Back to the classroom - Strikes, Teachers and the uncomfortable maths

Teachers that are members of the “old style” pension (before 2007) currently build up a pension at a rate of 1/80th for every year of full-time employment until the age of 60. The typical teacher graduates and becomes a teacher at the age of 22. The typical starting salary is £18,000. If we assume no promotions or management responsibilities and no career breaks due to children (which is a lifestyle choice) then retirement at age 60 is likely to lead to 38 years (60-22) of service. Retiring early tends to prolong life expectancy, it is certainly possible that this person could live to age 90 (30 years in retirement).

If we make the assumption that salaries for teachers rise at 2.5% a year on average over the 38 years. A starting salary of £18,000 becomes £46,000 at age 60 (the final salary) -which for the record means £1.1m gross income has been earned. I know that salary rises at present are low or below this, but this is a reasonable assumption over 38 years.

Here is the maths:

38/80 x £46,000 = £21,850 per annum + index-linking (inflation each year).

There is a also a tax free lump sum of 3 times this amount = £65,550 in this example.

If the teacher lives to 90 (another 30 years) and inflation were to rise at 2.5% on average over 30 years, then the £21,850 pension has become £45,832 at age 90. If the teacher died before this whilst retired, whatever pension they were getting would halve and pay their spouse for the remainder or his or her life. So at worst case the spouse would receive £10,925 a year, at best (in this example £22,916 a year). The rate of increase to the pension in retirement has been part of the current falling out - whether the link is to RPI (as it was) or the change to CPI (which is the proposal).  Any assumptions about the differences between the two over the long term will have an impact, but it is frankly pretty difficult to determine which will actually be higher. We will only know when we get there (each year).

Teachers contribute 6.4% of their salary towards the pension. So a salary of £18,000 this is £96 a month. This does attract tax relief at least at basic rate relief (so is really £76.80 net a month).

Using our example, over 38 years 6.4% of salary would amount to a gross outlay of £72,503 over the 38 years. In practice due to basic rate tax relief this would really be £58,002.40.

Annuity rates today providing a pension for a 60 year old that is inflation-linked and also provides a 50% spouses pension are approximately 4% perhaps lower. So in order to achieve an initial income of £21,850 the pension fund would need to be £546,250 and this does not include any lump sum (which in the example is another £58,002 or 10%).

By way of a fair comparison, we need a target fund of £600,252 (£546,250+£58,002) over 38 years contributing £96 a month and increasing this by 2.5% each year. This would mean that an after charges growth rate of 10.21% per annum would need to be achieved. This is highly unlikely to occur, half of this return (5% after charges) is more probable, but still not certain as the pension is investment based.

If we assumed a 5% return each year after charges, then you would need to invest £314.47 a month, rising by 2.5% a year for 38 years to achieve a fund of £600,332. This is a gross (before tax relief) outlay of £237,449. This is rather more than the Teacher contributing a total of £72,503 gross. The mathematicians amongst you will be thinking, hang on if this is roughly half the return (5% instead of 10%) why is the cost 3.27 times as much? Well that is the power of compounding returns. A maths teacher would have taught you that this is called compound interest.

Sadly, because most people do not get decent financial advice, they do not start paying into a pension early enough, or paying enough (note that for a 22 year old on £18,000, £314.47 a month (£3,772.64 a year initially) which is a whopping 20.96% of salary. Teachers are automatically enrolled into the Teachers Pension Scheme (good advice). The amount that they contribute is a fixed percentage of their salary (also helpful advice). Importantly they start in the pension as soon as they have a teaching job (at a young age).

Starting your planning is vital. To achieve the same fund with 10 fewer years (starting the pension at age 32) would require a £626.08 investment each month, increasing by 2.5% a year for 28 years growing at 5% after all charges. This would see the target fund of £600,332 achieved but at a gross cost of £302,879. So a 10 year delay costs an extra £65,430. The matter of whether someone can afford £626.08 a month at age 32, given the likely extra financial responsibilities that they have is a significant point.

This is essentially the problem for the members of such schemes and their employers. The cost is unsustainable and significantly out of line with the private sector. It is the same for any of the main State employers. The other problem is that even though both employee and employer contribute towards the pension, this money is not really used for future provision. Most of these schemes are funded from the general public purse, the contributions by employee and employer are largely little more than a joining fee for the guarantees provided. Sadly this is an issue that has been ignored for far too long and as we have seen the cost of delay merely adds to the cost.

I have sympathy for anyone that is caught in this problem, but unless the public finances are re-arranged in other areas, then there are few realistic alternatives. Some of the schemes have altered, for example some pay more (doctors earning a certain level of income will pay 8.5%). Sometimes the scheme has been closed to new staff and they are in the money purchase scheme instead. Some are in a 1/60th scheme rather than a 1/80th scheme (38 years in a 1/60th scheme is a pension of 63.33%). Some have had the definition of Final Salary altered, to be a career average or average of last 10 or 3 years, but taking the higher “number” of whatever definition has been agreed.

This is not a political point. I am drawing attention to the reality of maths. There are different salary levels and of course, promotions with increased salary improve the pension. Some people are single, so do not benefit from a 50% spouses pension. Some will die before they reach retirement, some will die within a few years of retirement. Working longer means delaying payment of a pension, but it also means increasing the number of years of service and salaries will also be increasing.

These sort of final salary schemes are very valuable, giving up such benefits is going to be painful, but nothing like as painful as not having a pension at all.

The painful and disappointing reality is that the maths cannot be ignored any longer. According the the Teachers Pension Scheme, they currently have over 1.4m pension scheme members, which of a population at around 60m is 2.3% of the population. This is just the Teachers Pension. The NHS Pension Scheme is larger.

