New Year’s resolutions often involve making promises to ourselves we can never keep. But instead of tilting at windmills, we can often generate better results by merely resolving to be less dumb in certain areas.

And money is a good place to start!

One human tendency is to judge the effectiveness of our retirement savings strategies by looking at performances on one, two or three-year horizons. We do this because we are wired to be more sensitive to short-term losses than to long-term gains.

This is why much of the financial services industry and media encourage a short-term focus for an audience with a long-term horizon. This is akin to looking through the wrong end of a telescope. The thing you should be focusing on looks even further away.

The result of this short-term mindset is that investors can end up following the herd and seeking safety when opportunities are plentiful and seeking risk when opportunities are few. The less dumb thing is maintain a level of discipline amid the noise.

Another human tendency, and one allied to our in-built loss aversion, is to be suckers for the supposedly ‘free’ or discounted offer. Like Homer Simpson, a zero price tag makes us fall for pitches that sell us stuff that is neither necessary nor good for us.

In the world of investment, it’s this tendency that makes people gravitate to strategies that headline high returns without mentioning the risk or that conveniently bury fees, commissions and other costs. Regret lies on the other side of those decisions.

A less dumb thing is to focus on return and risk. They’re related. Focusing exclusively on return can lead to rude awakenings when risk shows up. Focusing exclusively on risk can lead to disappointment when returns are delivered.

A third tendency among humans is to succumb to what behavioural scientists call “hindsight bias”. Essentially, this is our habit of viewing events as more predictable than they really were. Call it the “I saw it coming” syndrome.

There is a fair bit of this around at the moment, with plenty of “experts” saying the sovereign risk crisis was completely predictable. This is strange, because the overwhelming consensus among institutional investors a year ago was that fixed income would underperform in 2011.

The crisis may have been predictable, but the market reaction wasn’t.

(In 2011 the FTSE All-Share fell by 6.7% [3% when you add in dividend payments], whilst The FTSE 10-15 year gilt index climbed by 15.1% in 2011 while the FTSE Over 15 years Index-linked index rose by 24.6%. It was a similar story around the world, with the obvious exception of the Eurozone problem countries. For example, the US 10 year+ Treasury bonds returned an impressive 26.5%).

The consequence of hindsight bias for investors is they tend to be forever rewriting history and forever seeking to interpret performance based on what they know now rather than what they knew a year or more before.

Key Considerations

A less dumb thing is to accept there will always be a level of uncertainty. The future is unknowable. And all we can do as investors is to ensure the risks we take are related to an expected return, that we diversify around those risks as much as possible and that we exercise a level of discipline amid the noise.

It’s a way of embracing your imperfection and it’s a New Year’s resolution you have a chance of sticking to.

Action Point

So what is an ordinary investor supposed to do?

The first lesson might be that forecasting is hard, particularly about the future! You can do all the analysis you want, but events have a way of messing with your assumptions.

The second lesson is you don’t really need forecasts to succeed as an investor. Yes, equity markets were rocky again this past year, but a properly diversified portfolio would hopefully have cushioned some of the equity losses.

Staying diversified both across and within asset classes provides protection in down times and ensures you are still positioned to reap returns when riskier assets come back into demand.

The third lesson is that the past has gone. The news may be gloomy, but that information is in the price.

When risk appetites are low, the price of safety is higher than at other times. But the expected reward for risk is higher. Conversely, when risk appetites are high, the expected rewards are lower.

It’s human to feel anxious about bad news because we fear loss more than we like gains. But in this case, the loss isn’t real unless you realise it, so it makes sense to stay with the asset allocation your financial planner/adviser has tailored for you.

The final lesson is that nothing lasts forever. In fact, of all the forecasts ever made, the only one really worth counting on is that things change. What’s more they often change in ways we least expect.

Q. You recently covered the impact of investment charges that all investors face when they put their money into funds within personal pensions and investment based Individual Savings Accounts.

