanied by his son, who was no apparently more able to understand the products or risk involved.

The main lessons from my perspective are clear.

•Avoid pressurised salesmen
•Seek independent, preferably fee based advice
•Don’t put all your eggs in one basket (in this case 2 funds)
•Don’t believe the headline figures (from investment companies or newspapers)
•Work out what you need, investment risk could have and almost certainly should have been avoided entirely by someone aged 89 living in a residential care home.
•Please, please, please, please forget getting advice from a Bank, this is not 1950!

Reaching for the Moon

It’s surprising how once a goal is achieved it quickly becomes “familiar”. Yesterday was the 40th anniversary of the moon landing. What an incredible achievement! Yet if I’m honest, as this accomplishment has been a part of my life history - well, almost all my life! - it has become simply another historical fact, which has rarely involved much thought on my part (if I’m being completely honest). However, this stands as one of the most amazing achievements in history and when reflected on is truly inspirational.

Imagine the notion of standing on the moon, to someone who lived even in 1868 - something that very few had conceived, with the notable exception of Jules Verne who wrote “From the Earth to the Moon” in 1865. It caused me to wonder how many of us live our lives with small dreams, and how much more could be achieved if we can make our dreams rather bigger, perhaps apparently impossible.

I am fortunate to be able to meet some very inspirational people – entrepreneurs, performers, creatives and people at the leading edge of their field. A common link is the ability to think bigger, to push themselves to achieve what many might doubt as being possible. I wonder how much more we might all achieve with a reminder that the impossible is really a temporary state.

Good financial planning is, without sounding twee (which it does), is about making dreams come true. Of course one can only do this if you are able to imagine them in the first place. Money is a part of the story, but not the reason and invariably not the motivation. So may I encourage you to imagine, to dream perhaps bigger than before. For many, this is precisely what needs to occur at a time of job uncertainty.

I’m not going to pretend that there will not be struggles and many days when perhaps the feeling of wanting to give up may seem overwhelming, but persistence pays – just ask an English cricketer. Now is the time to dream dreams.

The Price of Coffee

It was hot in Paris and I’m partial to a chocolate Java chip Frappuccino. The Starbucks in Paris, close to the Louvre, charged me 4.80 Euros (about £4.30), whereas locally in London the same thing is £3.20.

This is about 34% more than the UK price, or to put it another way, the UK price is about 75% of the Euro price. This was my common experience in France against UK prices, so make sure you take plenty of Euros this summer when you travel!

Magic Numbers

On 29th June 2009, the American legal system sent Mr Madoff to prison for the rest of his life. He had been found guilty of fraud on a massive scale and lost investors in excess of £40bn. His actual sentence was over 10 times the amount that his lawyer had pressed for. Perhaps this is poetic justice for the man who appeared to multiply numbers to his advantage for many years.

It was his sons that were left to report him to the authorities as they questioned how he could afford to bring forward bonus payments at a time when they could not afford to pay investors, prompting them to ask the questions that had presumably not been thought of. Within 24 hours their father was arrested on 11 December and charged with securities fraud.

There have been experts that failed to appreciate the workings of the Madoff business. Fund managers, stockbrokers, auditors and regulators all got it wrong. Indeed this is the tale of a family business that went horribly wrong. Several members of the Madoff family worked within the financial services industry, rising to positions of significant power. This is an embarrassment for them as well, hence his sense of shame. One might be concerned how a single individual could actually carry out such a massive fraud, but he refused to implicate others.

This is a case in point that has clear warnings for everyone – for investors, yet again a reminder that when something is too good to be true it probably is. Equally, don’t put all your eggs in one basket, which is something that many of his clients seemed to have done. For advisers, to always be mindful when researching investments, about where the returns are really derived and to look beyond the face of respectability. As for regulators, frankly the focus on stockbrokers has been woefully lacking and it is difficult to imagine how an IFA could ever create a similar problem, yet this is where the focus often lies. As for relatives, this must tear the fabric of a family apart.

Madoff has lost the trust of anyone that had financial dealings with him and the impact of his actions has been catastrophic for many of his clients. Several have literally lost all of their savings. So when selecting an adviser, care is needed. Trust should not be under valued. How your adviser is paid is a key factor in building a trusting relationship.

Has the Madoff case altered your feelings towards the financial services industry?

Time Flies

Perhaps I am simply another person with my mid-life crisis switched to “stand-by” , but like many people, I have a passing interest in some of the social networking sites. These facilitate the possibility of reconnecting with old friends, colleagues and perhaps a far wider category “people that I once bumped into”. I recently crossed from the virtual world into the very real and met up with and old friend that I had not seen for 30 years.

We had spent time at school together and played for the school team and so on. I remembered him well and upon meeting him, quickly realised that the years have been kinder to him than to me. It was good to meet up, we had both been curious about what each other was now doing. His parting words were “let’s not leave it so long next time” – if we do, there is a high likelihood that one of us won’t make the next meeting given the average life expectancy of men.

Last months news of pop icon Michael Jackson’s death at the age of 50 was merely another reminder that time does indeed pass very quickly.

Scottish Equitable

Aegon, who bought Scottish Equitable in 1994 have decided to drop the Scottish Equitable name. The insurer began life in 1831. This is yet another great piece of news for printers and designers and another Scottish brand being lost. The rebranding will begin in August and probably take several months to conclude. Aegon is a Dutch company formed from a merger between AGO and Ennia in 1983 and I assume that the amalgamation brought about the unusual name.

Tennis fans will have noticed that Aegon are the main sponsors of the Queens tennis tournament that precedes Wimbledon, this year won by Andy Murray. Aegon have some very well managed UK funds and I have been a fan of Audrey Ryan who successfully runs the Ethical Equity Fund.