Newsletter January 2012

Update – what’s happening over there and in the Isle of Man

EIS and VCT

In the UK the Chancellor’s Autumn Statement contained few surprises, the main exception being changes in the rules affecting Enterprise Investment Schemes (‘EIS’) and their collective investment variant, the Venture Capital Trust (‘VCT’).

EIS were introduced in 1994 and VCTs in 1995, both with the intention of encouraging investment in small companies by offering tax concessions. EIS invest in single companies which satisfy certain criteria and VCTs in portfolios of qualifying businesses. Up to £500,000 can be invested annually via EIS, and £200,000 via VCTs; and both schemes offer up-front income tax relief of 30%. In addition, EIS provide exemption from capital gains tax if held for at least three years, and VCTs for five years.

The first change announced in the Chancellor’s statement is that the investment limit for EIS is to be increased to £1 million p.a.. The second is that restrictions on the size of companies in which the schemes can invest are being relaxed to include companies with assets up to £15 million and up to 250 employees.

The major surprise in the Autumn statement is that a new ‘Seed EIS’ (‘SEIS’) is to be introduced to encourage investment in start-up businesses. A major accountancy firm described as “astonishing” the fact that SEIS will provide 50% income tax relief in the tax year 2012/13 on investments up to £100,000 even if investors’ own tax rate is lower than 50%. In addition, if the investment is made from gains made from the sale of other assets in the same tax year, these gains will be exempt from capital gains tax.

As a result, every £1 invested in SEIS will cost the investor only 50p. In fact, the total relief will amount to 78% if gains are reinvested and account is taken of the 28% saving in CGT.

However, the benefits of SEIS could be outweighed by the very high risk of investing in start-ups, and the difficulty in conducting due diligence suggests that it is unlikely that SEIS will be available as a retail product. Investment is likely to be confined to entrepreneurs’ friends and families.

Pensions and tax

It had been suggested that the UK Chancellor might withdraw some of the tax benefits of pension saving, notably the availability of tax-free cash (usually 25% of the value of the fund) and higher rate tax relief on contributions. In the event these fears proved unfounded, but they serve as a reminder to higher rate taxpayers to take advantage of the current concessions while they last.

There were, however, other developments on the pensions front.
The State pension age is to be increased from 66 to 67 from 2026, eight years sooner than originally planned. This may cause some people to consider working longer or saving more, but one benefit is that retirees who have not yet accrued their maximum benefit entitlement will have a chance to top-up their National Insurance contributions. We understand this will also apply in the Isle of Man.

In the UK firms with fewer than 50 employees which do not have a comparable staff pension scheme in place will be required to introduce NEST (the National Employment Savings Trust) and the operative date had been set at April 2014. However, recognising the financial burden that compulsory contributions will place on such firms, the Government has announced that the operative date is to be deferred until May 2015. Larger employers are already instructing financial advisers to provide staff briefings and advice.

We see IOM government giving consideration to NEST or similar at some point in the next few years as pressure continues to be applied to Manx budgets and people are expected to save more for their own retirements rather than falling back on the state.

On the tax front, the annual UK capital gains tax allowance has been frozen at its present level of £10,600 for 2012/13. Finally and as an aside, we see the IOM review on the taxation of investments being a way by which the tax office may be able to apply capital gains tax in all but name. Watch this space.

Junior ISAs

In the UK, Junior ISAs have been available since November 2011, when they replaced Child Trust Funds. Family and friends can contribute up to £3,600 a year into either cash or stock and shares accounts, and from April 2013 the annual investment limit will increase in line with the consumer price index.

Accounts can be established for any UK resident under the age of 18, but no withdrawals can be made before the child’s 18th birthday, except in the case of terminal illness or death. When the age of 18 is reached, the Junior ISA will be converted automatically into an adult ISA.

Any method of encouraging children and young people to save, and being introduced to the concept of credit being the last rather than first resort, is to be welcomed. The lack of such options being available locally is something we hope government will consider.

