My colleague Zac Ghadially was quoted in an article in this month’s Money Observer magazine.
Investment trusts are currently trading at a wide discount to the value of their underlying assets. Zac discussed a cheap index tracking trust, the Edinburgh UK Tracker, which tracks the FTSE All-Share Index and available on a discount of around 5%.
Speaking on the BBCs 5Live radio programme this morning, (”Wake up to Money” – there are better things to wake up to I’m sure) I was asked to talk about Individual Savings Accounts. Are they a good idea? The short answer is yes.
Try not to categorise ISAs as merely a financial product like a unit trust or a particular bank account; instead an ISA is merely a tax wrapper that can be applied to either cash, stocks and shares, or a combination of the two. If you have cash, stocks or shares that are not sitting inside an ISA tax wrapper, then what are you waiting for?
Chatting generally to other guests on the show I discovered that even higher earners with cash in the bank were not making use of the annual ISA allowance. OK, it might not rock their boat to chase around for a £7,200 deal, but ISAs are now 10 year old, and over that time it would have been possible to shelter up to £70,200 from the tax man. Half of which could have been in cash.
The problem that many of clients are facing right now is how to secure a good rate on existing ISA cash. Whilst it is possible to get several reasonably good interest rate deals, it is usually only for new money and not for existing ISA cash, so you cannot transfer ISA money from one provider into a new account. Seems to me that if you have no new money to commit to ISAs this year, but your existing ISAs are only earning 0.1% or similar, then why not simply cash in £3,600 of existing ISA money and then treat this as new money into a new ISA. If you are not going to fully use this year’s allowance then why not recycle previous allowances?
But perhaps the time has come to think about the longer term. Too much ISA money held as cash isn’t going to do you too many favours in the long run, especially if inflation does take a hold next year or the year after. You could consider switching ISA cash into other eligible investments. Corporate Bonds (especially AAA rated) are looking attractive at the moment, and within an ISA the income is entirely tax free. With income yields of around 8% and depressed capital values these might be a good medium term play.
Finally, if you have existing shares or unit trusts and are currently sitting on capital losses, why not crystalise the loss to use against future gains, and then re-invest within an ISA, the future gains on this portion of your money will be Capital Gains Tax free in the future – until the government change the rules that is.
Hurry through, there’s very little time left.
2 days ago I had a meeting with a possible new client and I’m still seething – WHY?
Looking through the large pile of papers that she brought to the meeting I could see that the existing financial adviser had made some investment recommendations way back in 2001. The advice at the time seemed reasonably comprehensive, if somewhat predictable. In short a portfolio of unit trusts was established alongside a with profits bond held in a trust. In total a sum of around £250,000 was invested. The client was adamant that this was work done on a fee basis, however, the fee mirrors the levels of commission normally available from these products. Significantly, included in the structure was a trail commission of 0.5% payable each year to the IFA. On a nominal £250,000 portfolio this equates to £1,250 paid every year since 2001.
So looking through the papers accumulated since 2001, comprising mainly annual valuations and newsletters, I was keen to understand what level of service had been provided for this annual payment of £1,250. I can see no evidence of any advice or fund switches to cater for a changing economic climate, nor any attempt to re-evaluate risk tolerance. Despite the client calling to the adviser on several occasions over the years suggesting a further meeting, there has been no contact apart from a computer generated valuations and an accompanying newsletter about world markets.
So what exactly does this £1,250 per annum actually do for the client? Well, it has reduced the value of the fund by around £10,000 because of higher annual management charges to pay the trail commission. Apart from that I can see very little; annual valuations, but at £1,250 each this is a bit steep isn’t it?
The sad thing is that this practice is repeated over and over as advisers build a business built of recurring trail commissions, but instead of delivering a service they simply retain the money and then find new clients to build an even bigger pile of money from which to derive a passive income. Many advisers I talk to see the trail commission as a reward for selling the unit trust in the first place, and not as a reward for service.
I have said it before and I will keep on saying it, commission should be banned. The Financial Sservices Authority agrees with that statement but have so far shied away from a complete ban. I know that there are many advisers who do deliver a service for the money they receive, and in my opinion they could easily demosntrate their value and move to a pure fee basis, that way we could show up the others for what they really are: parasites.
So I’m in a bit of a quandry here, what should I do? In the end I put the ball back in the client’s court. It’s a lot of informatio to absorb and in my experience many clients do not fully understand how we are paid, or what the differences are between various ways of charging fees. Expressing remuneration as a percentage of assets under management also doesn’t help, 0.5% doesn’t sound like a lot, whereas £1,250 (in this case) does. I suggested they go and talk to their existing IFA and determine exactly what commissions he had received since 2001, and what level of service he proposed to deliver for the money being received.
It is likely however that the trust between client and adviser has been eroded to the point the relationship no longer exists in the client’s mind. If the client decides to engage us instead, then I think we owe a duty of crae to the client to write to the IFA for justification of the commissions received so far, and to ask for a rebate. I doubt we will be successful, but we do need to chip away at advisers who think they can continue to get paid commission year in and year out without having to deliver a service.
Dennis Hall appeared on Strictly Money on CNBC. Dennis again answered viewers’ emailed questions, including whether it was better to pay off a mortgage or save the money, and his thoughts on the ‘Gilt bubble’.
See the video on the CNBC website.
