This article was published in the February issue of Master Investor Magazine
All articles in this section are provided courtesy of Master Investor Magazine and are not necessarily the views of Alan Steel Asset Management.
Have you noticed that survey after survey shows that most people in the UK are desperately unprepared financially for retirement? That the gap between those who are prepared and those who aren't is widening? That increasing numbers are losing their savings, especially their pension pots, to scammers and conmen? That recent evidence highlights the majority of investors still chase performance, following what's popular, not learning the lessons of the past? And despite the chaos that follows those who die intestate (without a will) it's still the case that around half of UK adults don't bother having one? Why, oh why?
All this chaos has transpired in spite of 30 years of financial regulation designed to protect savers, but which has failed miserably. Chaos, despite a myriad of increasing "advice" columns in the national press and social media, written by a revolving crew of young journalists with no money or experience, and who compete with one another for "shock horror" stories and media awards. Chaos, assisted by successive governments tinkering year after year with never-ending tax changes and broken promises. There is another way – which I shall deal with later – but first, let's review how we got into this mess.
Early signs of madness?
Forty-five years ago last month I left the job security of a "big" life assurance company to become an Independent Financial Advisor in a small firm in the Scottish Borders. My mother thought I was daft. Not to worry though, for I was all of 25, had spent three and a half years as a Trainee Actuary, and dabbled in Training, Job Evaluation and O&M (Observations & Measurement) so I knew practically everything. Two years later I started my own business, Alan Steel Asset Management (ASAM). Blind faith? Or early signs of madness?
Incidentally the "big" life assurance company (or to give it its proper description a "life assurance society", for it was a mutual established in Victorian times and owned (theoretically) by its policyholders) went bust many years ago, whereas the small firm in the back of beyond is still going strong. As is ASAM. (Touch wood!)
Anybody remember the advice from generations of personal finance "expert" journos to save only with mutuals, especially their favourite one, that "nice n cheap" Equitable Life? It went belly up 18 years ago and most mutuals followed suit one way or other. As did another one of their favourites, the "safe as a Volvo" Split-Cap Investment Trusts. Oops.
Forty-five years ago in March, UK Pensions legislation was turned on its head when in the 1973 Finance Act shareholding (controlling) directors of SMEs, or family companies as they were known then, were for the first time given the same pension rights as PLC employees. I'll spare you the complicated details but it was a game changer for those affected. And it turned effective financial and tax planning on its head.
Since then the bloody taxman, or HMRC as they're known these days, has introduced hundreds of tax changes, affecting taxes on earned income, investment income, capital gains, gifting, trusts, pension laws, and death, with perhaps the most confusing changes directed at private pensions. As for the latter, there were 300 major changes alone between 1997 and 2005, and that's before they dreamt up the utter disasters of Lifetime Allowance and Pensions Freedom. Today, thanks to constant interference and broken promises, pensions are a dog's dinner as my grannie would have opined. No wonder so many people fall for sweet-talking scammers.
If all that wasn't bad enough, those trying to invest or save for their later years have to contend with an increasingly bewildering array of investment choices and products, and are subject to a barrage of 24/7 opinion and noise from all sides by "experts" in a social media explosion, where fear trumps balance, quantity trumps quality, and "reporters" are chosen for their looks and shiny teeth rather than knowledge or experience.
A dog's dinner
Consider why so much in the UK sits wasting away in cash earning nada, as I reported last month. Apart from the £270 billion fermenting away in Cash ISAs, and £355 billion in bank accounts (as at Sept 2017) being quietly eroded by inflation, there's another £150 billion in National Savings, the vast bulk of which sits in Premium Bonds. Premium Bonds? What does that say about the way savers think? You stick away hard earned after-tax income into a plan that gives you no return, unless of course Ernie picks out your number at random from a few billion others.
Mind you, that didn't stop a Daily Telegraph Personal Finance "expert" in a main Money piece exactly three years ago advising readers to put the maximum they could into Premium Bonds rather than invest in "stocks and shares" ISAs, because in his opinion the stock market was "overvalued". Guess how many FTSE 100 all-time highs there have been since. 36! But as experienced investment managers like Terry Smith would ask, "why stick to the UK market when so many opportunities lie elsewhere in the world?" Any idea how many times the Dow Jones index has closed on a new all-time high in the last five years? 197! Yes, really.