Deferring annuity purchase

The income available to purchasers of retirement annuities has fallen by around 20% over the past three years and now stands at historically low levels. Consequently, many retirees are asking whether it would make sense to delay annuity purchase until rates might improve

There is a good chance that the yield on gilt-edged securities, which are the main influence on annuity rates, will rise from current levels in the foreseeable future. It is also a given that annuity rates will rise with increasing age, as also will the likelihood of declining health qualifying the annuitant for the improved rates available from an enhanced or impaired life annuities.

However, it’s not a one-way bet. Every year’s deferral is a year’s annuity income lost. And with every passing year, the period between payments starting and the reaper coming to call gets shorter.

The answer is likely to be different for each individual, but a good way for investors with larger pension pots to hedge their bets would be to phase annuity purchases over a number of years.

January 2012

No responsibility can be accepted for the accuracy of the information in this newsletter and no action should be taken in reliance on it without advice. Please remember that past performance is not necessarily a guide to future returns.
The value of units and the income from them may fall, as well as rise. Investors may not get back the amount originally invested.

Latest chance for IFA’s to keep their knowledge up to date in the Isle of Man

It’s 2 years countdown to RDR deadline in the Isle of Man for all financial advisers to reach a level 4 qualification and satisfy all the learning outcome ‘gap’ requirements and only 12 months for UK advisers. Significant ‘gap fill’ may also be required if qualifications were completed some time ago due to the pace of change in the financial services sector.
With this in mind the first of the PFS Regional Conferences is being held on Wednesday 18th January, 9am at the Claremont hotel followed by Investment Principles & Risk: Gap Fill: TBC 59-65 which is being delivered by David Brown of Jupiter during the afternoon.
Specialist sessions include ‘Economic Crisis and Investment Opportunities’ and ‘Risk profiling investment advice’ and are delivered by visiting speakers engaged and funded by the PFS
To register for either or both events visit www.thepfs.org Admission is free to members, of which there are over 130 in the Isle of Man.

RDR update and dreams of an idealist

How do you really put Financial Services in the Isle of Man on the map for the right reasons when faced with such dire headlines as only this week? I refer to the “Bank denies mis-selling” story – see; http://www.iomtoday.co.im/news/isle-of-man-news/bank_denies_mis_selling_1_4074609

“RDR” is a phrase that is causing much controversy and some fear in the UK amongst those involved in providing financial advice to consumers. Not since the first UK Financial Services Act (1986) has there been such a shake up of the system of providing financial advice to consumers. The UK’s FSA has been disappointed with the results of its earlier legislation and practice on the topic and is now proposing wholesale changes that will take effect on 31 December 2012. In the mean time advisers are expected to get their houses in order in preparation for the new regime.

The proposals are wide ranging and detailed. The FSA says it wishes to push through the changes to improve consumer confidence in products and services and to address poor standards amongst financial advisers. They believe the changes will raised standards of professionalism, improve clarity and reduce conflicts of interest that have plagued the industry. Their vision is to raise IFAs’ game and to move them in to the circles of other fee paying professionals. The new rules will be in place for the start of 2011 with minimum qualifications to be achieved by 31st December 2012 and in the Isle of Man only a year later.
For an industry that is already regarded as a lifestyle choice and populated by an increasingly aged group of people, it is clear that something must be done or else the availability of financial advice will reduce as more people leave the industry and large corporations switch to a product sales model. Add into the mix the fact that currently 70% of individuals do NOT seek financial advice.

Arresting the decline in numbers of advisers, I believe can be achieved through working with government – Departments of Economic Development (DED) and Education using public/private partnerships. Broadly my ‘dream’ involves a framework of a ‘home-grown’ financial services degree with core and satellite subjects offering vocational credits and recognition towards Chartered status from certain Professional Institutes, such the Chartered Insurance Institute. After all, in these austere times, wouldn’t it make sense for the Isle of Man taxpayer to fund core subjects at higher education establishments locally, rather than non-core ones in the UK? – yes, that’s controversial I know.