What are these costs and where can I find out more about them for the funds that I invest in?

A. Investment costs/charges is certainly a ‘hot topic’! In fact, this very topic was discussed in detail during a recent episode of the BBC’s MoneyBox.

The first thing to say of course, is that the costs apply regardless of how you hold the funds that you invest in, i.e. you pay costs that are held in an ISA as well as in a Unit Trust held outside of an ISA.

On a typical fund, the costs are:

• Annual Management Charge, paid to the fund management company, can range between 0.1% to 2% pa
• Total Expenses Ratio, includes legal fees, auditor fees and other operational expenses of the fund, can typically range between 0.1 to 0.4% pa
• Portfolio Turnover Rate, which is a measure of how frequently assets within a fund are bought and sold by the managers, the range can vary – the average costs added to a fund is 1.3% pa (Source: Financial Services Authority Occasional Paper 6).

The first two should be relatively easy to find. You will usually find the information on a fund fact sheet or you can ask the fund manager directly.

The Portfolio Turnover Rate can be a little harder to track down (and they are not published for pension funds). You can ask the fund manager where you can find it – it will usually be available in what is known as the ‘Simplified Prospectus’.

Unfortunately, the Simplified Prospectus is in the process of being phased out and with it’s successor, the Key Investor Information Document (will be introduced by July 2012 for all funds), fund management companies will NOT be required to disclose the Portfolio Turnover Rate.

We believe this is a step backwards as it will allow fund management companies to be less transparent about the true running costs of their funds.

Of course, it could be argued that charges are less important if the fund managers concerned are providing their investors with the sort of returns that make the charges an afterthought.

Unfortunately, many funds do not even beat the benchmark (which could be the market index) that they are compared against on a consistent basis.

This has been covered many times by various journalists, such as Paul Farrow who is personal finance editor at the Telegraph Media Group and discussed this in 2010.

Q. With future uncertainty about the economic outlook, what would you say is one key factor when investing disposable income and any capital I have available?

A. As you might expect, there are a number of factors that you should consider.

If I had to pick one, it’s investment charges.

We’ve written about this topic many times during the last few years (see below) and the message remains the same.

Reduce costs to a minimum so that your invested capital does not have to work as hard.

It’s a logical approach if you think about it.

All other factors being equal, for every 1% pa of charges/costs applied to your invested ‘pot’, your returns must cover this 1% to stand still.

A number of funds have high charges, which can be avoided if you do your homework.

Our recommendation is to invest in funds that aim to provide you with the return of the stock market, rather than trying to beat the returns of the market.

These funds tend to have lower charges than those that employ an ‘active management’ approach.  

Of course, there are funds that will promise this (and some do beat the market), however the difficulty is predicting which funds will beat the market in future years (crystal ball time!).

A recent article appeared on the Daily Telegraph’s website on this very subject which makes interesting reading.

Some past articles that we’ve written are:

Investment Costs – What Is The Real Deal?

Investment Costs – Are They Important When I Invest?

As you’ll no doubt have noticed, it has been quite a few weeks in the investment markets!

They have been very volatile to say the least and have provided us with a reminder of why we have developed our investment philosphy as we have.

This philosophy has come from much experience and studying the vast amount of academic evidence that has built up over many many years. This has resulted in some absolutely fundamental rules which we follow.

We covered this in some detail in 2008 when markets fell markedly, see the link to an article by Dennis Hall, a fellow Financial Planner, at the end.

Let’s look at one of the areas covered by Dennis (point 5) – the importance of diversification:

“Not everything will fall at the same time; conversely not everything will rise at the same time. Property and shares are two asset classes that have taken large falls over the past year. 

On the other hand cash and government bonds, which were perceived as dull, are proving to be the better performing assets in an investment portfolio”.

Portfolios need a spread of different asset types to help weather the downturns.

