Wednesday 30 November 2011

The Joke Economy? Not Quite So Easy

I received this as an email this morning and thought I would share it with you on a day that probably requires some humour - with my own thoughts.

1949: Always Leave Them Laughing
Suggestions for fixing the UK Economy:
The Patriotic Retirement Plan

There are about 10 million people over 50 in the work force. Pay them £1 million each severance for early retirement with the following stipulations:

1) They MUST retire.
Ten million job openings - unemployment fixed

2) They MUST buy a new British car.
Ten million cars ordered - Car Industry fixed

3) They MUST either buy a house or pay off their mortgage -
Housing Crisis fixed

4) They MUST send their kids to school/college/university -
Crime rate fixed

5) They MUST buy £100 WORTH of alcohol/tobacco a week .....
And there's your money back in duty/tax etc

Whilst the above is amusing, sadly life is not quite as straight forward as that for the Government (of any persuasion).

1. For example, making everyone over 50 retired, would create a significant gap - there are nothing like 10m unemployed people in Britain. It would also be folly to ditch anyone over the age of 50 who has a wealth of experience and value. It also smacks of ageism and a lack of understanding that skills are honed over years. There are also plenty of people unemployed over the age of 50. There are roughly 29m people in work, roughly 25m employed and 4m self-employed, 107,000 unpaid family workers and 87,000 in Government training and employment programmes. Of roughly 29m in work, 7.8m are part-time. (aged 16+) of a population of 62.3m.Of the 29m people working in Britain 86% were born in the UK. The average public sector employee pay is £24,804, in the Private sector it is £23,920.

2. If it were simple to fix the British car industy, this would have been done. The sad reality is that British Companies do not really make mass market cars. "British" cars are rather rare and even Top Gear might think that they wouldn't be suitable for everyone. The UK has about 2% of the global passenger car production. Of car production (which is a wide term) 75% is exported. Last year (2010) Nissan produced the most cars (432,262), Mini BMW (216,302) Land Rover (179,165) Honda (139,278) and Toyota (137,054). Whilst we may think of Land Rover as British, it is owned by Tata Motors from India, who also own Jaguar.

3.The housing crisis is not solved by repaying mortgages or buying homes. The problem is that property is over-priced and "out of reach" of many people. The declared income of average First Time Buyers in 2010 was £44,464 who took an average 68.9% mortgage. There is a lack of homes to buy where people want to live, which is why prices have soared in certain areas. In 2000 there were 25.2m dwellings across the UK by 2008 this had risen to 26.9m. Price increases have largely been fuelled by all home owners, myself included, who want to maximise the value of their home. This has been worsened by Estate Agents who price property by comparison to other properties not on what they are worth (but what real choice do they have in this). Similarly Surveyors are caught in the same game. The price problem is made worse by anyone that owns more than one property.

4.Education does not make people honest. Crime is generally related to a perception of lack. There are plenty of very well educated individuals that have committed massive financial crimes. A thoughtful reflection about war/conflict might cause one to consider who actually financially benefits. A University education does not by default create a model citizen. Emotional intelligence is grossly undervalued and largely ignored. Since the 1970's the number of people in higher education has almost quadrupled from 621,000 to 2.5m in 2007/08. In the same year having attained a first degree only 60 percent moved into UK employment within 6 months. Crime levels of all types have remained reasonably static at around 11m reported incidents. More sophisticated crime in terms of plastic card fraud has increased in value from about £130m in 1998 to over £600m in 2008. The Prison population has increased from about 40,000 in 1978 to about 85,000.

5.The notion that excise duties are in some way a tax back is deeply flawed. The spending on healthcare in 2009 was £136.4bn compared to £54.8bn in 1997 an increase of nearly 8% a year. As a proportion of GDP this has risen from 6.6% to 9.8%. The Private sector spending on healthcare has remained relatively stable at between 1.3% and 1.6% of GDP. Few people actually pay in tax what it costs for the NHS to care for those with drink, drug or alcohol problems, let alone the associated costs where lives have been wrecked. In 2009 there were 8,664 alcohol related deaths, two thirds of whom were male. However coronary heart disease is the major cause of death, breast cancer and lung cancer follow closely in the tables for those that died between the ages of 35 and 79 in 2009.

Grim Reality of Tall Tales

2005: Brothers Grimm - Terry Gilliam
Today is St Andrew's day and a day of strikes across the country, which will be loaded with opinion depending on which side of the argument you sit and probably where your pension fund is currently held. I am not going to get into this one as I think I have already said enough about pensions.

On Monday I wrote a piece "Missed Target - The Cost Of Failure". Well the price tag of this failure has now been released, with the FSCS drawing up a £58m hitlist. Whilst this is more akin to the shopping budget of some Premiership football teams, this is in fact the amount of money that the FSCS are now chasing from IFAs across the country that advised and arranged Keydata products. The lawyers for the FSCS (Herbert Smith) have taken the highly unusual and arguably unhelpful step of publishing the list, which will obviously not do the reputation of those firms any good. There are 437 firms listed, sharing the collective bill of £58m, nearly 100 of them have exposure of over £100,000 and I would be surprised if this didn't turn into a list of firms going into administration, which would be a very sad turn of events, 15 of the companies are being chased for more than £500,000 with Chase de Vere having a massive £8.5m (nearly 14% of the total).