Consider also the annual US Dalbar Survey findings over the last 30-odd years. The investment returns of private investors over varying time periods show that their returns in equities and bonds drag substantially behind index returns. And I mean substantially. 4% per annum net as opposed to 9% per annum from the S&P 500 index is one hell of a difference, believe me. The former doubles your investment every 18 years; the latter does it in every eight!
As for those talking heads on telly who see Armageddon around every corner, a recent spat between economist Dr Ed Yardeni and CNBC didn't go down well with their "anchors" when Ed reminded them that despite their 58 panic attacks since March 2009 the secular bull market was still intact and continuing to deliver positive returns.
Meanwhile the savings industry here in the UK has been regulated by an FCA increasingly obsessed with ever more regulation. Only four years ago their RDR (Retail Distribution Review), which was supposed to help investors, has actually led to increased charges. To increase transparency, we now have "MiFID II" (don't ask!) with only 1.7 million paragraphs. No kidding. There are fewer than 300 words in the Ten Commandments. Good job there were no regulators in those days. It gets worse. There are now more than 70 times as many stock market indices as there are quoted stocks in the world. According to the World Bank there are around 43,000 public companies but 3.28 million Indices. Eh? Madness or what?
So is it any surprise that so many savers these days are confused? New clients are coming to us looking for someone to trust. Someone that can create order out of their chaos. Someone to explain in simple words what they actually have and how to make it simpler and better.
Usually they turn up with an unstructured pile of disparate investments, savings plans and a mess of pension plans collected over years of employment. Hieroglyphics from old Final Salary Schemes, the odd Section 32 Buy-Out, private plans from periods of self-employment etc. Old single-premium investment bonds stuffed with charges, far too much in deposits, bits and bobs of shares or funds they bought on tips ages ago. Can't remember why. And when you ask what they're trying to achieve with all this, they look at you in quiet despair.
Time to change
But even if your finances are a dog's dinner you can only fix things if you are open to change. As I learned thirty years ago in a workshop with a chap called Dr David Cormack, a former Head of Training at Shell, who was an expert on Change, there are only two ways to change someone. Either give them a frontal lobotomy or help them to want to change. And the only way you can do that is to create disquiet. No disquiet, no desire for change. Simples.
Presumably as readers of Master Investor you are pretty clued up on money. So you've maximised your pension pots, and your investment ISAs, carefully selected good value shares using a tried and tested process, and made sure you aren't paying more taxes than you need. Let's check.
Now what's the worst thing that could happen to you today? You could die. And if that happened, how organised are your financial affairs? If you have a partner or family, what are you leaving them with? Everything well organised and simple? Or a bit of a shambles? Do you have a will? If you haven't, have you any idea of the mess and extra pain (and costs) you are leaving behind? If you have a will, when was it last looked at? Is it still effective?
What will happen to your pension pots? Who gets what? Are you sure? Are they protected by Trust? When was the last time you reconsidered the wordings? Did you have them rewritten since Pensions Freedom changes? Do you understand the question?
Is there any debt? Mortgages? What happens to them? Are they paid off with life cover? Are you certain about that? So the policies are written in trust? If you're married and have a wife, is her credit card an extension of yours? If so she could be struggling for cash or credit. And how is your partner going to survive financially if you were the breadwinner and the assets are in limbo for at least six months and often much longer?
On the assumption you're not going to snuff it today, let's check your goals for the future. Are you aiming for financial independence? What age would you be then? If you were that age today what would that look like in terms of net disposable income in today's money? Are you on target? What do you mean you've no idea?
How have your pension plans and investments done over the last year? How about over the last five years? How do you choose the shares or funds? Any laggards? Why do you have so much sitting earning nothing in Cash ISAs and deposits? Doesn't it make sense to ensure all your finances are firing on all cylinders? And doesn't it make sense to have at least an annual financial MOT?
David Cormack introduced me to the change formula. It changed my thinking (if you forgive the pun). And as a result it changed the financial effectiveness of hundreds of my clients. It's quite a simple wee formula:
C= D + V + F + E – where C stands for CHANGE, D for DISQUIET, V for VISION, F for FIRST STEPS, and E for ENERGY
So, if you fancy a fresh look at how you're doing, go see an experienced financial advisor, who will ask the questions to check for disquiet, explain how easy it is to fix the problem by taking responsibility, and then provide the ongoing energy, year after year, to keep you on target. Otherwise as you're probably aware, you'll simply slip into the old bad habits all over again. Good Luck!