Bob Rall, a Wealth Manager in the USA, explains further:

“The purpose of diversification is to reduce risk in the portfolio by investing in a variety of asset classes.  We want asset classes that do not move up and down in tandem.

The technical term for this is correlation. 

We want to build our portfolio with asset classes that are not highly correlated.  A good example can be seen in the broad asset classes of stocks and bonds.  As we have seen over the years, and especially this summer, stocks can be highly volatile, moving up and down in large amounts. 

We add bonds to the portfolio because bonds tend to go up when stocks go down and vice versa, and usually to a lot lesser degree.  So, they help to smooth out the ride, or lower the risk, of the overall portfolio.”

So we thought that this would be an excellent time to take a look at three examples of our risk assessed portfolios that form the bedrock of our investment proposition.

Have they performed the way they are designed to perform?

Taking the period from 1st May to 1st September 2011, approximate figures are, excluding fees:

FTSE All Share (100% Equities) – minus 12.5%

RW Balanced Portfolio (60%) – minus 6%

RW Prudent Portfolio (40%) – minus 2.5%

RW cautious Portfolio (20%) – plus 1.5%

Note: Fees are excluded to show a true comparison with the FTSE All Share which does not include fees.

So in this particularly volatile period, when equity values were falling markedly, the bonds element of the portfolios did their job.

We have many older clients who are interested only in wealth preservation, not wealth creation, and so find this approach vital for their peace of mind.

Having said this, it is a good time to reiterate that risk and return in the longer term are related, and that in the past equities, after their various’wobbly periods’, have gone on to outperform bonds.

So it is very important for a portfolio to have a mixture of asset classes -bonds and equities as well as, say, property.  However, the higher the equity element the higher the expected return, but also the higher the volatility. 

When meeting new clients in particular, we cover all these areas, including how fear and greed when investing can get in the way of a successful investment experience.

A final point here is that when we discuss this subject with clients, they mainly invest because they want to:

• Gain a return over cash over time
• Achieve their goals within a given time frame

Looking at the latter, this is the absolutely crucial point. It’s all about only taking the risks you need to, in order to achieve your goals.

Key Considerations

Why take more risks with your investments than you need to?

Ensure that your investments are consistent with your goals in life to give you the best chance of achieving them.

Action Point

Really examine your investments whether they are pensions, ISAs or unit trusts.

What is the balance between equities, property and bonds?

Is this the right level of risk for you?

Have you been worried about your investments lately? 

If you would like to find out how to get a free ‘X-ray’ of your investments – email us quoting ‘FTips X-ray’.

And here’s the link to Dennis’s article.

Q. In light of the recent falls in Stock markets around the world, should I consider selling my equity (share) holdings and buying safer assets?

A. This is a great question and we totally understand why you are asking it at this volatile time for world stock markets.

As you’ll know, there’s a great deal of psychology involved with investing.

When values fall, sometimes the feeling can be to sell to avoid any future potential losses.

The danger of course is that you can end up selling when asset prices have fallen, therefore crystallising losses – in effect the opposite of rebalancing, which aims to sell when prices have risen and purchase more of the assets that have fallen in value.

It’s also important to view your portfolio as a whole over the longer term. We know that the bond funds you hold are doing exactly what we’d expect in times of volatile equity markets. They are the insurance policy to fall back on.

For every c4% fall in equity values, the bond funds only have to provide c+1% return to compensate (as they are a near 4:1 ratio). When it comes to the UK equity markets, we’re back at the same level as 12 months ago.

When investors do sell and sit on the sidelines, they are likely to re enter equity markets when prices have risen again and they have missed some of the best days.

This is why our investment philosophy and discipline is for clients to remain invested throughout the periods of volatility.

Lastly, you should not view your investments as separate from your overall financial goals. After all, you are expecting to utilise some of your invested capital to help fund your retirement so you should ensure that you are only taking risks that you are comfortable with as you approach retirement.

The Junior ISA will be launched on November 1, 2011 and the government estimates that 6m children will become eligible to contribute, with a further 800,000 a year after that.