However, developing the plan a stage further forward thinking companies, including IFAs, Life companies (representing the largest proportion of private sector employment in the IOM), captive insurers and General insurance Broking firms, large and small, can see a less costly and risky way of bringing in new talent to a sector where grey men in suits are the norm, where at the moment there is a dearth of young talent taking these vocational qualifications. Such a scheme would go a long way towards ensuring the future succession plans of their business, increasing profitability, especially where you throw into the mix an apprenticeship type incentive, and you have potentially the biggest ‘jobs opportunity’ advert to appear in Isle of Man Newspapers ‘job vacancies’ column. We all want the Isle of Man to succeed as a ‘Centre of Excellence’ in one form or another; most of the infrastructure needed, including mentors, both private and public is already here for Financial Services which is a vital support for all the diverse industries DED are so keen to attract and retain.

To go back to RDR, advisers need to respond to the new environment now, not least because the Island’s regulators will adopt the proposed changes and already have progress towards qualifications on their radar. UK providers changing systems to cope with RDR in time for 31st December 2012 are hardly going to go out of their way to accommodate a minority market like the Isle of Man. Does this mean those with their heads stuck in the sand need to look for another role? We’ve heard it all before about having 30+ years ‘experience’; Because, how do you know what you don’t know if you don’t know what you don’t know?

Sound financial advice will be important to all clients. In the current economic climate where negative headlines like the ‘Isle of Man Bank Adviser sells terminal cancer patient annuity’ are sadly, all too common and call into question impartiality and conflict of interest (with targets for bonuses?). As circumstances and appetite for risk change as a result of external influences, all clients should regularly review their plans and financial goals, then go and employ the best adviser for the job. You can be sure Thornton Associates Ltd, as the Isle of Man’s first firm of Chartered Financial Planners will be ready and able to help clients, both existing and new.

Sharon Sutton FPFS Chartered Financial Planner

Global Investment Markets – not for the faint hearted at the moment

Global investment markets are not for the faint hearted at the moment.

It is likely more stable conditions will return in due course –when the politicians come back from holiday in September and face up to their issues. Of course volatility is affecting even the best quality holdings as prices are forced downwards by indiscriminate sellers who need liquidity. We’ve seen it happening before not so very long ago.

I like the following commentary by Alan McIntosh, Cheviot CIO, on the latest market conditions.

“Market update – reading the mood music

The recent rally in markets evaporated yesterday on further disappointing economic data. The US Philly Fed survey, which measures business conditions, fell to its lowest in two years, when the US was last in recession. Bear in mind, however, that this survey was conducted while the US was suffering the paralysis of negotiations over the debt ceiling and may be unduly pessimistic. Nevertheless, if the US does go back into recession later this year or early next, much of the blame rests firmly with the ineptitude of the politicians. In Europe, things are not much better. The Merkel / Sarkozy meeting gave us precisely nothing other than the prospect of a financial transactions tax. As they return to the beach, the ECB is left on its own to put out the fires in euro land. Banks were particularly hard hit yesterday. They are seen as a proxy for the woes of sovereigns. Markets are registering the seeming inability of the authorities to grasp the issues facing their economies.

Stockmarkets, if not pricing in outright recession in the US and Europe, are certainly factoring in much slower economic growth next year (and therefore lower corporate profits). Gilts and US treasuries continue to see lower yields, with investors willing to accept substantially negative real yields for “safety”. One can’t help but feel, however, that this will end in tears, since the finances of the UK and US are hardly solid.

Defensive shares are holding up comparatively well, offering solid cash flows and dependable yields. The trailing yield on the All-share index is now 65% higher than that of a 10-year gilt. On any sensible assessment of value, that is surely wrong. Nevertheless, investors are extremely risk averse at present and you would be forgiven for thinking that the mood music was closer to Mozart’s Requiem than Beethoven’s Ode to Joy.”

Last week banking shares suffered the steepest losses on the FTSE 100, on mounting concerns over the eurozone’s debt crisis. Resources stocks also dominated the loser board, amid fears that weak global growth will sap demand. Meanwhile, the yield, or implied interest rate, on benchmark US 10-year treasury notes fell 12 basis points to 2.05%, after touching a record low of 1.98% in an investor flight to safety. Similarly, gold prices jumped 1.7% to $1,819 an ounce, after hitting yet another record high at $1,826.