This is not good. It is rarely good when a business fails, but for those that do, all that will happen is that the outstanding bill is passed to the remaining IFA firms - who are not even on the list because we didn't sell Keydata products. This increases operational costs considerably, reducing profitability and therefore sustainability. I'm sorry, but I just don't understand the wisdom of the system that eventually simply punishes good practice by default. There's also more to come of similar products (also rubbish) that it is reported has a list five times as long.

Sadly, the failure of Keydata is a failing at lots of levels, but above all, surely the structure of the industry is now very much shown for its failings. Research into products needs to be done not just by the IFA but also by the regulator and professional indemnity insurers and arguably industry journalists. If Enron taught us anything, it was to ask awkward questions when the supposed professionals (Arthur Andersen) were blinded by a story. Everyone knows that you shouldn't judge a book by its cover, but of course in today's culture it seems that this is harder to remember.

The link between those selling and buying Keydata products and the strikes today to my mind seems to be one of defying the sad, but real constraints of life, ultimately the price has to be paid. Any Government that takes a responsible approach to public finances, needs to research the commitments that it takes on. To do otherwise is like the IFAs that didn't look under the bonnet of Keydata. Caught in time means that the pain is less than it would have been, but it was always going to hurt because expectations were wrong. We have myths and fairytales to remind us of truths. Beans are not magic.

Tuesday 29 November 2011

Autumn Statement - deckchairs on the Titanic?

1997: Titanic - James Cameron
Perhaps its me, but my impression of the Autumn Statement today was frankly underwhelming. In fairness, bar a complete change of policy the Chancellor has worked himself into a corner. The growth forecasts are cut, public sector pay has been more or less frozen. The hope is that for UKplc this is not a case of rearranging the deckchairs on the Titanic. The Chancellor seems upbeat, but then he has to. He wasn't dealt a terribly good hand and he is now stuck playing it as well as he can. The economy and frankly Parliament are short on good ideas to get us out of the recession.

One of the positive announcements was the provision of £40bn to small businesses. Whilst this is a big number, by comparison to the NHS Budget of £106bn it is relatively small. This after all is the Budget to help our ailing nation and where wealth and job creation are supposed to begin (in the private sector). There was as a case of deja vu - with social tennants given the opportunity to buy their homes at a 50% discount on a right-to-buy basis - something that we have certainly seen before with council homes.

Many of us will be receiving a State Pension later (if there is any money left by then) and the £1m limit of Venture Capital Trusts will be removed. This has little real benefit to the vast majority of the population directly and I have my reservations about the genuine long-term business plans of VCTs.

Most of us probably would have expected this sort of Statement. There isn't money around and there's not a lot of festive joy to be gained, save altering an petrol price increase, which has not even happened yet. So whilst I attempt to digest the 98 page statement, I don't think there's an awful lot to write home about, but I will keep you posted. I assume that the strikes by Public Sector workers will proceed tomorrow.

Monday 28 November 2011

Missed Target - The Cost of Failure

1941: Target for Tonight
Sadly I have heard that yet another IFA firm has gone into administration, this time from my old stomping ground in Bath. This was primarily due to the compensation claims levied against them for selling clients Keydata products. The compensation claims seem to have run to £6m. The firm concerned (Target Financial Management) was part of a group called Target Chartered Accountants and both have now gone into administration according to the financial press.

This is a very sorry tale - in January this year all IFAs were invoiced for the collapse of Keydata by the FSA to the tune of about £93m. This levy was applied to all adviser firms, irrespective of whether they had advised/arranged/sold Keydata products. So even firms like us, that didn't think Keydata were any good, were still caught up in the fiasco.

As we approach the deadline for RDR on 1st January 2013, IFAs will only be able to use the term "independent" if they genuinely consider the entire market of funds - duff ones and unregulated ones as well. The problem with this is that many IFAs are concerned that unless they sell these sort of products the regulator may withdraw their ability to use the term "independent". I can see many old problems reappearing. Even today the regulator has expressed grave concerns about "Life Settlement Funds" which they describe as "toxic" and having no benefit to investors - again nothing we have ever sold to clients, but undoubtedly will have to pick up the bill for those that have.

So contrary to the view that a "competitor" going bust would surely be welcome news - it really isn't.  Fewer advisers means the public have less choice and probably higher costs. Yes when mistakes are made redress should be made, but investors must also share the responsibility when things don't go well. Advisers should be better informed and clearly have the ability to investigate products more thoroughly, but investors must also ask questions. Clearly not enough questions were asked and few actually remembered the adage - if its too good to be true... it probably is.