Funds: Henderson and Gartmore start the name calling

Gartmore were taken over by Henderson earlier this year and trading will be suspended on 8th July as the "nearly final chapter" of the renaming of funds is implemented. This is normally a lengthy process and one that probably only printers welcome. There are a number of funds concerned, all currently start with the Gartmore name and this will be replaced with Henderson (not exactly rocket science is it!).  So from 11th July 2011 the UK OEIC funds concerned will be:

Cautious Managed managed by Chris Burvill

China Opportunities managed by Charlie Awdry

Emerging Markets Opportunities managed by Chris Palmer

European Absolute Return managed by John Bennett, Leopold Arminjon and Tomas Pinto

European Focus managed by John Bennett

European Selected Opportunities managed by John Bennett

Global Focus managed by Neil Rogan

Japan Absolute Return managed by John Stewart and Robert Tull

Multi-Manager Absolute Return managed by Tony Lanning and Paul Craig

UK & Irish Smaller Companies managed by Rob Giles and Adam McConkey

UK Absolute Return managed by Ben Wallace and Luke Newman

UK Index managed by Mark Underhill

UK Tracker managed by Mark Underhill

US Growth managed by Tom Marisco, Doug Rao and Coralie Witter

US Opportunities managed by Cory Gilchrist

Silence is Golden? Seeking more purity from Gold

This morning I have had a response from Goldcorp to my questions about the San Martin mine in Honduras. Their response has been very thorough. To be perfectly honest with you, their response merely leads me to question (again) the quality of the journalism that we endure here in the UK. I have seen the letter of response from Goldcorp which in my view meets the questions and criticism levelled at the company by the Dispatches programme. I have asked Goldcorp if it would be OK to publish this letter here on my blog and am awaiting a response. I will quote two key bits here now though:

"Thank you for your letter regarding the program examining the gold industry that you are producing for British television Channel 4. Goldcorp Inc. is based in Vancouver, British Columbia and our operations are located in the Americas. As a result, we cannot accommodate your request for an interview in London on such short notice. Goldcorp has made arrangements with other journalists to visit our operations in Guatemala, Mexico, and Canada with respect to stories on the mining industry and the company. We are disappointed that you are not planning to visit one or more of the sites on which you intend to report to see first-hand the situation and to speak with additional members of the local communities. In lieu of an on-camera interview, we are prepared to offer a spokesperson for an interview by phone. As you requested, we are providing our responses to the points raised in your letter."

So, it would seem that the journalists did not even bother to visit the site, which I would think is a fairly basic and important element to collecting evidence. It would seem that this information has not been fairly reported - which is what we are all after isn't it? the truth? Certainly there is room for more dialogue and further questioning (paparticularly regarding CAFOD information) but the main problem with the media is that there is little real chance to respond. I imagine that an undercover, undercover journalist reporting about undercover journalism would be revealing. After all one of the owners of the company producing the programme is a well known Swiss investment bank, not exactly having a reputation above reproach when it comes to gold.

Yes there are questions about health issues (rightly) in the local community, but in fairness (and I recognise that the health problems are not trite) the background needs to be considered properly. The question whether the mining caused the health problems or did they pre-exist due to the environment (which has been identified as having high metal levels naturally - hence the mine being there) is an important one and no trivial matter. This requires impartial investigation - both "sides" need to acknowledge this. As for the mine and the local area, well actions speak louder than words - but here is a video (yes it is glossy and smacks of PR, but wouldn't you do the same, given the opportunity?). To be impartial means to be open-minded and attempt to see an issue from different perspectives, it does not mean seeking evidence to support your ideas and beliefs. No I have not been paid to promote Goldcorp, no I do not benefit from them, I am in search of the truth and a more just world. I do want to ensure my clients are not invested in companies that behave disgracefully. So free your own mind.

"The San Martin Mine in Honduras operated until October 2007 at which time mining ceased and all efforts were directed toward mine closure and reclamation. While closure activities continue, the San Martin Mine site is now being operated by the San Martin Foundation as the San Martin Ecology Centre. The Centre is located on 1500 hectares of land donated by Goldcorp to the Foundation. The Centre includes the former mine camp which is now a 31-room hotel with a restaurant, swimming pool, sports courts, playing fields and other amenities. The hotel is surrounded by forest, interpretive trails, bird-watching gazebos and wildlife habitat for deer, puma, roadrunners, lizards, iguanas, among other species. In addition, the Foundation operates agri-businesses, including chicken and hog farming, cultivation of lemons, oranges and mangos, tilapia fish farming, and growing indigenous plants as a source of biofuel. These eco-enterprises employ about 20 people from local communities. These sustainable businesses were featured in a video entitled "2009 in Review/ What's Next" which was presented at Goldcorp’s 2009 annual general meeting of shareholders and is available at Goldcorp’s YouTube Channel at http://www.youtube.com/user/GoldcorpInc."

I also asked a friend of mine that is a jeweller for his thoughts on the programme. He said ".. there is no way that any of us can trace the provenance of the gold we use as it's constantly mixed and realloyed with gold from other sources, whereas a diamond is a discrete object that can be traced from mine to end user."

Fair Trade Gold - Challenge to Investors

I watched the Channel 4 Dispatches programme "The Real Price of Gold". The programme made some good points, but also failed to really grapple in depth with what is a complex issue. In some respects, the information was a little dated and perhaps edged on the side of sensationalism with some of the statements and inferences that were made. This might simply be due to the "big story, not enough time" problem of TV.

OK, so first off, if asked the question - "would you prefer to buy gold that has come from somewhere where children are the miners and have little or no safety - or buy from properly sourced gold mines where ethical and environmental practices are followed?" I doubt anyone would select the former option.

The key is (as with any hazardous industry) how is demand met, by doing something that is innately dangerous, with as much danger removed? In one sense, the case was made for large scale gold mining operations that are well run and properly managed. However, these are not without their difficulties as the process of mining gold produces byproducts and waste - that needs very careful management. They also use a huge amount of water, a resource that is becoming increasingly scarce. This raises some very valid environmental and health questions for which mining companies need to find solutions. The case of the San Martin mine in the Siria Valley, Honduras with the impact on local water and health is one that should concern anyone and the statements shown (as coming from Goldcorp) were (and I have no axe to grind) without context, which as we all know is everything. The Goldcorp website suggests that the mine was closed in 2007 and the site is being rehabilitated. The comments by University of Newcastle Professor Paul Younger are deeply disturbing. A quick Internet search provokes questions about the way in which the mining company have handled this matter. The rightsaction's film "All That Glitters Isn't Gold" would concern anyone. I have taken this up with Goldcorp and with the Fund Manager.