‘The gold market is telling us that we are potentially heading towards a second and perhaps more damaging economic crisis,’ warned Ross Norman of bullion brokers Sharps Pixley.

You could be forgiven for thinking ‘lets buy gold’, but…. buy gold at its highest point in years? This is very much like all those people who purchased property at the height of the boom or all those people who got on the dot.com bandwagon at its high point. I can’t say for certain you’re wrong but buying an asset as it screams towards a ‘peak’ should be considered with extreme caution. If anything, if you already hold gold, consider taking some profits.

Surely it makes more sense to look out for those so many now undervalued companies that were cheap before and are now at below bargain basement levels. FTSE 100 is at a one year low and it seems more right to buy shares now – that is if you are in it for the long term.

If the Euro fails maybe gold was a good idea, but if, as seems more likely, we bump along the bottom for a while and the Euro survives, then buying and holding gold could cost you dear. Companies as a whole are very profitable; it’s just the lack of clarity going forward that ’causes young men to panic’ as one IFA posted recently on Citywire.

The moral; have enough money to do with in life what you want to do (for the short to medium term). For the rest; have a diversified, risk-rated, managed and monitored portfolio – and pick a team you know to be qualified, licensed and above all that you trust to provide that service for you.

Inflation in the Isle of Man; Up, up, up, down and up again!

The Island’s inflation rate fell for the first time in almost a year last month, but as expected the relief was short-lived with an increase again in June.

The annual rate of inflation given by the Retail Price Index fell from 6.7 per cent in April to 6.3 per cent in May but went back up again in June to 6.4%.

According to figures from the Treasury, the rate has been steadily rising since late 2010.

And the data shows air travellers are facing huge hikes – fares have risen on average by almost 22 per cent, whilst sea travel has risen by just over seven per cent.

Inflation rates in Britain (our main trading partner) are at their highest among developed countries and rising, and pressure is again on the Bank of England to raise the Base Rate of interest from its current 0.5% although the decision last month was to leave it unchanged. Can the Base Rate remain at the historic low of 0.5% much longer?

The main problem with inflation in the Isle of Man is that most of ours is imported. We have to bring in all the fuel to power our cars, heat houses and run our power stations to say nothing of clothing, food; in fact we are net importers of just about everything.

Savers continue to have difficult choices to make about exposing some of their money to investment risk or accepting an erosion in purchasing power.

Cash is most widely known for being subject to inflation risk where over time, its purchasing power is typically eroded by the rising cost of goods and services.

Keeping your money in cash can also result in ‘shortfall risk’, which is the risk of failing to achieve your financial objectives. Over time, cash typically produces the lowest returns of any major asset class. This is the result of the relative security of cash compared to, say, company shares.

Don’t forget ‘Corporate risk’ which is the danger that the bank or building society looking after your cash savings will get into financial difficulties and be unable to meet their obligations. In the IOM, individual savers are protected by the Depositors Compensation Scheme (DCS) which mitigates this risk, up to a maximum limit of £50,000 per saver per institution – but not necessarily within an immediate time-frame.

“The Island’s inflation rate has fallen for the first time in almost a year.

The annual rate of inflation given by the Retail Price Index fell from 6.7 per cent in April to 6.3 per cent in May.

According to figures from the Treasury, the rate has been steadily rising since late 2010.

And the data shows air travellers are facing huge hikes – fares have risen on average by almost 22 per cent, whilst sea travel has risen by just over seven per cent.”

However don’t get too excited. Inflation rates in Britain are at their highest among developed countries and rising, and pressure is again on the Bank of England to raise the Base Rate of interest from its current 0.5% although the decision last month was to leave it unchanged. Can the Base Rate remain at the historic low of 0.5% much longer?

Savers continue to have difficult choices to make about exposing some of their money to investment risk or accepting an erosion in purchasing power.