As you’re probably aware, the child trust fund (CTF) was closed to children born after January 2, 2011. The Junior ISA is a replacement for the CTF.

Let’s look at some of the ‘key features’ of the Junior ISA, as well as some of the pros and cons.

Key Features

• Only UK resident children who do not have a CTF will be eligible (born prior to September 2002 and after 2 January 2011)
• A Junior ISA can be opened by anyone with ‘parental responsibility’
• Any person or organisation will be able to contribute to any child’s Junior ISA
• A child aged over 16 can open a Junior ISA themselves
• This will be in addition to the adult cash ISA that they are permitted to open at age 16 (with a limit of £5,340)
• £3,600 can be contributed every year, which will be increased in line with the consumer prices index measure of inflation each year from 5 April 2013
• It will be possible to hold one cash pot and one stocks and shares account, therefore holding the money with a maximum of 2 providers (unlike an adult ISA where you can take out a new ISA with a different provider each year) subject to the maximum annual allowance of £3,600 combined
• It will be possible to transfer between providers
• The contribution limit applies to both types of account combined
• All income and capital gains will be tax free
• Once the child reaches 18, the Junior ISA will revert to being a normal adult ISA

Other Pros

• The parental settlement income tax anti-avoidance rule will not apply. This means that if income in a tax year derived from the subscriptions of a parent exceeds £100 gross, it will not be assessed to tax on that parent even though the child is a minor who is unmarried and not in a civil partnership

Cons

• no transfer from a CTF will be possible
• those with a CTF will not qualify for a Junior ISA
• the Junior ISA will be unsuitable for funding towards school fees as the money cannot be accessed until 18
• there will be no voucher from the state as was the case with the CTF
• the child will be able to access all the accrued funds at age 18 as control of the money passes to them

It’s also worth pointing out that if you do hold a CTF, the annual allowance will be increased from £1,200 to £3,600 from 1 November, 2011 to match the Junior ISA (as well as being index-linked from 2013).

It has been predicted that if a junior ISA were commenced at birth and the full investment permitted were made each year then at an assumed rate of growth of 5% and the maximum contribution adjusted upwards by 5% pa a fund of around £100,000 could result at age 18.

With the burgeoning costs of higher education all of this is likely to be needed to fund a full time degree course (assuming of course that the child wants to spend the money in this manner!).

Key Considerations

Junior ISAs will be a credible and valuable option for parents who want to save and invest towards their childrens’ futures.

At the same time, there are a number of other options available, which we covered not too long ago:

Part 1

Part 2

Action Point

When the Junior ISA launches, make sure you take the time to do the research necessary. If you’ll be opting for the stocks and shares option, you will have a wide choice of funds to choose from.

You should think carefully about how much risk you want to take, although you will be able to alter this during the life of the account.

Q. Over the years I have used various financial advisers. A lot of the time they call me with a new idea on investing that involves putting money into an ’exciting new product’.

I have had my fingers burned on this sort of thing before, but still find the ideas interesting as they sound so good when an adviser presents them.

You seem to believe in avoiding the exotic, but do you ever look at these types of new products?

A. ‘Pushing the new thing’ has recently been discussed in one of the financial publications we read called Money Marketing.

Here, a fellow planner was quoted as saying:

“Recently, we have relished our boring approach to investment advice. By keeping things simple, we have been able to avoid the exciting funds which have failed so spectacularly. It seems that the desire to impress clients is the root cause of bad investment advice.”

We couldn’t put it better than that!

Keeping it simple with proven risk assessed passive portfolios at a low cost has been our approach for many years, and has stood up well in good and bad times.

Yes we do look at all types of investments, and are ourselves approached by fund managers with new ideas.

But why take more risk than you need to? It simply does not make sense to us, and we aim to get our clients from where they are to where they want to be with the minimum risk.

National Savings & Investments (NS&I) have announced that they are once again offering savings certificates.