The changes that are coming are likely to see more Accountant firms link up with IFA firms. This can work well, but as today's news from Bath highlights, one mistake can take the entire house down. So this should serve as a warning to those firms considering joint-ventures or attempting to operate in a field of expertise which they lack. Better each to his/her own. So if your Accountant is considering this, or you are an Accountant, please may I encourage you to learn from the mistakes of others like TCA and not repeat them, because I'm fed up of paying for the mistakes of others, particularly when I thought that the investments were daft.

Friday 25 November 2011

NEST: In a Flap about Pensions?

1951: Love Nest - Joseph Newman
There is speculation that the Government will announce that the auto enrolment (NEST) will be delayed for firms with 40 or fewer staff, perhaps by a year. This is political kudos, which would be seen as helping small businesses, by reducing the cost of implementation and ongoing additional pension costs. As this is little more than a "quoted source" there is no substance to this information until the Treasury says something rather more concrete. On Tuesday we may find something in Mr Osbourne's Autumn statement, but until then, assume that nothing has changed.

If you would like to know when your firm has to comply with NEST (its currently intended staging date) then click this link. You will need the last two letters of the firms PAYE code if your firm has fewer than 50 staff.

There are now a growing number of organisations interested in running NEST qualifying schemes, even one from Denmark. The auto enrolment process is a fairly "involved" process. The largest employers - which includes the State institutions are due to begin NEST in October 2012. It isn't until a year later that firms with fewer than 1,000 staff must set a scheme up (or have a compliant one). At the moment, the earliest a small firm (fewer than 50 staff) would need to have implemented a scheme is August 2014. In practice The Pensions Regulator will contact the employer a year before their outlined staging date. If you need help with your pension at work or what to know about the implications for your own existing pensions do get in touch.



Thursday 24 November 2011

When Digging A Hole Works

1985: King Solomon's Mines - Thompson
Antofagasta announced their Q3 results today, showing a 28% increase in profits. Not heard of them? well anyone with a UK index tracker will have holdings in this Chilean mining company, specialising in copper. In fact the company have been part of the UK's 100 top companies for some time - since 2004. This is a reminder that whilst investing in the UK would on the surface appear to be investing in Britain, in reality the world is rather smaller and indeed something like 70% of revenues of the FTSE100 are generated on a global basis on a UK basis. There's nothing particularly bad or wrong with this, but it needs to be understood that the the UK market is heavily linked with the global market, whilst we are a geographical island, our financial and commercial systems reveal very different realities.

In the case of Antofagasta, roughly 95% of their revenue is derived from mining, the vast bulk (65%) of which over the last 9 months was from Los Pelambres, in Chile. Suddenly the connection to the Chilean miners rescued last year becomes a little closer. In fact all of the mining revenue comes from Chile, with mines in - El Tesoro, Esperanza and Michilla making up the remaining 35% of revenue from mining. Yet this is a UK listed company and part of the FTSE100 index - a small world indeed.

Turning to some of today's news, the Germans are contemplating the implications of a poor showing in the Bond auction. The Americans are taking the day off as it is their Thanksgiving. The UK economic data for Q3 revealed growth of 0.50% which was probably better than many expected and British supermarket giants are expected to begin a Christmas price-cutting war and the Portuguese have gone on strike in relation to austerity measures and Portuguese Bonds have been downgraded to junk status. Meanwhile Iceland (the country) have been given a revised (upward) outlook as "stable" by credit rating agency Standard & Poors. Nervousness continues and caution is advised - noises are being made about global contagion, not simply European contagion.

Who Cheques Which?

2011: The Adjustment Bureau
Today, Which? have announced that they plan to become one of the largest mortgage advisers in the UK. They propose offering a "free" service.  Here's my two bits worth.

Firstly, I think that for an organisation like Which? to become a product supplier is counter-productive if they wish to remain an independent assessor/evaluator of products and services. Secondly and frankly more importantly, to use terms like "free" is decidedly misleading. Which? currently employ staff (advisers) to provide mortgage advice and have presumably regulatory, PI and operational costs. The mortgage companies pay them a procuration fee for placing a mortgage (which is related to the size of the mortgage), but some (a small number) do not. Which? currently take this "on the chin" which in their speak is their own reserves (their own money). At the moment this is about 20% of the mortgage cases that they place. This model is not sustainable in an environment where the client has to be (finally!) told what the costs are. The procuration fee is effectively a cost built into the mortgage, which if removed (often it cannot be) would reduce the cost of the mortgage. I believe that any consumer champion should be advocating that mortgages, one of the biggest financial commitments, are transparent in the same way. This means lenders will have to pull apart their pricing structure, separate out the parts and then put them together again in a clear fashion. This is precisely that is happening to investment products from 2013 - with all of the "costs" separated out.

