September 2020 - Agile IFA

Hello again readers! I hope you are all well and getting to grips with the second new normal. Over the last few months we have been trying to ‘control the virus’ and I have been trying, probably with more success, to ensure that this temporary blip in the road doesn’t lead to irrational investor behaviour. What I’m failing at is the urge to link these posts to coronavirus. I’ll stop soon I’m sure, but for now, here’s another insight that could help you to use the impending further lock down to take positive steps for your financial future. This week the topic is inflation, the silent killer of your nest egg.

What’s your number?

Everyone should have a number. For everyone it’s different. What number? Your number. The one that represents the amount of money you’re going to need for retirement. The one that let’s you answer ‘yes’ to the question ‘am I going to be OK’? The number is the answer to the sum of your life. It’s based on the lifestyle you want in the future and have become accustomed to after your years of toil. So what if slowly and silently the value of the money it represents was siphoned off? So sneakily and slowly that you never realised, until all of a sudden you hit 70 and find that your three weeks in the Caribbean have turned into a caravan in Cleethorpes?

There are a few predators that can deviously devour your retirement nest egg if they aren’t kept in check. Some of these you can control, such as the charges on your investment portfolio. There are others such as tax, which you can control to a certain extent, by making use of your tax efficient allowances such as ISA’s and pensions. Don’t worry, I intend to delve deep into these topics on future blog posts so sit tight! For today however, I will concentrate on one killer that you unfortunately have absolutely no control over – and that’s inflation.

Headline returns

Every investor hopefully wants to generate real returns after charges and tax and should do everything in their power to keep these as low as possible. This is just a no brainer. But what else? The media spends much of it’s time giving us headlines and never more than over the last few months. I’ll give you two examples of this.

Savings rates

We are always aware of changes in the Bank of England rate and the subsequent change in savings rates. During the first few weeks of recent government support for firms and individuals, some of the best rates around could be found at National Savings. I never thought I would be saying to clients that for funds held in instant cash (and this should only be your emergency funds people!) they should use premium bonds. Alas, the amazing return of 1.4% has now come to an end and has reduced to a mere 1%. It was only kept high because the government needed your money. Now it appears they want it less and last week has seen commentators jump all over this.

The markets

For the investors out there (and even if your only asset is a workplace pension you are an investor) you may have been paying more attention to the level of the stock market. We have recently had daily headlines of ups and downs, sometimes in the region of 9%. You always hear about the downs more than the ups! Of course you shouldn’t have been giving this more than a passing glance. These are temporary falls. If this ever isn’t temporary, capitalism will have failed. We will have much more to worry about.

For the financially informed, the stock market (and by this I mean global businesses) represent the best long term return available. You just have to be well behaved and accept the ups and downs, but I invite you to look around you right now. You are surrounded by everyday products that represent your support for global businesses. Do you plan to stop buying things? Do you think anyone else does? Why wouldn’t you want your share in the profit of all of our spending, magically compounded over time? I’ll leave that thought with you.

Inflation should be much more of a worry for you now, but we don’t tend to spend a lot of time talking about inflation rates. BBC and Sky news don’t show us a lovely inflation graph every day, but they should. Why don’t they? Because it’s not a headline, it’s just there every day, slowly and sneakily stealing the buying power from your wealth.

Inflation isn’t like it used to be

The 1970s to the 1990s were a time of high inflation, but by and large this has been off the table as an issue for investors since then. Just have a think back to this time though. In 1990 the rate of inflation was a whopping 9.46%, but if you were savvy you could get interest on a bank account of 14%. That is a real return. From cash. Who would believe that now! Let’s take a look at today. We have an RPI inflation rate of 1.5% and the most you can get from a bank account (if you are lucky) is 1% and that’s for premium bonds or locking your money away for a lengthy amount of time. The majority of cash accounts now pay next to nothing.

I refer to RPI specifically, because this is the rate of inflation more related to the things we spend on a day to day basis. You may also hear the term CPI also used. Why is this important? CPI usually measures lower, but RPI is your main concern! Confused? Check out this handy ONS explainer.

Why you should be concerned

A lot of savers these days are holding large cash balances in the hope of riding out current market volatility. The problem is, with the return on cash hovering around 0% in nominal terms and -1.5% in real terms, this puts investors in a pretty deep hole. If you believe the inflation predictions this will only get worse.