These were withdrawn in July 2010 because they were attracting too much money. Now that NS&I are in a new financial year, with a new fund raising target of £2bn, they have scope to reopen their doors to investors.

However, NS&I has learned some lessons and is being cautious!

For a start, only five year certificates, both fixed rate and index-linked, are available. The maximum investment in each (other than for reinvestment of existing certificates) is £15,000.

A major attraction is that the returns are tax free, which is especially appetising for higher and additional rate taxpayers.

The terms for the index-linked certificates have worsened – it now offers RPI + 0.5% rather than RPI + 1%, whilst the fixed rate certificate is unchanged.

The year by year rates are:

Year         97th Fixed Rate Issue        48th Index-linked Issue                    

            During Year | Cumulative     During Year | Cumulative

1              1.85%        1.850%        RPI+ 0.25%   RPI + 0.250%

2              1.95%        3.836%        RPI+ 0.35%   RPI+ 0.601%

3              2.15%        6.069%        RPI+ 0.40%   RPI+ 1.003%

4              2.45%        8.667%        RPI+ 0.65%   RPI+ 1.166%

5              2.86%       11.775%       RPI+ 0.86%   RPI+ 2.534%

Overall            2.25% pa                       RPI + 0.5% pa

The crossover RPI inflation rate between the fixed and index-linked certificates is 1.75% (ie 2.25% – 0.5%).

One of the most interesting aspects is the option of making an investment for one year and then deciding whether to roll forward or move elsewhere.

You can withdraw money after one year and receive the inflation uplift plus the applicable rate of interest (see table) for each month that you are invested. If you withdraw in the first year you will lose the inflation uplift.

For example, at present the best one year fixed deposit rates are around 3.5% gross. For a basic rate taxpayer, that means if the RPI increase for the next year is more than 2.55%, the index-linked certificates offer a better return.

For higher rate and additional rate taxpayers the corresponding figures are just 1.85% and 1.50%. For an investment made in June, the base RPI figure would be that of April 2011.

The chances of inflation reaching these break-even levels in the next year are very good. The latest Bank of England Quarterly Report has a central projection that Consumer Prices inflation will be 3% at the end of the first quarter of 2012.

And The Centre for Economics and Business Research (CEBR) forecasts RPI will rise to 6% by the end of 2011 and then fall to 4% in 2012. The following 3 years will be 3.8%, 4.4%, and 4.4%.

By then interest rates are also likely to have risen, which will feed through to the RPI as this includes mortgage costs.

Key Considerations

For anyone looking for what could be a short-term home for cash, the new issue index-linked certificates are worth considering, even if they are not as good as last year’s offering.

Action Point

If you have money held on deposit and do not need access to a portion of it for at least the next year, the new NS&I certificates are a very good option to consider.

Take the time now to look at this, as due to the likely rush, they may not be around for long!

All the details are available on the NS&I website.

The tax efficient nature of Individual Savings Accounts makes them particularly attractive for the higher rate taxpayer.

However, because the charges of some ISAs will be higher than, say, an ordinary unit trust, before investing in an ISA rather than a unit trust investors must be satisfied that the tax advantages will outweigh the increased costs. 

For example, ISAs could be an attractive alternative for higher rate taxpaying investors seeking to maximise income or for an individual seeking capital growth where that individual is already likely to be using his annual capital gains tax exemption each year.

Let’s look at how an ISA can be used:

As a Cash Reserve

Most people keep some cash in an instant access account for use in an emergency.  Any amount invested in an ISA in an instant access cash component will accrue interest tax-free.

It is important to note that not all cash components are likely to provide instant access, and if money is withdrawn it can only be put back into the ISA subject to the subscription limit for the tax year in question.

For example, if £4,600 is put into a cash ISA in 2011/2012 and £1,000 is withdrawn in the same tax year then only £740 can be put back into the ISA in that tax year i.e. deposits of £4,600 and £740 together make up the subscription limit of £5,340 for 2011/2012.