Which? normally berate companies that say things are fee, when in reality there is a cost. Here they seem to have become blinded by their own ambition. Certainly set up a decent mortgage broking company, but please do so in way that applies business practices and accounting principles that demonstrate a viable, sustainable approach. Frankly this smacks of yet another media outlet protesting its independence, whilst actually being paid to sell products. Most, if not all of the main newspapers have a cut of commission from selling insurance in various guises to its readers, yet failing to disclose this rather fundamental point.

I wonder, if given that a mortgage is going to be arranged, whether Which? will provide proper advice regarding relevant and suitable protection products - which the FSA would expect any other adviser to do, ensuring that should problems befall the borrower, they are not unprepared. If so, Which? would have to become a proper financial adviser - but under RDR rules, they would be restricted, not independent, unless they also offer the full range of investment advice. The term independent is one that I assume that Which? regard rather highly. Oh dear, it seems as though they have not really thought this through. Another mess waiting to happen.

As I don't arrange mortgages and any protection policies arranged has all commission removed, I think I'm probably in a position to cast justifiable doubt on what Which? are proposing.

Wednesday 23 November 2011

Happy Birthday to...

2008: The Dark Knight - Nolan
The markets are in the doldrums today, news generally is bleak with further anxiety about the Eurozone. The FTSE100 is close to 5,100 and the Dow Jones has fallen 200 points today at the time of writing.

So how about a couple of Happy Birthdays. According to IMDB, Diana Quick is 65 today. Daniel Pinder, from Wimbledon is celebrating his 40th birthday. He is a music editor with a very impressive resume working on a variety of films like the Batman film The Dark Knight, X-Men First Class, The Boat That Rocked and The Holiday.

Lloyds Chased for Missed Payment

1962: Cash on Demand - Lawrence
The blood-letting has begun. We have reached "that point". Today an investment company whose services were terminated by the Lloyds Group have begun to take legal action against Lloyds. This is all to do with getting their severance pay for early termination of services, as contractually agreed. Lloyds have missed part of the payment that was due in June and now the investment company has decided to take matters further and publicly.

Invista Real Estate Investment Management is taking Lloyds to court for a missed final payment of £545,600. Not small beer and the irony of this will not be lost on anyone that has run into difficulties with a Bank. It is reported that Lloyds did pay £2.6m to Invista in May, but this payment has simply not been met. I wonder if they apply bank charges and daily interest.

This is perhaps an indication of the juggling that many businesses are now doing (whatever their size) - in effect delaying payments for as long as possible. This can be fatal to small businesses. Cashflow is king in the world of finance and irrespective of profitability, without cashflow, there is no business. The Lloyds Group Q3 results show a decline in income and profit - reducing income by 15% and profit before tax down 30%.

Tuesday 22 November 2011

Funds: Henderson Ethical/SRI Funds

1955: Hold Back Tomorrow - Hugo Haas
Henderson are in a cost-cutting spree and according to industry press are making their entire SRI team redundant. Henderson announced that Tim Dieppe will remain running the Industries of The Future Fund until the end of the year (which really is not that far away).

As a consequence I am reviewing holdings with Henderson and shall write to clients in due course. Henderson have had considerable success with their SRI funds. I am sure that Henderson have very good reasons for their actions, but this does seem like a backward step.

House of Sand - waving Dubai to money

2005: House of Sand - Waddington
I've been a financial adviser for over 20 years, my industry is full of people constantly believing that they have the best idea for the next money making exercise. In reality the vast majority of so-called good ideas make money for those selling the product, not those investing into it. I often refer to the Californian gold rush, in which those that made money were the ones selling the shovels and picks, not the ones doing the digging.

Today I learned of yet another sorry tale, this time a local firm that were "experts" in property investment funds, that has a number of joint ventures firms (Bentley-Leek Properties Ltd) that have gone bust, losing clients over an estimated £22m and creating an awful headache. The firm was involved with multiple joint ventures, formed with separate firms of Solicitors and Accountants. Sadly, this will impact a number of people in the local area who have been advised to implement this type of investment in Surrey.

Look, I'm not going to throw mud, but joint ventures exist to make money and usually because the cost of going it alone is too great or too arduous. The legal structure of the companies can become incredibly complex. Stand back for a moment and reflect if this is really what investing is meant to be about. The detail is buried in a mountain of complexity and paperchasing.

The company concerned is also an IFA and appears to be involved with Lusso Homes, although this is not completely clear. Lusso provide "high quality" homes for property investment. The investment brochure online provided by Lusso, has a table on page 10 that frankly I don't understand - and I do this for a living. The numbers, though are enticing and anyone from the area knows that property in these locations is not exactly cheap. This may not have been their undoing (I don't know the detail) but the fund also had property investment in Dubai - which might be a wonderful place to shop for luxury items, have some amazing architecture, but has little to do with property expertise in Surrey. One of the reported failed projects which intended to provide an annual return of 10% by investing in Dubai, used properties in Esher as security. Some of this investment was established via pensions (a SIPP).