Cash is most widely known for being subject to inflation risk where over time, its purchasing power is typically eroded by the rising cost of goods and services.

Boiler Room Scams – preying on pride

28th March, 2011

A phonecall today prompted me to update and republish this article. If you’re contacted out of the blue purporting to offer some wonderful investment opportunity, for goodness sake, get advice locally from a licensed qualified adviser

Boiler room scams continue unabated, and Iocal residents continue to be victimised. The Isle of Man Constabulary recently recorded the second £1million loss suffered by a victim of this crime.

The following is a generic typology of the modus operandii employed by boiler room fraudsters, which may assist the finance industry in recognising potential victims.

A ‘boiler room’ is a bogus stockbroking company, usually based overseas, which cold-calls investors and pressures them into buying worthless or bogus shares, or even old shares they might have with the promise of participation in a hostile takeover bid for the shares they already own. This latter case had pressurised the individual concerned into signing a ‘non-disclosure agreement’ (NCD) which prevented him from feeling able to seek advice earlier – they were actually preying on his pride. This horror story meant £50,000 had already been sent with a further £50,000 promised and he had only contacted us to check the bank weren’t acting strangely in refusing to send a second sum to an international escrow account!

Historically, older people with previous experience of investments or share dealing are targeted. Typical local losses average around £40,000, but are increasing rapidly and when you see the extent to which these criminals will go to with false websites and bogus due diligence you will see how easy it can be to be lulled into a false sense of security.

In the current economic climate, boiler rooms are starting to target high net worth victims or those who are not experienced investors, the latter initially being asked for smaller sums of money to invest. Many victims participate seeking to supplement their pensions with interest rates remaining a record lows.

Those operating the boiler rooms have developed new strategies to target investors, such as a promise to recover monies lost to the original boiler room, or to purchase these worthless or bogus shares, once an up-front fee has been paid. In addition, investors are being encouraged to sell previously highly regarded ‘blue chip’ company shares, such as banks and financial institutions and to invest in green or new technology shares marketed by the boiler rooms, or even to take out loans to fund new investments, like warrants, possibly even in company shares they already own.

The fraudsters are usually well spoken and knowledgeable. They are also very persistent and may groom their victims for several years beforehand. They might call their victim several times with offers of research, discounts on stocks in small overseas companies, or shares in a firm that is about to float. They warn them to guard the information jealously as otherwise they may miss out. Boiler rooms make their money in one of two ways: by simply taking money and walking away, or selling ”shares” at vastly inflated prices and with exorbitant dealing charges.

Most victims purchase their “shares” by telegraphic transfer, with smaller amounts being paid by same day money transfer (Western Union, Moneygram etc). Where banks are utilised, it is evident in most cases that the victim has not sent money by this method before. Fraudsters also coach the victim in what to say to bank staff if challenged over transferring large sums of money. Generally, most payments are made to accounts in Spain and the USA but other jurisdictions, particularly in the Far East eg Hong Kong, also feature prominently. There are no known cases where the victim has sent money to the same country that the “broker” or “shares” purport to be in.

If the investor has access to the Internet, they may be directed to websites to monitor the share’s impressive performance, not realising the entire site is controlled by fraudsters. Soaring share prices often induce the investor to increase their holding. Often, when the investor attempts to sell their holding, the fraudster encourages them to reinvest their “profits” in another red hot share, and then introduces a minimum investment sum which is greater than the profit figure, so if the investor wishes to participate they are required to send more money.

If the investor insists on selling, they will then realise their shares are “restricted” – it sometimes states this on the share certificate, if the investor has one. The fraudster will demand fees upfront to de-restrict the shares and once the investor has paid these fees the fraudster disappears. It is during the selling process that victims usually realise they have been scammed. Intelligence suggests most boiler rooms operate from virtual office accommodation using virtual telephone numbers etc which are untraceable.

The IOM FSC Financial Crimes Unit kindly requests that any person identified as a boiler room scam victim or potential victim, be furnished with a copy of this Advisory Notice and advised to seek independent financial advice. In blatant cases of deception, victims should be encouraged to consider reporting the matter to police.