The reality is unless you are getting over 1.5% net (current rate of RPI) then you are guaranteed to lose money. So, if you’ve got your maximum £50K in premium bonds this means a real loss per year from now of at least £250. This may not seem so bad to you. But if your remaining 50K is paying no interest at all, in total you are losing £750 a year in real terms. £100K in a normal savings account paying nothing? You’ve lost £1500.

Inflation is by far the biggest investment risk over your lifetime

Take a step back and say to yourself. “I put my money in the safest place I thought I could and I’ve lost a grand.”

Does this sound mad? Are you hearing yourself right? Yes, you damn well are.

This is money that would and should have been spent on you. It was part of ‘your number’ and was for whatever makes you happy. It’s been stolen. It hasn’t been taken away from your balance on paper, but ‘your number’, that amount you need for a great life, just went up. Same difference. This is the wrong kind of compounding, the reverse of what you have become accustomed to.

The answer

So, what can you do about it? This is very simple in principle. You can have a proper financial plan. A plan which carefully considers your current and future lifestyle. One with a carefully selected set of investments designed to provide you with access to capital and income exactly when you need it. A plan which includes a long term investment strategy that can allow your nest egg to create real returns. It should pin down and focus on what you want out of life and make certain that you’ll have ‘your number’.

It doesn’t matter where you are in your financial life or where your capital is invested at present. A plan is a mandatory, crucial and responsible thing to do if you want to ensure the continued prosperity of your family isn’t pilfered by inflation. If you’re thinking about getting something together you can find some things to think about in our retirement blog post.

The best time to make your plan was 20 years ago. The second best time is now.

Thanks for reading.

Until next week…

Chris @ Agile

I’ve been trying to think of things you might associate with the number six. Six eggs. Six pack – ha I wish! Six geese a laying. Six of one and half a dozen of the other. Some readers, I’m sure, will remember spending a sixpence in their younger years, otherwise known as a ‘tanner’. Given that’s the number of the now, we should all try and remember it somehow.

I wouldn’t want any readers to inadvertently breach the new rule of six and bag a £100 fine. That would be a terrible move for the health of your finances and the nation. Even if you think that’s a price worth paying to visit grandma with the kids, or the local rave if that’s your thing, I wouldn’t recommend it. So, in order to keep the number firmly on your mind, here are six things to (potentially) avoid if you want to maintain healthy finances for a lifetime…

1. Slacking on saving

Most people tell me that they have managed to save more recently, perhaps more than ever. We obviously haven’t had as much to spend our money on! Holidays are a risk, there was no point in new summer clothes and getting out and about to shop or socialise has been much more of a chore. But as the new normal starts to materialise, we are all going to be compelled to loosen the purse strings a little.

It doesn’t matter how rich you are, your fear of missing out on the best phone, best car, best clothes and other important (?) luxuries can have a serious affect on financial planning for the future. You may have heard the wise Chinese proverb that says “The best time to plant a tree was 20 years ago. The second-best time is now.” Well that pretty much applies to saving too. While the best time to start saving may have been 20 years ago, don’t panic. There’s plenty of time to control the FOMO and direct some of your cash into a long term savings plan.

I’m all for having a great lifestyle now, but as humans we are compelled to black out the future. Thinking of today and putting off until tomorrow creates one thing – uncertainty. It’s my job to remove it. So read on…

2. Prioritising other people

Only you are responsible for your financial future. That’s it. Fact. There are fewer final salary pension schemes these days. The state pension gets further into the future by the year, and if you haven’t already, I advise you to check when you will get yours here. To top it all off, your company pension usually needs to be invested with care and diligence in order for it to provide you with the retirement you deserve. That’s because it’s got risk attached to it and guess what? The risk is yours.

Why then do people often set priorities that are the total opposite of good financial planning? I often see people paying tens of thousands for children’s education, weddings, house deposits, cars and so on. Are you creating a future problem?! Yes, if you are forced to move in with those kids to survive in later life or if your holidays move from Barbados to Blackpool!

I’m not saying that you shouldn’t help out the kids, far from it, but the ‘bank of mum and dad’ needs a prudent manager. One that can put the outlay into the context of your wider financial planning, make sure it’s affordable and won’t affect your future. There are ways to fund education, such as student loans. There are government incentives to fund housing, such as help to buy. Then there are of course the more traditional ways to fund this stuff like good old fashioned responsible saving… theirs I mean. These options can all be exhausted before your nest egg is.