As a consequence of the collapse, the IFA firm has also had to close. BDO have been appointed  for the property company as the administrators and have written to investors, who are reported to be livid with the news reported that Directors of Bentley-Leek Properties Ltd also borrowed £2m from the fund.

There are some key points to make, that many forget all too easily. Property will not always go up in value. It is not a safe form of investment. It is not very liquid. Sure it can be part of a portfolio, but it should not be the entire portfolio. Investment in property abroad is much more "risky" than property in the UK. In nations where regulation is lax or non-existent, I get particulalry concerned. Our own regulators failed to identify or highlight practices that led to the credit crunch, so what chance have smaller, less transparent nations got? I don't wish to sound simple, but frankly - if you don't understand how the investment works within 2 minutes walk away. If it sounds too good to be true... well it probably is.

We all make mistakes. It is very easy to get finance wrong. I am not immune from making mistakes, to my knowledge nobody is. However, I imagine, believe (and know) that clients expect an adviser to properly know the investment product that is being advised. The FSA certainly believe this and so do I. This is yet another example of why I believe that my role is to help clients reduce the number of mistakes that they may otherwise make.



Monday 21 November 2011

Coldplay - Just The Ticket or The Just Ticket?

1999: Just The Ticket - Wenk
For those that like attending gigs (I loathe that word for some reason).. anyway "music events", you will appreciate the bizarre way that the ticket market operates. The ticket price may be £20-£150 but there is invariably a handling/postage fee which makes the ticket agency a fair profit I suspect. Anyway, apart from this gripe, I am also increasingly annoyed by the way that "events" are promoted. For example, Coldplay (Britain's biggest band at the moment and one that I have liked for many years and seen them live on numerous occasions) have a new album "Mylo Xyloto" and are beginning a world tour. Tickets are sold out within minutes of being released online, jamming up various Internet servers. In theory you can only buy 4 tickets at a time for most bands. Yet no sooner is the panic over as you purchase the last remaining tickets, than a new date is announced - the following day.

Now I'm fairly sure that venues probably need a little more notice than what appears to be an impulsive reaction to the huge demand for tickets. It smacks of a con and must surely be market manipulation. I'm not citing Coldplay as unique in this, they all do it - and frankly it probably has almost nothing to do with the bands and everything to do with the promoters.

To make matters worse, ticket agencies seem to be allocated loads of tickets and then sell these on at a premium, even when an event is sold out, clearly it isn't ever sold out. Turning up to the actual event also reveals a considerable number of "empty seats" - whoever the band is.

Within the financial services industry regulation makes market fixing illegal. Prices are meant to represent the real metrics of supply and demand.

Coldplay tickets can be found at their own site, but it will redirect you to Ticketmaster - so if you would like a little more choice, here are just a few of those of the first page of google.




Saturday 19 November 2011

Dear George...

1939: In Name Only - John Cromwell
We are gradually counting down to 29th November, when George Osbourne presents his Autumn Statement. There has been much debate in the press about whether he will abolish or reduce the amount of tax free cash available from pensions - currently 25% of the fund. A cynic might say that the change in terminology brought in by the previous Government might aid this cause.

Pensions no longer have a retirement date. The current and previous Governments have made this possible through the abolition of the compulsion to buy an annuity - even though in practice, most will still do so. You no longer retire - you crystallise benefits. Yes you did read that correctly, at least they didn't call it "fossilize".

The new jargon for the tax free lump sum is "Pension Commencement Lump Sum" PCLS... which leaves open the door for having no reference to tax free.

In his bid to cut costs, Mr Osbourne and the Treasury are also rumoured to be considering reducing or scrapping higher rate tax relief on pensions. In theory this could be worth £10,000 a year to someone using the £50,000 annual allowance. This sort of rumour has been around for as long as I can remember and one has to be a little suspicious of the financial services industry, who invariably use rumour of change to encourage people to take pre-emptive action.

Pensions have already had far too much change. These sort of changes would be entirely counter productive to encouraging the population to save for retirement and independence of the State. So should anyone with any input into the Treasury be reading this. Please don't mess things up further!

Friday 18 November 2011

The End of Sterling? sein größter bluff?

1954: The Million Pound Note - Neame
I'm at a loss for words (well nearly)... it is being reported (in Die Welt) that the German Finance Minister Wolfgang Schauble believes that Sterling will be dumped in favour of the Euro, much more quickly than we in Britain believe. I would have thought that the current fiasco in Europe is serving as a reminder that sharing a currency means sharing (for which read - have the same) economic and social policy, which does not work with different approaches to these rather important issues, many of which are culturally ingrained. Perhaps Mr Schauble is simply bluffing and hopeful that Germany will not be left alone in bailing out its Eurozone partners, but I cannot see many here agreeing that the Euro would make really good sense for Britain. I imagine that this may be something that David Cameron discusses with Angela Merkel today.

Gold: Fools Rush In?