Victims of boiler room scams are not likely to see their money again, mainly due to the length of time which elapses between them investing and realising they have been defrauded.

Stocks and shares and other such investments should only ever be purchased from locally licensed stockbrokers, and not from strangers who cold-call them at home. If in doubt consult an impartial and well qualified financial adviser; someone who is responsible (and insured) for the advice given. Please do note that if you are cold called, this is against the rules. Do not use a firm or individual who is not authorised in the Isle of Man or the UK; you’re just asking for trouble.

More free financial planning talks planned for March and April

TLC Business Solutions and Thornton Associates, with the support of the Isle of Man Government, have arranged a series of free talks on financial planning for ordinary people. The new series leads on from the success of their first talk on the same topic, held in November last year.

TLC is a leading Manx corporate training company and Thornton Associates is the Island’s only firm of Chartered Financial Planners. The Managing Directors of the two companies, Sue Gee (TLC) and Sharon Sutton (Thornton Associates) first teamed up to provide a government backed seminar last year, which was met with overwhelmingly positive feedback. Over one hundred people attended the talk, designed to encourage people on average incomes to think about the details of financial planning, and 99% of attendees who left feedback said that they had gained something useful from it and would recommend it to a friend. One audience member said, “It was fantastic; the message was received and uncovered the steps to plan for my future – it was a great use of an hour!”

There will be a series of four talks spread throughout March and April on different subject matters, all of which will be hosted at the Claremont Hotel. They will open for coffee and registration at 5.15pm, with the seminars starting at 5.45pm and lasting one hour. They are supported by the Department of Economic Development and are open to anyone over the age of 18.

The first talk is on the 9^th of March and will feature Sue and Sharon, covering similar ground to their previous event. Sue commented on the talk: “It is a myth that only affluent, high net worth or rich people need to plan financially for the future; it is actually more important for those of us who have less disposal income because we need to make the money work harder for us. If you didn’t hear about the last talk in time or couldn’t make it along, I would really encourage you to try it out – it’s free, after all.”

Feedback from the last talk suggested that there were three areas in particular that attendees wanted to hear more about: debt management, wills and pensions. Sue and Sharon have addressed this by arranging three additional talks in this series. The second talk is on the 16^th of March and will cover the subject of wills. Sally Bolton, Principal of Corlett Bolton and Co legal practice, will lead the seminar, which will cover areas such as what your assets are and how to manage distribution via a will. Andrea Tabb will present the third seminar on the 22^nd of March. Andrea is the Advice Centre Manager at the Isle of Man Office of Fair Trading and will outline how to use credit while avoiding debt problems. Finally, Sharon Sutton will provide the last talk of this series on the 6^th of April, on the subject of pensions and how to get the most out of them.

Sharon commented on the new series of talks: “We were very pleased by the success of the last seminar and it is good to see the Isle of Man Government supporting further talks. The feedback from the last event has given us the opportunity to understand more precisely the subjects that people struggle with and we have been able to tailor this series to address some common concerns in greater depth.”

To register for any of the free financial planning talks, call Janet on 664 789.

Make sure you’re getting the right advice

Financial advisers are already subject to tighter regulations following the latest version of the Financial Supervisions Commission’s (FSC) rule book

From end 2012 the Financial Services Authority (FSA) in the UK will require all independent financial advisers (IFAs) to shun commission payments from product providers and rely on fees paid by investors instead and the Isle of Man is likely to follow suit in some way shortly thereafter. The fundamental changes followed an FSA investigation; as outlined in the FSA’s Retail Distribtion Review (RD) Feedback statement issued in November 2008, found that commission payments by insurers, banks and other financial institutions often distorted advice. The FSA’s RDR will also require other changes, such as higher professional qualifications for advisers from end 2013.