To Generate Income

When rates of interest on bank and building society deposits are low, and with a marginal rate of income tax of 40%/50% for the higher income investors, such individuals may be seeking alternative homes for cash in an attempt to enhance income. 

A corporate bond or cash ISA may be an attractive alternative. 

An equity-based ISA, which offers prospects of capital growth to offset the effects of inflation, may be suitable provided the underlying investment used is generating a reasonable level of dividend. 

It should be noted, however, that dividend income will not be totally tax free, since from 6 April 2004 the 10% tax credit on UK dividends has not be reclaimable. 

Nevertheless, for a higher rate taxpayer, a dividend yield of, say, 4% inside an ISA fund will equate to a gross deposit yield of 5.33% outside an ISA fund, with prospects of capital growth. 

Of course it is important to note that an equity-based ISA will offer no underlying security of capital in the same way as a deposit-based investment, and that the capital value of a corporate bond ISA is not guaranteed. 

As a Means of Holding Equities (Shares)

Equities, whether held direct or via a unit trust/investment trust/Open Ended Investment Company (OEIC), are asset-backed investments, which, as a consequence, offer the prospect of capital growth.  As any capital growth arises free of capital gains tax an ISA is particularly attractive to an individual who is already utilising their annual capital gains tax exemption.

Pound Cost Averaging

This is an important investment concept for equity-based investments that can be utilised to ensure that, even if investment values fall, an investor can achieve a possible benefit. 

This is obtained by making regular contributions so that units/shares are bought at regular intervals.  Thus if investment values fall, more units/shares are purchased which means that when investment values later rise the capital value of the investor’s ISA will be correspondingly higher.

This form of regular investment is particularly relevant as regards investments linked to equity markets where large changes in price can quickly occur. 

Planning For Education

ISAs can be particularly appropriate tax effective investments to fund for the cost of school fees or the costs of further education.  Whenever substantial future expenditure is envisaged and funds do not or will not exist to meet the expenditure there is no alternative (if the expenditure is to be incurred) to either saving in advance or borrowing at the time of need. 

ISAs, offering tax-free (apart from the unreclaimable tax credit on UK ordinary shares and preference shares) income and capital growth, should be seriously considered as a flexible simple savings option.

Subject to the parental settlor rules, from 6 April 2001 16 year and 17 year olds can subscribe to a cash ISA. 

On 26 October 2010 the Government announced that it would introduce a new tax-advantaged account for saving for children, to be known as a Junior ISA.  Legislation to provide for the Junior ISA was introduced in the Finance (No 3) Bill 2011.

It is expected that Junior ISAs will be available from 1 November 2011.  The Junior ISA will be available for any UK-resident child (under the age of 18) who does not currently hold a Child Trust Fund account. The Government will be consulting informally with stakeholders on the draft legislation during the spring of 2011.

Registered Pension Arrangements

One of the great benefits of registered pension arrangements is that investment growth is largely free of UK tax on investment income and capital gains.  However, more and more people will find that their benefits under the scheme will be restricted and maximum tax relievable contributions reduced. 

An ISA can therefore be a very useful method of pension scheme top-up as it too accrues free of UK tax on investment income (except for the inability to reclaim the 10% tax credit on UK shares) and capital gains. 

Moreover, ultimate benefits can be taken totally as a lump sum. 

Doctors and dentists affected by the annual allowance and/or lifetime allowance are likely to be higher/additional rate taxpayers and an ISA will therefore hold considerable appeal. 

An ISA should be seriously considered as the ‘first line’ of pensions top-up.

Repayment of a Mortgage

An equity-based or corporate bond ISA can be considered as a tax-efficient means of repaying an interest only mortgage. 

In particular, as investment growth is tax free (apart from the unreclaimable tax credit on UK ordinary shares and preference shares), the fund could potentially grow at an enhanced rate meaning that the mortgage could be repaid earlier than with an alternative mortgage repayment vehicle. 