1925: The Gold Rush - Charlie Chaplin
The World Gold Council has just published its third quarter data for 2011. I'm one of those people that find this sort of stuff interesting, which is presumably a good thing if you are a client. Anyway, demand for gold increased by 6% on a year-on-year basis. Investment demand for gold as a "safe haven" is driving demand and altering the shape of the gold market. Way back in 1970, when the world was clearly a different place, Jewellery accounted for about 70% of gold market with investment and technology roughly sharing the balance of the market equally. Scroll forward to 2010 and investment gold now makes up about 40% of the market, with jewellery squeezed to 50%.

What is also interesting in the report is that nearly 80% of gold production mines were in Africa in 1970 (the bulk being in South Africa) with 10% based in the US and the rest of the world accounting for only 10%. Today, or rather in 2010, there is a completely different picture, East Asia now has the biggest distribution of mines, but by an large there is an even spread across the US, Latin America, Middle East, Oceanic and Africa, Europe by comparison has virtually no significant input into the numbers. Of course since 1970, South Africa in particular has changed dramatically.

My concern is primarily that gold has become such a significant holding within portfolios that the price is perhaps unnaturally high due to the demand. It is clear that gold is a traditional "safe" asset, but the volatility in the price of gold would suggest that as with other asset classes, timing is everything and is of course very difficult to get right consistently. The economic environment leads investors to seek safety, but I am beginning to wonder whether we are gradually getting to the bottom of the mine that we have dug for ourselves. By the time characters like "the little tramp" (nothing to lose) are gold speculators, it is time to get out.

Avoiding The Pitfalls

1966: This Property is Condemned
What makes a good financial adviser? Given the way that most investors behave, I would assume that most must believe that a good adviser is one that makes them a fortune without any risk. If only this were possible. The truth is rather more uncomfortable. In my opinion, a good financial adviser is one that helps investors make fewer mistakes. I have spoken and written about this regularly.

Yesterday, an offshore British Real Estate Fund (BREF) run by Tilney Asset Management (owned by Deutsche Bank) went into administration. Accountancy firm PriceWaterhouseCoopers (PWC) are fairly grim about the chances of investors getting back any of their money. This is a fund with spectacular under performance in recent years. The fund, which invests in commercial property resides in Guernsey (a tax haven) and was able to use borrowing to ideally improve returns, but as we all know, debt can be a millstone and can lead to ruin, which is precisely what happened here when combined with sharp declines in commercial property valuations. Many businesses rely on finance (borrowing) to be renewed or renegotiated. This is not the world that the Banks now live in. In the summer, the fund had 24 properties worth £58.65m and debt of £77.61m a loan-to-value of over 130%. The  BREF could not agree a way forward with its existing lenders (Santander and Aareal Bank) and so called in PWC.

Most Fund Managers and advisers will have an element of property within their portfolios. I am reluctant to say "never" but in general I don't like assets that are not very liquid. Selling a property fund is sometimes very difficult - you might recall AVIVA suspended their European property fund in November 2008 for 13 several months. The point being that it is not easy to sell all or part of a retail/business park. The BRE Fund has only 24 properties (see page 10 for a list). Property can have a place in a portfolio, but it is not as safe as some would wish to believe. Indeed it can be a very high risk form of investment when debt is also involved. This is one mistake that our clients have not made of late, but one that many big-name firms have.

Thursday 17 November 2011

The Confidence Index

1946: Great Expectations - David Lean
Nationwide, the UK's largest Building Society provides a range of data. One is the Consumer Confidence Index which they report has fallen yet again, this time to a score of 36. This is a complex index and deals with perception. Nationwide drearily announce that the Expectations Index fell by 14 points, taking it to its lowest ever reading of 48. May I remind you of my post on November 4th about investors becoming curvaceous. As an investor, one might see "rock bottom, depressing news" as an investing opportunity... waiting for consumer confidence to return is invariably after the event.

Virgin Banks on Tyneside

2007: Virgin Territory - David Leland
Virgin Money have agreed a price for Northern Rock. I'm not sure if Mr Branson is having a slight joke as the jumbo sized £747million is the pricetag agreed with the Government, who are intent on selling the nationalised banks back to the private sector as quickly as possible. There will be other funds that will need to be paid, £330m of them in total if the deal works out for Virgin.

Virgin Money have made no secret of their desire and attempt to revolutionise the world of high street banking. In theory this builds nicely upon their existing financial services range, however it remains to be seen whether the typical Virgin customer has sufficient funds to make Banking profitable in these more challenging economic times.

Virgin are purchasing the "good bank" part of Northern Rock, as with most things that Virgin do, very little are actually "virgin" in the sense that a business is invariably bought and rebranded as Virgin. The toxic element of Northern Rock will be left with the British taxpayer (naturally!).

The first half results for Northern Rock reveal continued losses, Executive Chairman Ron Sandler "Northern Rock has made good progress in the first half of 2011. The company continued to be loss-making, [£78.8m] as expected, but losses are significantly reduced [£140m in first half 2010] and we are generating momentum. The company expects to begin trading profitably during the second half of 2012". If to be believed, Mr Branson won't have to wait too long to begin to see a profit on his investment.