To ensure you are receiving the best advice, here are 10 tips to help you;

Hello, stranger! If you are contacted by a financial adviser you dealt with in the past but who has not been in touch for more than a year, you might ask why he or she is so keen to do business now. Much of it will be for good reasons but investors should think about why they suddenly hear from any adviser out of the blue and why haven’t they heard from them for many years?
What’s it going to cost? The amount you pay will depend on your particular needs, however an adviser should be able to provide an estimate of possible costs based on the work to be performed. As part of your financial planning agreement, the financial planner should clearly tell you in writing how they will be paid for the services to be provided. Don’t be afraid to ask whether this is in the form of commission or fees.
Don’t be lazy; apparently simple solutions can prove very expensive. Beware ‘nicely wrapped packages’ which purport to solve all problems; for example, an investment bond may look like a convenient one-stop product which offers easy, simple administration, access to managed funds and can even solve your tax problems and income requirements. An investment bond, however, can be a poor product proffered by an insurance company with little investment expertise, which is not tax efficient (for the onshore version) and can pay the salesperson up to 7 per cent commission.
Refuse to be rushed. If your adviser says he or she needs an answer now, then perhaps the answer should be “no, thank you”. A good tip is that investors should take due diligence. They should take time before buying products. Have a long term strategy and then think how buying products will meet those long term needs.
Require regular advice – and full disclosure. It’s not unreasonable to expect a financial adviser to review your investments and pensions on an ongoing basis and, if so, tell you what incentives he or she is receiving from product providers. For example, a typical trail commission would equal 0.5 per cent of the value of your investments What service are they providing to justify their fees?
What about my existing plans? Ensure your adviser is prepared to look at your existing plans in addition to any new monies to make sure any advice being given is taking into account your entire financial situation and needs. However, also beware changes to portfolios that could incur tax charges or other charges unnecessarily without receiving a written ‘reasons why letter’ first.
What qualifications does your adviser have? You may wish to ask your financial planner if they have a specialized qualification in a particular area that they are advising on, i.e. pensions or long term care. Ask them what steps they take to keep their qualifications up to date with changes and developments in the financial planning field. Whilst exams are no guarantee against bad financial advice, investors may ask advisers whether they have obtained the qualifications which will be required by the FSA after 2012, and the FSC after 2013 (possibly) – or are on track to obtain them.
Beware obfuscation. If you don’t understand what your adviser is saying, tell him or her to try again in plain English. Jargon can obscure some nasty surprises.
If it looks too good to be true, it probably isn’t true. Beware of high allocation products which may look impressive but could be concealing the initial commission. All that happens is the charge is ultimately taken out of the contract over a number of years and back end penalties will apply. Investors should look for a transparent charging structure.
Remember that ‘free’ financial advice can prove very expensive; you generally get what you pay for. Commission-driven advice is by definition not independent. So, if an individual is looking for independent advice, they should be prepared to pay a fee for it. You can avoid commission altogether and opt for time or project charged advice from a highly qualified fee-only adviser.

Sources: Ian Cowie Your Money, http://www.fsa.gov.uk/ http://www.fsa.gov.uk/pages/About/What/rdr/index.shtml http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/139.shtml

http://www.financialplanning.org.uk/pdfs/10Questi.pdf

Sharon Sutton is Managing Director of Thornton Associates Ltd who are Licensed by the Financial Supervision Commission of the Isle of Man. Registered with the Insurance & Pensions Authority in Respect of General Business

Is now the time to Invest?

They say time heals pain and so the financial crisis of 2008 seems more and more distant. Markets have been in a buoyant mood and recently the FTSE 100 crossed the 6000 barrier, up some 8% year to date. The cost of government borrowing, as measured by the gilts market, continues to fall with 10 year gilts yielding a miserly 2.94 %, close to the year lows.

The new UK government has nailed its colours firmly to the mast of fiscal rectitude and has spelled out the deepest cuts in public spending for a generation. The hope is that private investment will step in as the public purse steps out.

There are precedents; remember the early Thatcher years were characterised by severe spending cuts leading to strong growth in the mid 1980s? The early Clinton presidency also paved the way for growth in the mid 1990s by bringing Federal deficits down.