Also, should an individual later wish to encash the investment (perhaps due to the repayment of the mortgage or moving house) there will be no inhibiting factors on the individual at that time. 

This could be compared with an endowment policy where the surrender value may be considerably reduced in the early years due to the initial charges involved. 

Of course, in considering an ISA as a mortgage repayment vehicle, the risks involved in total equity investment should be borne in mind, especially in view of the intention to use the investment to repay a fixed debt at a fixed date in the future. 

Term assurance cover should be considered to repay the mortgage on the death of the borrower prior to the redemption date. 

To Retain the Benefit of Age Allowance

For those aged 65 or over in the tax year, a higher personal allowance, and married couple’s allowance may be available. 

These age-related allowances are cut back, but not below the standard allowances, where total income for 2011/2012 exceeds £24,000.

The ‘cut back’ is £1 of allowance for every £2 of income in excess of £24,000.  The personal allowance (which gives full income tax relief) is cut back first before the married couple’s allowance which only gives relief, as a reduction in tax payable, at 10%.

Savings income is taxed at 20%.  Basic rate taxpayers have no further liability and higher/additional rate taxpayers have an additional 20/30% liability. 

A non-taxpayer can reclaim any tax deducted at source and a 10% taxpayer can reclaim any tax overpaid. Since 6 April 1999, UK dividend income has been paid net of a 10% tax credit.  The 10% tax credit satisfies the liability of a 10% and basic rate taxpayer, and can be set off by a higher/additional rate taxpayer against their 32.5%/42.5% tax liability on the grossed-up dividend income but cannot be reclaimed by a non-taxpayer. 

By definition, those individuals whose age-related allowances are capable of being cut back are basic rate taxpayers i.e. they have total income in excess of £24,000 per annum but less than the threshold at which all age allowance is lost. 

Income which causes a person to lose age allowance is therefore effectively taxed twice – firstly as income and secondly in terms of a reduction in age allowance.  The effective rate of tax on income which causes the personal allowance to be cut back will depend upon the type of income a person enjoys. 

The effective rate of tax on investment income which causes age allowance to be cut back is often not appreciated.  When income is in the ‘age allowance trap’, reinvestment in assets which do not suffer tax on income, such as an ISA, should be considered. 

The reason for this is that provided an ISA remains qualifying, dividends and interest are exempt from income tax (apart from the unreclaimable tax credit on UK ordinary shares and preference shares) and therefore do not form part of an individual’s total income for age allowance purposes. 

From this it follows that income derived from an ISA will not affect entitlement to age allowance.

Key Considerations

So there you have it. The ISA wrapper has many benefits for all investors – it’s just a question of deciding how ISAs can sit within your own portfolio and which type (cash or equities) you should invest in. 

Action Point 

If you have ISAs already, there’s 2 things we recommend you do:

• for cash ISAs, make sure you are getting a good rate. Some providers reduce the rate once your account has been opened for a specific length of time, such as 1 year
• for equity ISAs, find out how much risk you are taking with the funds that you are invested in. It’s possible that you could be taking too much risk (most doctors and dentists we meet are)

As Financial Planners and Wealth Managers, we take our role in managing risk for clients very seriously.

After all, we talk about the small (but very big) word TRUST all the time when we examine why a client will choose to put their faith, and money, with us.

Of course, risk is ever more topical at the moment what with the terrible tragedy of the earthquake in Japan, the Libya conflict and massive unrest in many Arab countries. Events like these affect confidence which in turn affects stock markets.

So we were interested to see the Financial Services Authority (FSA) revisit this subject recently, and the many discussions taking place in the financial trade press.

One such trade journal, New Model Adviser (NMA), was launched in 2006 to reflect the growing number (although still small) of commission based advisers becoming fee based planners.