The Dispatches report suggests recycled gold is the solution. It certainly can be part of the solution - but it would be naive to think that this would solve the problem. If all gold mining ceased then the available resource is more limited, pushing the price up and of course increasing the likelihood of "illegal" mining to occur. The pressure of poverty drives children (and adults) to search for gold, which is not well explored in the Dispatches film. I would imagine that this gold ends up in the black market and could potentially end up anywhere. I am very dubious about the inference that 10-20% of the gold supply is mined from Senegal and child labourers. I think this is at best sensationalist. In such ad-hoc mines there is no regulation, this is do it yourself mining. The "proper" mines are not driven by poverty, but by business, which one might describe as greed. An uncomfortable term, perhaps - meeting a need at a profitable price is more palatable. Good business needs to be sustainable and can of course create wealth and prosperity for many.

The World Gold Council have stepped into centre stage with a clear attempt to identify the source of gold with their ethical standards. Deirdre's report reminds us that as consumers and investors we are partly responsible for the situation and now that the genie is out of the bottle (by way of information) we need to play a part in finding solutions. I do not believe that regulation removes corruption or greed, but at least it provides a framework and set of guidelines that hold individuals and companies to account. Sadly, gold is often mined in parts of the world where Governments rarely represent their people and corruption is rife.

Investors see gold as a safe haven which is particularly required during volatile periods, arguably gold is safer than cash in a post-credit crunch world. So these are issues that investors are forced to grapple with as a result of portfolio diversification requirements.

If we count ourselves as the educated and fortunate elite (on a global basis) we must also shoulder the burden of responsibility, that the poor are not exploited in pursuit of our security or pleasure. I recognise that there are no quick and easy answers. My own view is that active engagement with problems is the journey towards solutions. I do not believe that denying that difficult questions exist or working as though everything will be OK in the end, is a path to justice or indeed a good life. The wise know that the safest world is one in which your neighbour also prospers. Thank you Channel 4 for raising this issue. I don't really think shouting from the top of a double decker in London is terribly effective, but at least the discussion has been given a platform here in the UK, albeit rather late to the debate. Here is the Cred Jewellery website and video found on their home page produced by the fair trade organisation. If you would like to add your voice to the Channel 4 Dirty Gold Pledge you can do so by clicking here.

Business News Updates 27 June 2011

Over the weekend we learned about the demise of another high street retailer - Habitat. Habitat was originally created by Sir Terrance Conran, who has achieved considerable success in the world of style and design. He has a unique eye for design and it would appear that he also has the knack of fantastic vision and timing, something that many retailers seem to lack consistently. Hilco bought Habitat a little over 2 years ago and specialise in "restructuring" (this does not mean saving) retail businesses that are in distress. Presumably this was the outcome that they were looking for. The Home Retail Group that own Argos and Homebase have agreed to buy part of Habitat - 3 of its stores and the online business. This is perhaps a strange buyer, given that HRG have their own struggles with Argos (sales down 9%) as the retail world has evolved to something rather more than the ability to sell a lot of BBQ sets.

I'm not sure if the economic backdrop or the warm weather has resulted in improved sales of beverages, but the Whitbread Group reported increases in sales of 9.2%. It owns Costa Coffee who saw a 22.5% increase in sales. On the other side of the earth, Fosters Group recommended shareholders to reject a bid from SABMiller (owners of the Grolsch and Peroni) that values the Group at £6.2bn. The world of brewing beer is not one that I understand terribly well. It seems that firms brew and market all sorts of beers in various different global regions, to the extent that SABMiller actually brew (importing some of the specific ingredients from Australia) and market Fosters to parts of India. This is effectively brewing under license, but suggests that few beers are actually from the assumed place of origin. Beer seems to have a rather confused market and I'm not sure if this is due to historic agreements or the consequence of sampling the products. However, here is a video from a man that is definitely not confused, creating fantastic design pieces and discusses his perspective on brands and his work with Peroni. Here is Antonio Berardi.

Gold Stars All Round?

I think I may be developing a sixth sense...having blogged about gold and the new ethical standards, I now bring your attention to a Channel 4 Dispatches programme - The Real Price of Gold. This will be aired on Monday 27 June at 8pm and will presumably be available on the 4oD site soon afterwards. I am hopeful that Dispatches will do more thorough investigative journalism than Panorama last week, though of course this remains to be seen. Deirdre Bounds will be investigating the problems with identifying ethical gold and the loopholes to get around the voluntary standards. She will challenge shopkeepers knowledge of gold sourcing - which may be pretty pointless as there are few sales assistants that would do anything to prevent you from making a purchase. However, the reality is that few of us would willingly want to buy something that was "unfair" or "unethical".

Anyhow, it will be interesting, I hope that it will be accurate and fair. Anyone with a brain knows that a natural resource has come from the ground, so someone somewhere has had to dig it out and it wasn't the person wearing it, the key is how can we as consumers and investors work with organisations like the World Gold Council to reduce and ideally prevent "unethical practices". I hope that Deirdre offers some solutions as well as criticism. She certainly has the advantage of not being a journalist, but being a businesswoman that like me (and many others) believes that ethics and business do mix, indeed surely they must. She successfully built and ran an ethical travel business which she sold to a FTSE100 company. She has become a social entrepreneur and has started to inspire many people. The evidence would suggest that she is, the real McCoy or should I say honest Yorkshire lass? Oh and here is a video by GoldCorp, one of the holdings within portfolios via the Blackrock Gold and General Fund.

Conflict Gold - new initiative

On Friday the World Gold Council announced plans that have produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. Not a million degrees different from the concept taken up by the diamond industry (blood diamonds). The new standards enable miners to produce newly mined gold which is certified as "conflict free" on a global basis. This of course can only apply to newly mined gold, any gold in current circulation is somewhat out of the loop. This is a good initiative and frankly, a little late in the day, but finally we have something.