Nevertheless, there are risks. Followers of Keynes would argue that, whilst the budget should balance in the medium term, too much fiscal contraction too soon risks taking demand out of the economy while it is still weak, pushing it back into recession.

The Bank of England, put on notice by the new Chancellor, will provide more monetary stimulus if the economy slows but the Monetary Policy Committee (MPC) is divided on this issue with some arguing consistently for near-term interest rate rises with the prospect of rising inflation.

The pound has resumed its decline against other world currencies; clearly a weak pound remains a key plank in the UK recovery. It is becoming evident that a Euro rate of 1.20 is just enough to provoke members of the MPC to go public in efforts to talk the pound down. Whilst it makes our holidays more expensive, a weaker pound also makes our exports cheaper and raises overseas earnings in Sterling terms.

Often overlooked is that of all major markets, the UK has the highest exposure to overseas earnings; optimism remains that UK international blue-chips are well placed.

Another reason to be optimistic is that valuations do continue to look good; results have generally been favourable, dividends are high and dividend growth is back on the agenda. In fact many dividend yields are higher than their respective bond yields and underscores the fact that equity owners are being paid reasonably (compared to cash and bonds) whilst the economy gets back on its feet. This could be paving the way for some modest multiple expansion.

The “Euro” economy remains at risk from the very tight policy framework adopted by the ECB and the strength of the Euro is a significant headwind for the weaker Euro economies such as Ireland and Spain.

Elsewhere, in Emerging countries growth remains strong, although redirection of their priorities from export led growth to domestic consumption would likely help the rest of the world. A strong indicator to watch out for would be an international agreement on global trade and a revaluation of the currencies belonging to the exporting nations; chief among these, China.

Clearly risks remain as does our view that the best way to insure assets against volatility is diversification through seeking advice from a licensed, reputable and well qualified adviser.

As Mark Twain said, ‘“History never repeats itself, at best it sometimes rhymes.”

Sharon Sutton is MD and Chartered Financial Planner at Thornton Associates Ltd who are licensed by the Financial Supervision Commission of the Isle of Man and Registered with the Insurance and Pensions Authority in respect of General Business

‘Bond Bloodbath’ Bootle Warns

Sharon Sutton reports from the PFS Conference having heard Capital Economics MD Roger Bootle’s keynote speech…..

Bootle warns of ‘bond bloodbath’

Well respected Independent City economist Roger Bootle has warned gilts are not a safe bet in the present environment, despite record low yields.

Speaking at the PFS conference this week attended by Thornton Associates MD, Sharon Sutton, the Capital Economics managing director said: ”My forecast for ten-year gilt yields is currently 2.8%. Bonds at this level are extremely risky as they will eventually rise causing a bond bloodbath.”

Bootle also says soaring inflation fears are unfounded and UK CPI will ‘collapse’ by 2013.

He expects inflation to fall “below 0%” within three years, and dismisses recent reports interest rates could soar to 8% by next year.

“If anyone thinks interest rates will rise to 8% next year they can see me about it. I will offer it to them as a both ways bet! It’s not going to happen.”

Bootle says UK official interest rates will remain at their current level of 0.5% for another four years. He said he forecast last year they would remain low for 5 years – so on that basis there’s another 4 to go and forecasts UK unemployment will rise to 10% by 2012.

He also warned of a break-up of the eurozone, with either the strongest member Germany, or one of the weakest members Greece, being forced out as their economies continue to diverge from those of other states.

“In real terms, consumption in Germany has been flat at 5% for 11 years. In the UK and the US it has risen 25% in that time. Germany is strong in exports but does little spending. This puts a real strain on the eurozone with a long period of Eurowobbles.”

He said he thought there was a real risk of things getting really nasty in the world economy with the imbalance of trading relationships especially between China and the US. “Countries and regions who have also been ‘exporting like the clappers’ are Asia, oil producing countries, the Germans, Swiss and Norway in Europe”.

However, he ended his speech on an upbeat note, saying he expects to see a “much better economy and a much brighter future” for the UK in the next few years provided the Asian exchange rates went up and were offset by increasing domestic demand from the aforementioned countries and regions.

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