3. Declining to defend

“It will never happen to me.” Well maybe it won’t, but as we are all too aware these days, it can and will. No-one knows how or when. That’s why you need to consider two key things that can soften the blow when disaster strikes.

Firstly, you need an emergency fund. A few months expenditure in a relatively accessible place that can help you deal with a disaster. If you lose your job this will give you some breathing space. If your boiler packs in, you need the money to sort it.

Secondly, you should consider insurance to cover anything that can’t be paid for with your emergency funds. If you will eat into your retirement savings to fund a disaster, such as loss of income or in the worst case due to a death in the family, then it should be covered with insurance. Why? Because if it isn’t covered and the worst happens your retirement could end up looking much less rosy.

Yes you will pay a monthly premium and it’s a cost. Put that cost into the bigger picture and in the majority of cases, if something does go wrong, it will be a much lower cost. You don’t want to affect your retirement through spending your nest egg. You shouldn’t be forced to damage your health further by the need to work to pay the mortgage. Cover it.

4. Selling not staying

What is a ‘paper loss’? Let me explain. Let’s say you buy a house for £300K and then 6 months later it’s valued at £250K. Have you lost £50K? No. You still have the house and the loss is on paper. You’ve only made a loss if you sell the house!

This also applies to investments. Often when investments fall in value people panic, their gut instinct tells them to sell and without someone (like me) to steady their nerves their paper loss turns into a real one. What’s more, they typically then try to time the markets, miss out on gains and are left in a much worse position. Do this a few times in your investing life and your financial plan will catch more than a cold! You can read more in my post on timing the investments markets here.

The main thing to remember is that you should only be selling investments to create cash that you will absolutely need in the short term. Otherwise sit tight and do absolutely nothing!

5. Living too much life

We all become accustomed to a lifestyle. It’s inevitable that as we hopefully increase our income we will use some of that to enjoy the finer things in life. However, once you’ve got this lifestyle you are going to want it to continue, for life.

The problem is that one day you are going to want (or need) to slow down a bit. Less work means a loss in income and that needs to be replaced. That’s going to have to come from savings or pensions, both of which need to be contributed to now.

Some of you may have heard of a famous investor, the one and only Mr Warren Buffet. His quotes get banded about quite often but always aid good financial planning! I make no apologies for highlighting the following two…

“Do not save what is left after spending; instead spend what is left after saving.”

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.”

Thanks Warren. Enough said.

6. Passing on the professionals

This can be a big problem. There’s a reason why we use professionals to do jobs we think we might be able to do ourselves. My oven recently decided to start indiscriminately burning everything to a crisp – so I bought a new one. It was lockdown, it could not be fitted by the well known appliance firm for health reasons and to top it all off they would only leave it at the bottom of the drive. “OK Chris” I said to myself, with the oven up the drive and steps, two coffees down and much head scratching later, “you can do this.”

I enthusiastically began work removing the old oven. Three hours and many expletives later I had finished the whole task. Along the way there was an argument with my other half re positioning, the unnecessary removing and then refitting of the cabinet housing and the dislodging of the gas pipe to the hob. After the final screw had been turned and the oven was proudly in place, I found the protective plate, to be fitted to the electrics at the back, right there on the kitchen side. This was as well as all the other minor issues, you know the ones, “where is that screw?”. You get my point. I’m a great financial planner but I’m terrible at fitting ovens. This would have been a safer and shorter job with a pro.

A less stressful alternative…

Many people go it alone when it comes to financial planning, but often they don’t know what they don’t know. As a result, they can’t fix what they don’t see. Like the oven debacle, it could cause much stress, mistakes and in the case of financial planning , retirement doom. Luckily I could hear and smell the gas. You can’t hear and smell lost investment returns.

In client conversations I often uncover blind spots in estate planning, tax and investment strategies that were hiding in plain view. That’s as well as acting as a great sounding board for all of the financial decisions that get thrown at me, whilst always making very clear the effects of these on the longer term plan.

A good financial planner can serve as a guide to help you see your blind spots and help you avoid sabotaging your financial future. It’s about helping you make the right decisions and avoid costly mistakes. If you’re thinking that’s a great idea, I know a good one.

Thanks for reading.