The draft standards have been "stress tested" by many of the leading gold mining companies and refineries. The World Gold Council invites participation in its press release: "The World Gold Council recognises the multi-faceted nature of this initiative and is seeking input that will foster a collaborative and comprehensive solution and is, therefore, undertaking consultations with stakeholders. Interested parties including governments, NGOs, the investment community, artisanal miners, end-users and other participants in the gold supply chain are being invited to review the draft standards and to provide their feedback by 1 September 2011. There will also be continuing work and dialogue on related issues such as recycled gold, audit and assurance."

We have seen much change in the world and political unrest is rather more "normal" in some countries than others. Gold has been a fantastic investment over recent years, but no one wishes to see it used to fund conflict. Of course a realist might suggest that gold, like any other precious resource has, does and can be a key source of conflict. Anyone with a History O'Level will understand something of this when thinking of the Spanish Armada, the New World and The 1849 Californian Gold Rush. However, this is surely a good and sensible initiative, albeit overdue.

The price of gold was fairly "flat" from 1900 until the mid 1970's when the dramatic rise in price began, peaking in the early 1980's before effectively collapsing until the new millennium, the price has rocketed by around 394% in the last 10 years from an average £184.09 to £792.41 in 2010.

Here's a few interesting facts. One ounce of pure gold could be hammered into a single sheet nine metres square. Gold melts at 1064 degrees centigrade and boils at 2808 degrees centigrade. It is estimated that 165,000 tonnes of gold have been mined since the beginning of civilisation - which would fit into a crate of 20 cubic metres.

That Dress

You may recall that I blogged about the auction of Marilyn Monroe's dress from the 1955 film "The Seven Year Itch". On Saturday the dress sold at the Debbie Reynolds Auction in Beverly Hills for a eye catching $4.6m which is a very good return on the $1.1m purchase price in 1999 and increase of $3.5m over 12 years. It may sound a lot, but when the numbers are crunched this actually represents an annualised return of 12.66% per annum. There were many other film buff pieces that were auctioned in possibly the largest film memorabilia auction ever, which included Charlie Chaplin's bowler hat, the peasant outfit and guitar worn by Julie Andrews in "The Sound of Music" and many other pieces. There is a substantial online catalogue with over 300 pages.

Over the 12 years we have seen the dot com bubble, Enron, September 11th and the credit crunch to name just a few key stockmarket troubles. So all things considered its a very good annualised return. If this were a UK investment, there would be considerable capital gains tax to pay at 28% reducing the gain by nearly $1m ($980,000). Then there would be the purchase and sale costs, along with insurance and storage over the last 12 years, which would be reasonably significant for an item worth over $1m. Leaving aside these other costs, the 12.66%pa return is reduced to 10.44% pa  net of tax. Still not bad, but the tax impact is significant and only looks like 2.22% pa but is actually nearly $1m.

Something for the weekend?

Tomorrow sees perhaps the world's most famous luxury store launch the summer sales in style. The place to be is of course Harrods, the sales starts on Saturday 18th June, as the Knightsbridge store welcomes a special celebrity guest to officially open its famous Summer Sale.

According to the press release - in more than 330 departments, across seven floors, customers can enjoy incredible summer discounts from luxury and designer brands, with highlights including: YSL halter neck bow back dress - was £1200, now £600; Sass & Bide Lovestate skinny crop jeans - were £159, now £77.95; Missoni skinny scarf - was £225, now £135; Panasonic 46" Full HD Plasma - was £999, now £499; La Prairie skin caviar set - was £378, now £270.

While shoppers embark on their summer bargain hunt, the celebrity guest will pose for pictures in the store's iconic Georgian Restaurant, fronting a catwalk lined by a host of mannequins dressed from head-to-toe in must-have sale items!

So if you are interested, pop along to Harrods. The sale begins tomorrow, Saturday 18th June at 9am and lasts until Sunday 10th July.

Business Updates 15 June 2011

There are few things more exasperating to Londoners than the inability for trains to run on time, it is part of the daily ritual for many and whilst the weather has been very warm throughout Spring, hot trains packed full of commuters is no laughing matter. I was rather feeling fed up with late running trains (that recently seem to have increased) due to points failures, when it was pointed out that one of the main reasons for the plight of commuters is the huge rise in the price of copper. Hey? well it seems that there are copious amounts of copper serving the tracks and it is being stolen faster than it can be replaced. Hence the points failures and delays. It seems that the rail companies are not terribly good at protecting their tracks from thieves, who are stealing on an industrial scale costing millions. So we could probably do with a few more British Transport Police...

So it is little wonder that the China Development Bank has recently loaned Kazakhstan’s largest copper miner Kazakhmys $1.5bn (in addition to the $2.7bn) to help boost its production by as much as 60%. China, like the rest of us needs copper... for all that electric wiring that is being lined in new buildings and infrastructure. All of which applies further pressure on the price of copper, which in turn eventually filters down to the cost of a train ticket. The rise in the price of commodities would also help explain the 47% rise in net income of Glencore to $1.3bn.

If the trains eventually grind to a halt (can you imagine the problems for the Olympics!) then there is of course always the prospect of working or cycling to work. Perhaps for many a good use of their Timberland boots, who have just been acquired for a blistering £1.23bn by VF Corp who own brands like The North Face, Vans and Wrangler Clothing.

Here is a short video about copper mining in Chile, I couldn't find anything about copper mining in Kazakhstan.

New Careers for Bankers?

Having seen the Panorama programme last night, here is an old message, but a timely one to people that feel that they are caught in their current job. I know its never easy to make a shift, sometimes it is forced upon us. This is one guy that has the credibility of being able to say "been there, done that" and seen great lows and highs in both his business and personal life. Whatever you think of Donald Trump he offers some pretty good advice about finding the right job, something that many in the financial services industry may be reflecting on this morning, but of course it may apply to anyone.