I fear though that despite the regulators efforts to ensure that financial products are properly marketed and sold from 2012 that this may simply be another Bank that struggles to know what free really means. Currently employers can set up staff pensions "for free" using Virgin, which is of course a nonsense that they acknowledge that they will charge the employees via their pension. Admittedly the financial services industry needs knocking into shape, but many of the issues are rather more complex than simply a new coat of paint. Whatever your view about Virgin, it is undoubtedly a successful sales outlet, not simply selling products and services, but invariably the businesses themselves. The only reason not to sell is when the profits show little sign of diminishing, which then perhaps tells us rather more about what is really being offered. As the regulator seems in the mood for fines, I do hope that Mr Branson got his caveat emptor.

Wednesday 16 November 2011

Tax - Speak Up Now

Its good to live in a democracy. Here in Britain we are being asked to help shape the future of our tax system. A cynic might say that this is a way to be able to blame the public for whatever mess then ensues. An optimist might say that this is a great chance for a radical overhaul and make the system clear and fair. As someone that has both of these aspects, I can agree with myself, that surely it is better to have a say than none at all - irrespective of whether opinion is implemented into something meaningful.

The Government want your views on the tax system... don't get too carried away, this is not to propose a tax dodging approach as applied in certain European countries, but a more of a request for feedback on how things could be clearer and perhaps better.

Tax is probably your largest single expense, even with people like me attempting to reduce and reclaim tax for you legitimately, you probably give HMRC more money than anyone else. So one would hope that taxpayers would get involved in the discussion. You now have 12 weeks (until 24 February 2012) to get involved. HMRC have produced a typically dry 25 page document (I'm sure a marketing expert could create something better that would encourage greater responses). I would urge you to get involved. I know Christmas is just around the corner - as is 31st January tax payment date - but this is an opportunity to do something about our overly complex and rather daft system.

You can find the document within the news section of my website or at the HMRC website. We all tend to feel somewhat fed up with how public money is wasted, so why not use this opportunity to create some change. Let me know if you get involved.

Monday 14 November 2011

Talking Money

The latest edition of Talking Money will be posted to clients today. If you cannot wait for your copy, please have a look at the resources section of the main website. This issue covers topics including SIPPs, Annuities, Tax and the new Flexible Draw Down Rules.

We have also added some updated documents regarding NEST, SIPPs and Inheritance Tax. Do take a look.

Collective Sunstroke in Government?


2008: Fuel - Joshua Tickell

The Government recently announced that it was altering the tariff system that enables more people to give serious consideration to adapting their homes to take advantage of renewable energy. Wondering if the warm autumn sunshine had possibly affected those in power, I spoke to Chris Whitelock, who runs Pure Renewables about the changes.

DT: In light of the recent Government announcement to more than halve the Solar PV Feed In Tariff, where does that leave a sector that was enjoying growth, employing a skilled workforce and contributing to our obligation to have 15% of our energy produced defined as renewable by 2020?

CW: Whilst I understand the reasons for reducing the tariff, what I, and most of the industry and a good portion of the general public, are struggling to come to terms with is both the severity of the cut and the speed with which it's being implemented. In short the PV industry has created over 22,000 jobs, 4,000 businesses and contributes over £280m/annum in taxes to the Treasury. The cut in tariff will save £220m! As of 10 November, the Government is facing legal action from a number of solar PV industry leaders which focuses on the short-notice given (just 6 weeks) of the cut coming into force despite the 'consultation' on the tariff ending 2 weeks after that date on 23 December. The short notice given has thrown the industry into disarray with stock levels plummeting and customers being unsure of whether their system will be eligible for the current or new rate. The cut will not only affect the wealthier middle classes - solar PV was a key element in local authorities reducing the electricity bills of their tenants and therefore tackling fuel poverty.

CW: However, it is not all bad news. Even at the proposed 21p/kWh generated (currently 43.3p), a Solar PV system can still represent a viable investment with a 4-5% return and an annual rebate for 25 years of £650. That's still a pretty healthy investment and is also a stable one. PV systems will likely increase a property's value by as much as 2% and will improve its Energy Performance Certificate rating so even if an investor sells up, the return is attractive. A little known fact is that PV systems can be taken to a new property anyway. There is little doubt that the manufacturers of PV systems will have to reduce their costs to remain viable and therefore these returns could prove even more attractive with time. It's true to say that just 15 months ago the returns on PV were similar but cost reductions of around 30% have led to a correspondingly higher return, hence making it a 'must-have' purchase. This in turn led to a huge increase in competition with the emergence of many companies whose only motive was profit. These will now largely be cut out therefore leaving the more specialist companies in the market. The only question remaining is 'Will the Government do this again or will they stand by their rhetoric of being the 'greenest Government yet'? Time will only tell.