The NMA states that the Financial Services Authority (FSA) has warned of some financial advisers’:

• failure to account for clients capacity for loss
• over-reliance on and poorly worded risk questionnaires
• unwillingness to place client money in cash accounts which can lead to inadequate assessment of client risk
• failure to take sufficient account of the client’s other needs, objectives and circumstances such as paying off debt

Furthermore, the FSA said it had seen examples of firms failing to have a robust process in place to identify a client’s real needs, and that it had concerns that risk profiling tools had “limitations, which means there are circumstances in which they may produce flawed results”.

The FSA said risk questionnaires used by advisers were often not clearly worded, and that the number of questions asked varied widely.

“We have seen cases where the resulting risk category is effectively determined by the answer to ONE question”.

The regulator also singled out for criticism the use of words like ‘some,’ ‘reasonable’ and ‘moderate’ to describe attitudes to risk.

It said it was also concerned that a number of advisers used vague labels to explain risk to clients, such as categorising risk tolerance on a scale of 1 to 10. “This was a problem because the risk represented by each number was subjective”.

The FSA also said some advisers were relying too heavily on information from a product provider when researching the suitability of an investment. “There were gaps in the provider’s information and as a result the firm failed to understand the nature of the risks of the product which led the firm to inappropriately rate the product as lower risk”.

The FSA also reviewed 11 risk profiling tools and found 9 had weaknesses which could have led to flawed results. “Firms must not rely on the findings of risk profiling tools without understanding the assumptions used by the system”, stated the FSA.

“We are also concerned that our findings suggest many firms do not understand how the tools they use work, including what they are (and are not) designed to do. Firms should only use a tool where they are satisfied that it provides outputs that are appropriate and fit for purpose”, said the report.

What It Means To You

Many financial advisers and planners have worked hard over the last few years to improve their standards and the service they offer to their clients. Unfortunately there is still a number who are satisfied to do the minimum, as long as they achieve the sale of the product/policy.

So in our opinion, there are still too many salespeople out there and not enough advisers and planners who advise properly.

One of the bugbears here is of course commission. If you need to sell a product to earn a living and you only have a hammer, everything looks like a nail!

For those of you reading this who are not clients of ours, does any of the above sound familiar? Are you comfortable with the investments you have, and why you have them? What risk levels are you taking, and why?

So, if you do use the services of a financial adviser/planner but are perhaps not certain what you’re getting for your money (and yes, if you do pay via commission the advice/service is NOT free!), we recommend that you shop around for an adviser/company that:

• compiles you a (written) strategy based on your goals and timescale that covers what to do with debt, cash and serious longer term investments (if any) and why
• asks you to complete a rigorous risk assessment (questionnaire) (the one we use, Finametrica*, has 25 questions)
• is able to inform you on an ongoing basis how much of your money is invested in cash, bonds, property, equities, etc
• conducts a ‘stress test’ that mimics what would happen to your money (in pounds) in a very volatile stock market
• could you tolerate it if you were to lose thousands of pounds? (and how would that affect your long term financial plan?)
• examines your financial roadmap, which compares your assets to measured needs
• does the portfolio chosen at the predicted rate of return mean that you are on target to achieve your goals in life (now and in the future?)
• if your roadmap looks very healthy, suggests to you to reduce risk further by choosing a different portfolio with a lower level of risk that still allows you to succeed

You probably won’t be surprised to learn that we cover all the above points. The whole point of the process is to do the best we can to get you from where you are, to where you want to be, with the minimum amount of risk.

Key Considerations

Clients often tell us that the most valuable thing for them to have is peace of mind. In our experience this is achieved by having a strategy which involves not taking risks that you don’t need to take, and being in control.

Action Point

If you are unsure of your investments and the risks attached, make sure you check this yourself or your adviser covers this with you in detail.

Where is your money invested and why?

What is the volatility (standard deviation) on these?

Can you reduce risk, and if so how?

Seize the opportunity and take action, don’t put it off!

*You can read more about the Finametrica risk tool here.