Panorama that is neither deep nor wide, but sadly blinkered

It is said that a little knowledge is a dangerous thing. I was looking forward to an objective report on Panorama that considered whether trust in our Banks was misplaced. I admittedly felt that I knew the answer to this and many of the reasons. Unfortunately it was my own faith in the quality of Panorama’s investigative journalism that was misplaced.

This was not a good example of investigative journalism, but simply more of the rather sensationalist red-top journalism that leaves nobody satisfied and nothing resolved. This was a grumble. My key points are as follows:

Every business that has to sell something to generate revenue is prone to ethical dilemma. This includes charities, Banks, the BBC, you and me. Think about it. This is the nature of being a human in a capitalist culture. The story is as old as time and the first traders passing off knackered old sheep as good breeders.

The Banking business model has not adapted well to the changes within financial services over the last thirty years. A Bank does far more than lend money from your deposits these days. Arguably they shouldn’t, but there it is. We expect free banking yet fail to appreciate that this is cross subsidized from other bank products – overdrafts, poor deposit rates and a plethora of financial products.

In the real world, the majority of people have an ostrich-like approach to money (be it personal or national). You may be surprised to learn that a significant number don’t know how much they earn, a far greater number have little idea about how much they spend. I believe that this unwillingness to do basic accounting is our way of being unwilling to “value” ourselves, as though it has any real connection to what we are “worth”. The cold truth is that we are in collective denial about money and don’t really want to know the numbers, because we know that by doing so we are forced to face some very uncomfortable truths that will require us to change.

So like children, we trust our parents – or institutions that seem to represent them – the Banks. Yet, much like our parents, they fail us, because guess what, they don’t know everything and are essentially human. I’m not apportioning blame, merely stating a reality. I am a parent too.

What do you really think “free advice” is worth?... not worth paying for I suspect? Certainly the complaints and scandals would suggest that this is the case, commission based “advice” has got us into all sorts of pickles over the years. That is not to say that paying for advice solves the problems of greed and incompetence, but I believe that the setting for such would be much smaller-scale. It seems that the regulators (FSA) would presumably agree with my sentiment as from 1st January 2013 all advisers will have to charge fees, unless you sell insurance (… no..I don’t understand why either). All advisers will also have to have an agreed level of qualifications, so that they are “competent” at least in theory. I would suggest that the reason Barclays is no longer offering financial advice en masse to its customers is not for fear of complaints and fines (by their standards both are small beer) but is has rather more to do with the fact that research by Ernst & Young reveals that advisers in Banks really cost £250 per hour…and not many of its customer base want to pay, particularly as until now it has been “free”.

If I were in Government reflecting on how well the country was saving for their future so that reliance upon the State purse was reduced or removed, I would be very concerned about this. I would want to know why in 2011 Mr & Mrs Adams and thousands like them still have such a poor understanding about the different types of financial adviser and how a Bank may not be terribly impartial. I would want to know what has been done to promote good advice, ideally independent and what had been done to improve financial literacy and  numeracy. Wouldn't you?


To really do a good job for a client requires time spent getting to know and understand them – something that Panorama struggled to really reveal. Time is money and as I have just said, from 2013 everyone pays. Good advice requires context, something that sensationalist journalism appears to forget.

Panorama briefly explain the sorry tale of Mr & Mrs Adams both retired from their post room jobs with presumably small sums of money. As a married couple, they sought financial advice separately, from different banks and didn’t understand what they were doing. Panorama are right to reveal their respective advisers poor ability to communicate this, but fundamentally they have little or no financial education. They describe that they wanted to live off the interest, yet ended up with an investment, something completely different, a poor show from the Banks concerned. Deposit accounts pay interest not investments. I’m guessing that both of them ended up with a stockmarket investment (something that presumably they had never done before), probably in a single fund (eggs and basket). I can only guess that the timing of their investment meant that a 50% fall was largely the result of the credit crunch and not understanding investments, decided to sell theirs when things were at their worst (buy at bottom, sell at the top). Today most of this loss would have been recovered as the markets have improved, which is one of the many reasons why investing is for the long-term, not 12 months. So the Banks get it in the neck, and yes Barclays and others messed up. In Barclay’s case (the one mentioned in the programme) they were fined for mis-labelling a fund which was much more aggressive than they had understood. Part of the structural problem of large institutions is that if you are up high enough you cannot distinguish between a red Ferrari and a truck full of tomatoes. I regret to say that Panorama has the same problem, failing to look under the bonnet of what on earth is going on.

It is concerning that despite successful complaints (the clients admitting that they didn’t understand what they were doing, the Ombudsman agreeing because the Bank also failed to communicate understanding). Both banks have met the claims and put Mr & Mrs Adams back where they started plus interest. So in a sense, the system worked, although Panorama believe that the couple still lost money. Come again..Panorama then go on to state that Mr & Mrs Adams are still several thousand pounds out of pocket because of the costs incurred using a company to help them with their complaint. Say what? a beautiful unintended side step. Nothing about these “claim companies” – just a sense that the Banks had still left their clients hanging. The Ombudsman can and does allow costs associated with a claim to be included in the settlement, which suggests that these companies have a very separate commercial arrangement with the likes of Mr & Mrs Adams, who of course are vulnerable, being taken in once….why not again. This is really the story worth investigating. We know that many of the Banks provide poor service and poor advice – often because of time (or lack of). We know that there is no such thing as free advice, we know that good financial planning should be within the context of your resources, goals, needs and agreed sensible assumptions about the future… don’t we? What we don’t know is how these companies find the likes of Mr and Mrs Adams, persuade them that they can help any better than say Martin Lewis or Which? And charge “many thousands” for the opportunity to help people that clearly don’t have “many thousands”. We also do not really know why the regulator takes so long to punish the Banks and seems to act mercilessly with the small IFA. Is this perhaps a double standard?

Investment Risk

A major focus of the programme seemed to have revolved around inability to understand investment risk. This is a hot topic for the FSA. Most advisers use a form of risk questionnaire, but the FSA often don’t like many of them, as they are often too narrow and too prescriptive, with both the adviser and client often not really understanding their purpose. In essence this should be a tool to open a conversation about the subject and revisited.