So if you are planning on converting your home or business to take advantage of the new clean energy, despite the planned changes to the tariff system, there are still plenty of good reasons to continue with your changes. I'd also suggest that you run your plans by Chris, who would be delighted to answer any questions.
 
The proposed changes will have an impact of various forms of investment products that take advantage of the entrepreneurial spirit of those involved within the renewable energy sector. As a  form of investment in its own right there are a variety of investment arrangements that seek to capitalise on the long-term need for renewable energy.
 

Client Money - Too Hot To Handle

1966: How to Steal a Million
You may recall that in a recent blog I mentioned an American broker MF Global has gone bust. Well it seems that their clients had another nasty surprise. Stockbrokers and some IFAs have the ability to handle client money - this is really so that they can get on with trading for clients without having to ask permission to alter a portfolio (discretionary fund management). As a result it is not simply important, but a clear rule that the FSA enforce, to ensure that the client money is clearly separated from that of the Bank/Stockbroker. A number of large firms have received the attention and fines of the FSA for failing to properly ensure that this always happens. Well, sadly for clients of MF Global, something like a further £374m has "disappeared" which was meant to be properly ring-fenced client money. This is not good. Whilst demonstrating the obvious merit in the rules, failing to keep them has left clients much worse off. This will not help restore any faith in the financial services community - which is why the FSA's approach to tackle these issues is absolutely right.

KPMG are the appointed administrators attempting to clear up yet another sorry tale within the financial services world. So if you are asking yourself if this could happen at Solomons - the answer is no. No because when I set the firm up I did not want powers to "handle client money" which has always made client relationships more complex. Human nature being what it is, there is always a chance that anyone with such "permission" as the regulators define it, puts a very real temptation on the table. Whilst firms may appear noble and ethical, when faced with ruin, history reminds us that ethics are often disregarded. Sad, but true. Hence my stance and the reason why my firm does not and will not have the ability to handle client money. My approach is always - advise, agree and implement. 

Market Manipulation - Private Investor Fined £6m

2011: Manipulation - Pascal Verdosci
The FSA announced that it handed out its largest fine to an individual last week. The individual investor was fined £6m for effectively attempting to manipulate the market. In a nutshell the investor had a lot of money in a structured product - which normally relies on a given index or set of indicies to reach certain levels in order to provide a positive return (in this instance Reliance Industries). The timing involved meant that the investor would face a significant loss. So, being a man of means he very ingeniously bought Reliance stock at the last moment in order to force the price to the required level and thereby push the price to a "non loss" position. I should add that you only do this if you have serious sums of money (the investor is based in Dubai) and know precisely what you are doing. The FSA saw this as market manipulation and applied a fine of £4m and restitution to the Product Provider (a Bank) of £2m.

At a basic level, this is someone using the system to attempt to recoup their losses. The FSA view this as market manipulation, different from central Government buying a Bank or printing money to issue Bonds - which are all ways of effectively avoiding losses and that directly impact the market, with the express purpose of reducing loss and increasing profit. Few will ever have the resources available to be able to do something similar, but it does beg some questions. Market manipulation is possibly open to interpretation when one considers the actions of large institutions and Governments - one could even argue that the media manipulate the market by constantly taking an extreme position.

Friday 11 November 2011

11-11-11 - eleven, eleven, eleven... lucky number eleven?

2001: Oceans Eleven - Soderbergh
Here's a chart, it could be the current volatility of the world markets. It isn't. If you'd like to hazard a guess about what this chart is and are the first to do so correctly, as it's my birthday I will send you a celebratory prize.

Send me an email to enter your answer.








Thursday 10 November 2011

Time for Confessions of a Shopaholic

2009: Confessions of a Shopaholic
The Bank of England have held the base rate, as expected. They also decided not to throw more money onto the Quantitative Easing fire. A good result for anyone with debt, but not a great piece of news for savers with cash deposits - save for the fact that more people are becoming better educated about the global economy and finances... if it looks too good to be true (interest rates of 7.25% offered on Italian Bonds) then it probably is... in short the higher "interest" offered is effectively a priced risk for not getting back all or any of the capital placed "on deposit". A simplistic explanation, but covers the main points.

Italy has been spending too much and borrowing to pay for it. Due to the way their debts are structured, they need to make a payment to their lenders shortly - but can only do so by borrowing more. This is most definitely a case of robbing Peter to pay Paul. If the Italians cannot secure new finance, they will be "bankrupt" which will mean anyone that has provided funds to Italy will have to take it on the chin. We're all connected as Banks lend to Banks who lend to us as a way of diversifying their own risk. Sadly none of the countries, seem capable of doing basic financial planning for themselves. The leadership of most European nations is nothing short of inept, which in their defence, is due to short-term political vote winning... this month is going to be a landmark month for Europe and the Euro. However, the whole of Europe (including the UK) needs to do some self-reflection, recognising that the entire system is skewed towards consumption and credit, as outlined in "Confessions of a Shopaholic".