Tag

Financial Planning

The hidden value of proper financial planning

By | News & Views | No Comments

Almost everyone worries about money, what the future may hold, and the decisions and choices that they will face along the way; yet few realise that proper financial planning is the key to sorting it all out.  At Wells Gibson, we believe it is the world’s best kept secret.  Everybody needs it, but only a few have unlocked its true value.

For those who have, the equation between the value that they receive from their financial planner and the fees that they pay needs to make sense.  Yet, because the benefits of good financial planning and advice are often received in the far-off future, it is sometimes easy to miss, or dismiss, the value received along the way.  Market noise, emotions and periods of what may seem like inactivity on a financial planner’s behalf, can also impact on the perception of value.  It is often easy to appreciate the value received in the first year, and easy to forget or appreciate the value on an ongoing basis. The financial planning relationship can be broken down into three key phases of value.

Sorting out the mess and designing the plan

New clients often arrive with a bag of bits and pieces collected over the years, such as a number of pension plans, with-profits bonds, endowment policies, life insurance and a stock broker or IFA managed portfolio.  This collection of ‘stuff’ often has little structure and rarely provides comfort that the future will be bright.  That’s a stressful place to be.

The first and most vital step is to help clients to set out their vision for the future, both in terms of lifestyle goals and the money needed to fund them.  Next comes the analytical work, which may involve using financial forecasting tools, to help empower clients to make sensible strategic choices.  The resulting ‘plan for the future’ becomes a joint effort between client and planner.  Once sorted and implemented, the client is then back in control of their future and their finances.  The value is easy to see.

Plan progress and progressing the plan

Financial planning is not a ‘set-and-forget’ process, far from it, in fact.  Progress Meetings, normally annually, help to provide clients with an insight into how things are going relative to the plan.  What is more important is the future and how the plan needs to progress from this point forward.  Some issues and consequent decisions faced may relate to events in the client’s life or may be more technical or could relate to market issues that sit in the financial planner’s knowledge base.  It’s fair to say, clients have better things to be doing with their time than trying to understand and tackle these issues alone.

Some years may be quite uneventful, while others are momentous.  In the former, not much may appear to happen, but that does not diminish the value of the financial planner, who is – behind the scenes – constantly on the lookout for issue that may threaten the successful outcome of the plan, or ways in which it can be refined.  At times of crisis, understanding the issues faced, finding a solution that makes sense, facilitating decisions that need to be made and having the fortitude to execute under pressure, is where great financial planners come into their own.

Long life, death and immortality!

There are also some more subtle areas of the value of a long-term relationship with a trusted financial planner.  For many people, living longer is a two-edged sword.  On the upside, we can all now expect to live materially longer than our grandparents’ generation.  On the downside, we also know that with longevity comes attendant health and financial challenges – long-term health care costs are rising rapidly and simply knowing that they can be met is a great comfort to many.

A financial planner, who knows the family and their financial circumstances well, is well-placed to provide advice, support and to facilitate the financial consequences of the new change in circumstances, when it is needed.

Many clients, often one of a couple who takes more interest in the finances than the other, worry about what will happen to their partner on their death.  Having a trusted financial planner (and an up-to-date plan), allows them to be confident that, in the event of their death, their partner will be well cared for financially and that their affairs are in order.   Administering an estate and applying for confirmation too, is a far easier process when everything is organised.

Most people would like to feel that they will, in some way, leave behind a lasting legacy.  For some, that can mean spending time and money supporting their philanthropic works and for others it may mean passing on wealth from one generation to the next.  The Pension Schemes Act 2015 created the opportunity to pass on wealth to future generations in a tax effective manner, for example.  Again, financial planners can play an important role in helping clients to make decisions surrounding such issues.

In conclusion

It is easy to forget when you meet with your financial planner for your annual Progress Meeting that the scope and value of the relationship is far deeper and more important than worrying about the 12-month market noise that has resulted in the value of your portfolio (pensions and investments) going up and down, or the fact that neither your portfolio nor the plan has changed much.

Meeting your lifestyle and financial goals, feeling confident in the future and having the time to enjoy the opportunities that your money provides you, your family and your community are what really matter.