Enter the hapless HSBC adviser who “looks into the eyes of the client (undercover reporter) and knows” that they are low risk – something that Panorama had briefed its reporters to request. OK this is daft, but at least he is attempting to pick up body language and other “soft information” to which we are not privy. When pressed to complete a risk questionnaire, he does so, but the result is that the reporters risk score is rather higher than expected – it is this that then shapes the investment advice (the software) not the requirement of the client or the hunch from the adviser. In practice, both adviser experience and client requirement are ignored in preference for the software result. This would also warrant investigation by a good journalist. I use risk profiling software, the world’s best (FinaMetrica) it is an extensive psychometric bit of kit used by leading advisers. However it is really part of a conversation, not a finite answer. It needs thinking about and reflection. The FSA recently issued a paper outlining their concerns about risk questionnaires – which is well intended, but given that they didn’t really identify what they want to see and that using one is surely better than nothing, was disappointing in its communication.  However, Panorama and the Banks seem to concur that unquestioning obedience to software output is... a better job? the FSA wouldn't agree.

Oh and by the way, can an investment fund be worth nothing? Well yes technically it can, assuming that all of the shares, cash, gilts and property within the fund are worth nothing… which if that is ever the case, you won’t be worrying about your investment, you will almost certainly be worrying about surviving some sort of apocalyptic event.

As for incentives to sell riskier investment funds, this is a non-issue for bank advisers. They get paid the same whether the client buys a high risk fund or a low risk one, the amount they get paid depends on the product (not the fund) and the amount invested. This is not to be confused with investment managers or stockbrokers, who get paid bonuses based upon the returns they achieve – so taking risk to boost returns is in their interests, potentially gambling with your money for their bonus.

It is not clear how much opportunity the two IFAs (called independent financial experts by Panorama) had to state some of the issues that I have raised. Preferring to think the best of them, I can only assume that this was either not understood or simply edited out due to time constraints, which is of course precisely the same problem that the Banks have.

The bizarre twist at the end of the programme is of a lady who decided to manage her own investments. Her £175,000 needed to produce £10,000 a year. She kept a third in cash (£58,327) and so had £116,673 to invest . She is happy to report that her investments are performing well and “cannot see the money running out”. Well, lets think about this shall we….£10,000 a year is 5.71% of the portfolio. So provided that it is achieving this each year (plus inflation) everything is ok. Unfortunately cash is not producing 5.71% at the moment so her investments have to work rather harder. She will have trading costs and also have to pay tax on both the income from the portfolio and capital gains tax if she makes any gains. Hopefully she is using her ISA allowances and various other tax reducing options. This is not a sensible strategy for most people to adopt. If full time, qualified fund managers find it difficult to consistently beat the market doesn’t that tell you something? They are not nitwits.

Managing your own portfolio is for people that are good at managing risk, find it easy to sleep, are not anxious about the markets or the news and have a clear investment strategy. They do not invest emotionally. That excludes the majority of the population. You do not get a feel for the market if you spend a few hours a week on it. You might (in the short-term) make more money if you do it yourself, you can also loose more money if you do it yourself - for which there is ample evidence. Look, I know that many investments have performed badly, but the delusion that trading yourself is cost free is staggeringly stupid. Fortunately Penny Haslam does point out that managing your own portfolio is a step too far for most of us, but why on earth put this confusing piece into the film.

I sincerely hope that Panorama improves its game. There are valid stories to be told and concerns to raise, but this needs to go hand in hand with educating the public. As it is exam season, I'm afraid that this piece from Panorama would not pass. I'm sure that you (Panorama) can do better.

The half-hour film is available on the BBC i-player for a limited time. It is found here.

Public Health Warning: MASsive Elephants in the room

The Money Advice Service is a Government initiative, helping you to feel good about money. This advert has created at bit of a stir amongst financial advisers. A variety of reasons for IFAs to chuckle - or perhaps do a Victor Meldrew.

The Money Advice Service is not free, it is free at point of use. It actually costs £43.7m which is paid for from some of the annual fees that financial advisers pay each year. Unfortunately, the language used is unhelpful.  The provision of financial advice goes hand in hand with the responsibility for it, something that MAS will not be taking. The term "Independent" can only be used in a financial advice context by Independent Financial Advisers. The suggestion that something is free and is therefore better, is surely a fools economy. No advice is really free. Free financial advice has arguably been the most costly of all, when you consider the scandals within the financial services industry over the years. Free advice of any kind is not really free, someone is paying for it somewhere, or they are using the opportunity to persuade you to buy something else...or just something. Any business or charity providing free anything without any notion of cost is delusional and unsustainable.

The proverbial elephant in the room (and several rather helpfully appear in their own advert) is that from 2013 it is going to be harder for most people to get impartial financial planning advice. Advisers have all been told to do more exams and charge fees from 2013... which I won't bore you any further with (since I've been doing this since 1999). Mind you the powers that be are in collective denial about the problem - so nothing new there then. Of course, the MAS is probably a partial solution for some people and I hope it will be a useful educational resource - which is really what the average person needs more help with. Clients of financial planners are generally a pretty savy bunch...like an elite sportsperson but in their own field of expertise. However, being such doesn't make them master of everything - and even the top sports people (and business people) have a coach.. which suggests that the right advice is going to add advantage, which is presumably something that has a value and therefore a price.

Banks - A Matter of Trust? BBC1 8.30pm tonight

The weekend FT has a good article about the plight of some of the UK's leading banks. The numbers are pretty sanguine and make dire reading for anyone holding bank shares - which of course is all of us, either as taxpayers or as investors. Since June 2008 Lloyds has seen nearly 75% of its share price lost. It is the worst financially performing bank this year, in the UK (according to the FT). RBS has fared better in 2011, increasing its value by 5.9% but still 83.4% less than where it was in June 2008.

The key question that is prompted is really whether or not holding bank shares is a good idea. Everyone has a view of course. Importantly, following the credit crunch a review of banking practice is underway, with the basic notion that Banks should be more careful, hold higher reserves and stick to their core functions. The Independent Commission on Banking (ICB) [an unfortunate use of words] is conducting the review and is expected to report and present its findings in September. New global rules about capital are also expected in the Autumn.