Until next time…

Chris @ Agile

A good financial planner could be your most valuable asset. OK, I would say that I know, but it’s true – I promise you! I often take on new clients who don’t understand what financial planning involves or the benefit it can bring. It’s very simple – financial certainty.

This post should help you understand the benefit of great financial planning. I will look at the different types of adviser and some pro’s and cons. You should find this useful whether you need help for the first time, or if you want to know yours is up to scratch.

Firstly, I think it would be best to manage expectations and dispel some myths about what the best financial planners do.

What they will do…

Understand you, your family and the life you want.
Work with you to put a financial plan in place to achieve it.
Simplify your financial affairs and make them easy to understand.
Hold your feet to the fire when it comes to the plan and check progress regularly.
Filter all of the financial ‘noise’ and help you focus on what’s important.
Tell you how it is rather than what you want to hear.
Make your finances as tax efficient as possible.
Be agile and work with you to change the plan when needed.
Be a sounding board for any of your future financial decisions.
Ultimately give you peace of mind and increase your long term prosperity.
Oh… and…ensure you have all the right financial products at the right time.

What they should never do…

Recommend products without understanding you and your financial plan.
Time the investment markets.
Recommend the latest investment craze or hot pick.
Allow you to sell investments in a declining market – unless absolutely necessary.
Claim to be able to provide high returns with low risk.
Find reasons to sell you a product.
Tell you they know which way the markets are going to go.
Recommend you do anything that they would not do themselves.

So, if you’re thinking “crikey what they do sounds good” read to the end. If not, just bear in mind the next bit…

The do it yourself option

Tiny little rant alert. Please hear me out for a few seconds…

Unless you know your stuff in all things financial or are prepared for the probability of having less money, please don’t do this!

Over the years I’ve seen numerous DIY investment plans go miserably wrong – it’s seriously counterproductive to try and save money here. Those that I have seen go well have mainly been due to a certain amount of luck and have been singular events in a wider plan that doesn’t usually exist.

If however you remain fastidiously DIY, just please remember three things…

You don’t know what you don’t know.
Investment craze’s and hot picks end in disaster. Don’t put all your money in them.
If it seems too good to be true it probably is!

I know that might all seem like a no-brainer, but you would not believe the number of normally sensible people who turn into the Mad Hatter when it comes to financial planning. It’s complex. Don’t use google to plan your retirement – you could end up old and broke.

OK, mini rant over! And breathe…

Seeking out some good financial planning advice

Still reading? Great! So, how do you find the right adviser? Google can now be your friend! Well, maybe. A local search will undoubtedly pull up hundreds of options including local firms and other directories with hundreds more advisers. Too much choice!

The problem is there are vast differences in advice offerings and quality. As a result, I regularly take on new clients who have had an experience which was less than ideal or quite frankly rubbish. This often comes at significant cost in time and stress.

Another quick note – not all advisers do everything, so make sure you have found one who can help with your initial problem (mortgage, retirement, inheritance etc) and remember the old saying ‘jack of all trades master of none’.

Questions to ask

Now I obviously think that, if we specialise in your area, Agile would be the best choice. I am unbelievably biased of course – and quite rightly so! However, everyone is different and you should always, always make an informed decision on your planner. It’s got to be someone you are comfortable with because a poor relationship won’t be good for either party. It’s also easy to get on like a house on fire with an adviser that has a terrible offering and ultimately you’ll probably be worse off financially.

Five words to remember here – Independent, Qualified, Transparent, Genuine. Let me explain using a few questions you should ask about an adviser…

Are they independent or restricted?

An ‘independent’ adviser must make a search from across the market to make sure you have suitable financial solutions for your needs. They are therefore on your side. They can focus on your life, your plan and getting the best outcomes for you. Importantly, it means policies can usually be changed in future as your life does, without the need to move firm. Yes!

Other advisers are ‘restricted’ and in the worst case you may have someone that only recommends their own products or a very short selection. Whilst it isn’t always the case, the adviser can be compelled to recommend their product knowing full well that you could do better elsewhere. Undoubtedly they will tell you theirs is the best to ever grace this earth and that this will be true forever. Why? Because otherwise they won’t get paid. No!