Perhaps, contentment and being less anxious about tomorrow, is the goal, consequence and value of proper financial planning.

 

 

A ‘set-and-forget’ investment approach? Absolutely not!

By | News & Views | No Comments

Wells Gibson’s systematic, evidence-based approach to investing often results in very little activity in our clients’ portfolios.  However, it would be wrong to think that this is the result of a ‘set-and-forget’strategy and the Wells Gibson Investment Committee would refute such a suggestion.  Considerable effort goes on behind the scenes to allow this state of calm consistency to exist.  The fortitude and discipline to deliver ‘not much needs to be done to your portfolio except for rebalancing’advice, comes from a rigorous process of ongoing challenge to the status quo.

The broad terms of reference of the Wells Gibson Investment Committee are set out below:

Manage risks over time

  • The Wells Gibson Investment Committee is responsible for the oversight of the risk in portfolios and the wider investment process.Meetings are regular and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members – such as Albion Strategic Consulting – provide independent insight and challenge.

 Challenge the process

  • The investment process at Wells Gibson is driven by the latest empirical evidence and theory available. It is always open to challenge.  If new evidence suggests that doing things differently would be in our clients’ best interests, then we will revise our approach.  The investment process is evolutionary, but change is most likely to be slow and incremental.

Review the portfolio structure

  • The underlying characteristics of Wells Gibson’s client portfolios are reviewed, including performance and risk level attributes. Risks (asset class exposures) and their allocations within a portfolio are evaluated. Any issues are raised and resolved. Existing asset classes are reviewed alongside asset classes and risk factors that currently sit outside the portfolios.  Areas of interest are placed on a longer-term ‘watch’ list.

Review the current ‘best-in-class’ investment funds

  • The current funds are ‘best-in-class’ choices seeking to deliver the returns due to investors for taking specific market risks.Each fund has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any fund-related issues are raised and resolved.

Screen for new funds and undertake appropriate due diligence

  • Although the current funds were recommended as ‘best-in-class’, new funds are regularly being launched. Tough screening criteria are in place against which new funds are judged.  New, potential ‘best-in-class’ funds face detailed due diligence and approval. They are included only when they make the grade.  Given the quality of the funds already in portfolios, the threshold for replacement is high, but not impossible for newer funds.

Reaffirm or revise the investment process

  • The Wells Gibson Investment Committee is accountable for reaffirming or revising the structure of client portfolios. Risk (asset) allocations and fund changes are approved by the Investment Committee.Any actions arising from portfolio revisions will be undertaken, after discussion with and agreement by clients.

The next time you open your latest valuation report, remember that despite the lack of activity on the surface, the Wells Gibson Investment Committee continues to paddle furiously behind the scenes to allow this be the case.

In the immortal words of the investment legend and author Charles Ellis, “In investing, activity is almost always in surplus.”  However, perhaps we should amend this slightly to, “In investing, activity is – except for the Investment Committee – almost always in surplus.’

How Much Do I Need to Retire?

By | News & Views | No Comments

As financial questions go, my late father regarded this as a big one we all need to answer:  how much do I need to retire?

There are various rules of thumb you can apply so you can answer this big financial question.  As a rough guide, some financial planners might suggest you need enough in your pension pot to provide the equivalent of two-thirds of your salary from employment.

We used to consider a £1m pension pot as the basis of a financially sound retirement, big enough to generate what is needed in later life.  This £1m pension pot rule of thumb would have typically seen the majority of investors through their later years, assuming they didn’t spend excessively, especially during the early years of retirement.  However, in recent years, a combination of factors has prompted a rethink of how much is typically needed in savings, pensions and investments in order to sustain a required level of retirement income.

A big driver of this need for more is that we are, on average, living much longer.  Sadly, my father died at 60.  Considerable improvements to life expectancy were experienced throughout the 20th century, thanks largely to health improvements for younger people, such as immunisations.  Since the 1950s, it has been health improvements for the older population which has driven life expectancy higher.  Back in 1980, life expectancy at birth was 71 for men and 77 for women.  Fast forward to 2011 (the latest year for available statistics) and those ages have risen to 79 and 82.8 respectively.