I'm not a stockbroker, so I cannot comment on the merit of holding shares in Banks, other than to point out the obvious (what has happened). We need Banks, but we all know that they need to change, yet most of us put up with pretty rubbish service and fairly excessive charges. The Government could do with their (our) money back and so are fairly keen to offload the banks back into the private sector as soon as possible. This is an almost unwinable scenario and I can see it going badly for whatever Government is in charge. Suffice to say, that generally its a given principle not to sell at the bottom, which is presumably where many Bank share prices are near... but who knows!

As if you needed reminding that Banks are somewhat cavalier with your money and personal details, there is a BBC programme this evening at 8:30pm on BBC1. Panorama will be showing "Can You Trust Your Bank?"... I will be watching the programme with interest, but doubt that it will tell us anything that we don't already know or sense. Whatever the outcome, we need Banks, we need them to be better, both as customers and investors. Banks to me are akin to oil tankers, it takes them ages to turn around and few searching questions are asked about their ability to perform. It normally takes a disaster to prompt discussion about reform, but invariably this ebbs away with the next tide...except for those left nursing the consequences. Here is a Channel 4 news item from April 2011

HRH Prince Philip is 90

HRH Prince Philip celebrates his 90th birthday today. He has been a tremendous servant to Britain for all of his adult life. There are very few people that have had such a long career in service, one might say that even at 90, he is not yet retired and remains the longest serving British consort.

At the age of 18 he joined the Royal Navy and like others his age, was projected into World War II intially serving on HMS Ramillies (1940) staying out of the conflict as Greece was at that point still neutral. The invasion of Greece by Italy saw him moved to combat duty on HMS Valiant (1941) and HMS Wallace (1942). He became engaged in July 1947 when 26 and was married on 20th November 1947 at Westminster Abbey. He became a father for the first time in November 1948 when he was 27 and has four children. He has now been married to Her Majesty the Queen for 63 years. This is a highly impressive man. Happy Birthday.

Bank of England Base Rate Held

Today's announcement by the Bank of England that the base rate would be held at 0.50% is no surprise, despite the pressures that are evidently within the system in terms of higher prices for things that most of us have to pay for. Increasing interest rates at this point, whilst the economy is fragile would seem somewhat counter-productive. However, how much longer will the Bank hold out is now very limited. My guess is that original predictions for a rate rise in July seem likely, though I would be happy to be wrong.

If you wanted to know what quantitative easing is all about, the Bank of England have a short and snappy video which is worth a quick view. The sad reality though is that our recovery is based upon printing money and then effectively lending it out, which really just fuels a debt-based economy. True some assets are being purchased with the money, the crunch question being - are they over-priced?

Marilyn's Iconic Dress

Marilyn Monroe would have been 85 last week on 1st June 2011. She died on 5th August 1962, age 36 nearly 49 years ago. There are many famous images of Marilyn, perhaps none more so than those of her in a white dress, standing on a subway grill in New York for the 1955 film "The Seven Year Itch". Long story short - the dress that she wore will soon be at auction on Saturday 18th June. I understand that Debbie Reynolds is the current owner of the dress having bought it for $1.1m back in 1999. It would seem that her plans to open a fashion museum have now changed and she will sell her collection of memorabilia.

It will be interesting to see how much the dress eventually sells for - and almost as a sign of the times and the power of the Internet a group of Marilyn fans have set up a website campaign (save the dress campaign) to raise money to bring the dress to a museum in New York. They are open to donations! It would seem that Marilyn's celebrity power remains in fairly good health all these years later. Perhaps this is a sign of things to come with the advancement of social networking. Marilyn continues to be a source of inspiration for collectors and we shall see precisely how good an investment the dress was for Debbie Reynolds in a couple of weeks time.  Just in case you have not seen the film, here is the original 1955 trailer.

Monthly Market Report June 2011

The latest monthly report is now available to view online. Clients will be aware that we have been rebalancing portfolios over the last few weeks. If you have not yet provided permission for us to do so please send an email. We have had a couple of problems with the new technology that has meant that some people have not yet had the relevant email and webform. If this is you, please get in touch.

FUNDS: Schroder Strategic Bond Fund

I have had a note this morning that Schroders want to rename their fund Strategic Bond Fund to Absolute Return Fund, to reflect the investment objective. Schroder believe that this is an inappropriate name for their fund and are making the changes as a result. Anyone with holdings in the fund will receive a letter to this effect. This will happen automatically on 13 June 2011 - which is next Monday. Not exactly a lot of time to prepare, but there it is.

To my mind this is a significant issue (the correct labelling of funds) and should any of our clients have this holding I will be writing to you within the next few days.

Business Updates 8th June 2011

Last week I outlined a little about the problems that Southern Cross have been having, in the last few days they have announced that they are going to sell off around 200 of their Care Homes (is there a worse time to be selling property than now?). They also seek something like £100m in additional funds to help meet the £230m annual rent bill (ouch!). I’m sure that there are some very good reasons that led to the thinking to take on these commitments, but it does appear that the company has rather over-stretched.

Rather than see HMV go the way of the Dodo, a £220m refinancing deal has been structured with the help of RBS and Lloyds (both now effectively owned by UK plc). HMV recently put Waterstones up for sale and has a growing debt and if the figures are to be believed, fewer and fewer people are buying music and film in the more “traditional” formats (an actual hard copy). As much as we may not wish to see brands disappear that have been with us and perhaps part of our culture for years, there does come a point in business where it is a case of adapt or die. Sales in the UK alone are down 18%. Shares in HMV have fallen nearly 70% in value over the last year to around £10.50. In September their peak price was £67.75 with an all-time high of £282.00 and an all-time low of £7.75. Stockbrokers are possibly wondering if this is a case of “dead cat bounce” and if the little dog has now had his day, much like the gramophone. All of which prompts the question (again).. do Lloyds and RBS know what they are doing?