I reckon you’re getting the gist here. When you add up the cost (more on this later) independent financial planning isn’t more expensive than restricted. There are plenty of independent firms of all sizes to choose from if that’s a concern for you. So why wouldn’t you use them? It’s better advice and better value for money. Think of it like this – would you ever want to see a doctor (no matter how good they might be) knowing they could only prescribe a limited range of medicine? In my view there is absolutely no need to use a restricted adviser – but don’t just take my word for it. You can find the views of BBC 4’s money man Paul Lewis here, but ask most financial commentators and they will tell you the same thing.

A firms website and introductory documents should make their independence or the detail of any restriction clear.

Do they hold higher level qualifications? Are they Chartered or Certified?

I will start by saying this isn’t the be all and end all. I know many very experienced planners without a raft of letters after their name. But, just like many other professions, higher qualifications would in most cases indicate quality advice and a good level of knowledge and experience.

The minimum standard for financial advisers in the UK is DipPFS (or similar) which is a level 4 diploma. More qualified advisers will hold titles such as APFS or FPFS which are level 6 and equivalent to a degree.

A Chartered or Certified financial planner has shown a commitment to getting to level 6 and that they have experience. The status is awarded by their professional body and you can be sure this means the adviser has been put through their paces. It can help you to differentiate those who are passionate about giving the right advice from those pesky product pushers.

More information on adviser qualifications can be found here and you would usually find all this info displayed on a firms website or literature. The good news is that in lots of cases this won’t increase advice costs, but ask my next questions to be sure…

What are the costs for initial financial planning?

Good financial planning advice costs money and is well worth it for those who need it. It’s sometimes a pain to compare costs as there is a big difference between advisers. Things are much more transparent than they used to be, although unfortunately some still fall way below the mark.

For initial advice you could pay a fixed fee, hourly rate, percentage of assets advised upon or a mixture of these. Your adviser should always highlight costs in ‘pounds and pence’ so you can compare. Unfortunately, some of the more expensive advisers are the more restricted and least transparent. It’s quite frankly scandalous. You could be paying £1000’s more for less – be very careful and always get a full picture of the cost of advice and implementation.

To confuse things more, some firms only charge if you go ahead. This might be explained to you as a great thing but it certainly isn’t. This is known as ‘contingent charging’ and again, its bad. The adviser is compelled to recommend a solution that means you need to change things in order to get paid. Be wary and avoid if possible! There are plenty of firms that charge fairly and provide better advice.

What are the costs for ongoing financial planning?

Understanding what you will be charged on an ongoing basis is very important. Higher ongoing charges mean fewer pounds in your pocket in the long run. Just half a percent difference in total ongoing costs per year would reduce an average pension pot by tens of thousands over a working life. This would be compounded much more with a poor investment.

What you need to understand is the total ongoing expense of your solution. This is important, because some firms quoting lower ongoing advice fees will actually be charging higher investment fees on their own products. The total ongoing expense should include the ongoing advice, product, fund manager and any extra expenses or transaction costs in the fund. You should receive this in both percentage and ‘pounds and pence’ terms for comparison on an illustration.

My advice – get a piece of paper and table all of the costs. Scrutinise it all. If you are concerned about your current situation we offer a free second opinion service to compare your plans on an independent basis.

Can I work with this adviser now and in the long term?

Most advisers will offer a free initial meeting and I advise you to take it! Make sure you will get along, whilst asking as many questions as possible. First impressions count and your adviser will hopefully be with you for life. Most initial meetings will give you lots of useful information and you’ll leave with a much better understanding of what’s on offer and the costs.

It’s worth speaking to two or three firms to get a feel for how they work, considering all of the questions above. You’ll then be able to choose which one is a fit for you. Why am I telling you to speak to other advisers? Because it’s about you not us! I want our clients to work with us because they know we are a good fit for them and we get along.

It’s also important to understand the type of firm you are using and where the adviser is in their career. Many firms see clients as a commodity and their business structure relies on advisers selling clients to each other internally. They probably also have high sales targets and a high adviser turnover to go with it. No! Both of these things are bad and mean you get passed from pillar to post. I have more than a few clients with me now who have experienced this with previous firms.

In Summary

For a good adviser, and there are many, the focus is the client and their plan. They will always be transparent and will always give value for what they charge. That means being independent and making sure they know their stuff. Choose carefully.

As always, you can contact us for a chat about any of the above, whether you want to use Agile or feel like another firm or specialism would be right for you. We will always be happy to point you in the right direction.

Thanks for reading, I hope this was helpful and good luck with planning your financial future!

Until next time…

Chris @ Agile