Of course, these are just averages.  50% of people will live longer than these average ages. Those who engage in the financial planning process, who tend to be wealthier, typically have a better life expectancy than average.  With longer lives comes a need for larger pension pots.

Another factor driving the need for greater retirement savings is the rising cost of living.  One million pounds isn’t what it used to be!  Price inflation might be relatively low at the moment, but even modest annual price inflation over extended periods of time can dramatically increase the cost of

living.  This cost of living increase has exceeded 70% over the last twenty years, pushing up the amount of pension savings you will need to maintain the same standard of living as previous generations of retirees.

In order to keep pace with the rising cost of living in retirement, you need a bigger pension pot.

One more factor driving the need for a bigger pension pot is a lower return from investments.  In the low interest economic environment which followed the global financial crisis, it takes a bigger pension pot to secure the same level of annual retirement income.  Yields on the benchmark 10-year government bond (Gilt yields), which is a widely used reference point for pension annuities, stand at 1.19% today.  Around twenty years’ ago, the yield was 7.4%.

With lower returns from investments today, a larger pension pot is needed to generate the same level of income in retirement.

Despite a trend towards needing a bigger pension pot to afford retirement today, it’s worth remembering that we are all different and have differing financial needs and goals.  It would be wrong to apply a simple rule of thumb and expect to get an accurate answer to this big financial question.

A pension pot valued at £1m will be sufficient for some. Others will need more and £2m worth of pensions, savings and investments will be closer to the target.

The amount you need to save to retire comfortably is going to depend on a range of factors; when you plan to retire, how much income you need, the amount of investment risk you are willing to take, whether you face any health challenges, and much more.

With the help of Wells Gibson, it is possible to quantify precisely how much you need in order to achieve and maintain the life that’s important to you without the fear of running out of money.

My father ran out of life, just make sure you don’t run out of money!

Inheritance Tax (IHT) and the Residence Nil-Rate Band

By | News & Views | No Comments

Recent changes to Inheritance Tax (IHT) legislation are certainly helping individuals to pay less tax on death, however it’s fair to say the system is slightly more complicated.

Last year, the government introduced a new allowance, the Residence Nil-Rate Band (RNRB) to reduce the impact of IHT on families and to make it easier to pass on their home to children and grandchildren.  The allowance applies where a residence is passed on death to a direct descendant.  The RNRB increased from £100,000 to £125,000 in April 2018 and will rise to £175,000 in tax-year 2020/21 when it will continue to rise in line with the Consumer Price Index.  One thing though, the RNRB cannot exceed the value of the home passed onto children and grandchildren.

The RNRB is different to the existing nil-rate band which applies to everyone and will remain at £325,000 until tax-year 2020/21.  Married couples and civil partners may transfer their assets to one another tax-free and the surviving partner can use both allowances.  This means that couples can pass on up to £650,000 in tax-year 2018/19. However, if the estate includes their home and is to be passed onto their children and/or grandchildren, they can pass on £900,000 when both RNRB allowances of £125,000 are included.  By tax-year 2020/21, they will be able to pass on up-to £1mn in assets tax-free.  Furthermore, the RNRB is available to anyone who has downsized, (or rightsized as we like to refer it as!) or ceased to own a home on or after 8thJuly 2015.

Some complications

Because the RNRB only applies to direct descendants, it does not apply to individuals with no children or to individuals who would like to leave their home to others not regarded as direct descendants.

Another complication is the tapered reduction in the RNRB at a rate of £1 for every £2 by which an estate’s value exceeds £2mn.  However, assets given away in the 7 years before death will not be included in the value of the estate when calculating the tapered reduction – this potentially encourages death bed tax planning to ensure one’s estate falls below £2mn!

Worth also adding that buy-to-let properties do not qualify if they have not been a residence of yours.

Final Thoughts

Despite the RNRB being welcomed by clients and their advisers, the number of individuals with an IHT liability continues to increase.

Estate planning is a key area where Wells Gibson can add value and is a core part of our Wealth Planning service – in fact, there are a wide range of effective IHT planning techniques at our disposal and these include gifting allowances, Potentially Exempt Transfers or PETs, trusts and Business Property Relief-qualifying investments.

As always, if you have questions and would like to discuss IHT further please contact us.