By way of an example, consider luxury fashion brand Prada who have announced plans to list on the Hong Kong stock exchange for a fashionably cool £1.6bn. This is all part of the huge demand from China for luxury brands as a rapid way onto the world stage. However, a note of caution – whilst it may be highly tempting to develop large markets, the main purpose of high end luxury brands is to convey a sense of exclusivity. Once luxury brands become widely available, the main purpose of the brand is lost, or certainly much reduced. I, of course know little about fashion, which is probably just as well as the latest advert from Prada makes me feel somewhat nauseous. It is probably the camera work.

Suits you sir...

Commodity prices have been all over the place of late, today's FT reports that the price of wool has doubled in recent weeks. This is in part due to increased demand from China, where the new bourgeoisie class continue to desire the same goods that us westerners take for granted. Basic economics would confirm the law of supply and demand, where demand exceeds supply, prices rise. The droughts in Australia, now the worlds largest wool producer has also contributed to the shortage of wool. Wool is now priced at around $14.85 a kilo. The recession has so far meant that the bulk of the cost has been assumed by suppliers, but retailers are now warning that many wool products are expected to increase by around 10%. So the summer sales may be a good opportunity to renew your autumn collection...all rather reminiscent of the Wallace and Gromit movie "A Close Shave".

The Apprentice - Everyone wants...

I'm an occasional viewer of the BBC's "The Apprentice" which has some occasional useful lessons or reminders of what not to do in business (and probably more generally). I have to admit that I'm often put off by the blind arrogance of some of the contestants who suffer from delusions of grandeur...though of course, this being television, one is never entirely sure of how much truth has been lost in the editing. Let's face it, on the same evening the BBC news reported the FIFA presidential election as it's top news story, which, given the array of truly newsworthy stories from the UK or around the world is more than deeply disappointing. One is merely left incredulous at the way the BBC now seem to regard their main purpose (which is readily found within 2 pages of the Royal Charter for the BBC).

Anyway, as I have probably now blown my chances of appearing as yet another TV pundit...returning to the issue of "The Apprentice", last night's show revealed the errors made by both teams, but the bulk of the focus being on the losing team. This team (Logic) attempted to market a "healthy" dog food for every dog.. the classic one size fits all. At the time, they thought that this was a stroke of genius, that they could develop into every cat, every fish... every Tom, Dick and Harry... their own inference was that this was as ingenious as the Easy brand... easyjet, easybus... need I go on. Their blunder was in part due to simply not listening to what the experts were telling them (that one size does not fit all within the dog food market) but ignoring this rather helpful information as well as probably their own life experience... do any of us want to be treated as though we are actually as unimportant as the next unimportant person? Yes there are businesses, successful ones that probably do sell just one thing and hope to sell it to everyone, but this is generally not a successful business model. Even a fast-food burger chain offers choice and plays to different needs/wants.

So it is with financial advice. There are lots of financial advisers out there, though our numbers are expected to reduce by 20% over the next 18 months. Most attempt to be a little different, but essentially we are all selecting from the same range of options (at least the independent advisers are anyway). However, assuming that everyone wants the same thing, or indeed should have the same thing is fundamentally daft. The real uniqueness or for those business/marketing types - the real USP (unique selling point) is actually the relationship with the adviser. Ideally this will be one where the adviser listens and thinks, reflects back, provides options and thoughtful questions. This in my view is the key to not just good financial planning, but great financial planning, one that can only be built upon mutual trust. Dare I say that this is probably what everyone wants in a financial adviser, but few find.

There are some things that can be marketed using the notion of every...for example the Everyman cancer campaign - though of course is aimed at educating men in particular (about testicular and prostate cancer) but would pretty well cover every man, just not everyone. By the way, Everyman are running a Turn Blue campaign on Friday 17th of June - in two weeks time. So in conclusion, much like medical advice to check yourself - check yourself!- something that the contestants of "The Apprentice" seem unable to do, series after series despite the fact that many of them are not fresh faced graduates, but have had some business experience.

Business News Updates 1st June 2011

Care homes and hospitals have been in the news. The BBC's Panorama team produced a shocking undercover report on the care (or lack of) at a a private hospital Winterbourne View owned by Castlebeck who seem to have responded appropriately to the film  which shows an appalling lack of care and depicts what can only be described as shameless abuse. A completely different company Southern Cross Healthcare (the UK's largest care home company) are having a few financial problems of their own. They recently decided to withhold a third of its rent payments. The company has seen revenues decline 3.4% over the last financial year to £464.3m, they are running at a loss of £310.9m which was 13 times greater than the 2010 loss of £22.9m. Debt pretty much doubled from £7.3m to £14.4m. Big owners of Southern Cross shares include Credit Suisse, JO Hambro, Wintrust, Deutsche Bank, UBS, Lloyds Banking Group, Legal and General, Allianz, ING and Standard Life who collectively own nearly 65% of the company.

A few uncomfortable days ahead for some of those groups and certainly a sense of being caught out - which reminds me of those rather bizarre "you've been Tango'd" adverts that appeared some years ago. Britvic investors (who produce Robinsons, Tango and J2O) will be pleased that there is some sparkle in their performance as sales rose 4.7%. However due to the increasing prices of commodities - in particular sugar, profits remained the same at £27.7m. Now that Wimbledon is just a few weeks away, perhaps a good run for Andy Murray at Wimbledon will help boost Robinson's sales and profits. Here's a classic advert to remind you of hot summers. The picture quality is poor... it was a long time ago!

As the cricket season really begins to get started, I am also reminded of my childhood team Somerset and their glory days with Ian Botham, Viv Richards, Joel Garner and Brian Rose. At the end of the summer, part of the preparation for a new term was one childhood experience I loathed (not really sure why) which was getting a new pair of school shoes. Clarks shoes were invariably the choice of mothers (well certainly mine) which seemed robust enough to last a thorough workout in the playground. So news that this West Country shoe manufacturer has finally exceeded profit of £100m for the first time is welcome (I guess... unless you are a parent having to fork out again for school shoes!). Clarks saw pre-tax profits rise by 28% with sales up 9% with a now global brand.