News
Top 10 useless financial products Which? experts name the products you don’t need
11th August, 2010
People could be wasting thousands of pounds on financial products they simply don't need, according to consumer champion Which? Money Quarterly magazine.
Experts who worked on the title, which are currently available at newsagents nationwide, have identified ten financial products that are usually useless - and which could leave you seriously out of pocket. Here is an outline to whet your appetite should you wish to run to the shops to buy it.
1. Mobile phone insurance
Mobile phone insurance can cost up to £100 a year, with mobile phone operators typically offering the worst deals. Before shelling out for specialist mobile phone insurance, find out whether your phone is covered under your home contents insurance policy. Many people don't realise their handset is protected in this way and, as a result, end up wasting more cash by ‘double insuring' their phones.
If your phone isn't already included on your home insurance policy, adding this cover should be straightforward - and probably more affordable than buying insurance separately.
2. Payment protection insurance (PPI)
PPI has been the subject of a prolonged mis-selling scandal. Not only have thousands of consumers been sold PPI without even being asked if they want it; others - for instance, self-employed people or those with pre-existing medical conditions - have been sold payment protection insurance although there is little chance it would cover them in the event they needed to claim.
What's more, PPI is expensive. Adding payment protection insurance to a £7,500 personal loan, to be repaid over five years, could cost an extra £2,000 - £3,000.
Which? experts recommend that consumers choose income protection insurance as an alternative to PPI. Meanwhile, if you have been mis-sold PPI, you can reclaim your premiums online using our free tool.
3. Extended warranties
Extended warranties are generally too expensive to ever be worthwhile. They are usually offered on big ticket items such as electrical goods - but extended warranties can cost up to half as much as the item they are intended to cover!
It makes much more sense to ensure your purchases are covered under your home insurance policy.
4. Secured loans
Taking out a secured loan is risky because, if you fail to meet your repayments, you could lose your home.
In addition, although the interest rates on offer from secured lending companies tend to look low, secured loans can end up being very expensive. This is because the interest rates on secured loans are often variable, and the loans usually extend over long periods of up to 25 years.
Unsecured loans - or personal loans - are a better option for borrowers because they pose less risk to your property and come with fixed rates of interest.
5. Debt management plans
Debt management plans can cost thousands of pounds in the long term - but if you are struggling financially you could get free help with managing your debts from a charity such as National Debtline, the Consumer Credit Counselling Service or Citizens Advice. Read the Which? Dealing with debt guide for more information.
6. Structured products
Which? experts believe structured products are confusing, complex and costly. Perhaps more importantly, they are not as safe as they seem.
Some people who had bought structured products backed by Lehman Brothers lost their money when the bank collapsed in 2008.
Check out the Which? Structured products advice guide for further information on why you should avoid these investments.
7. ID fraud insurance
Many people are worried about identity fraud - but ID fraud insurance, which can cost around £70 a year, may be bad value for money.
Most losses you might incur as a result of identity fraud will be covered by your bank or credit card provider, so you may want to think twice about paying for a policy.
8. Store cards
The interest rates charged on store cards are massively uncompetitive in comparison with the market's leading credit card deals.
While you could borrow interest-free using a 0%-on-purchases card, maintaining an average balance of £1,000 on a store card charging 29.9% APR would cost you nearly £300 in interest over a year.
9. With-profits funds
Investing in with-profits funds may mean you are charged high fees, and some with-profits funds have performed very badly over the last few years.
If you'd invested £5000 a year in a full-cost with-profits endowment during the past decade, you could actually have lost money - ending up with as little as £4,982!
Putting your money in a stocks and shares Isa is a better option, according to Which? Money experts. You can read more about these in our Stocks and shares Isas advice guide.
10. Packaged bank accounts
Finally, we think you should steer clear of packaged bank accounts. These current accounts come with benefits such as travel insurance and breakdown cover, but can cost up to £300 a year - and unless you use all of the extras offered by a packaged deal, it is unlikely you'll get good value for money.
It usually makes more sense to opt for a Which? Best Rate current account and then purchase any additional products you need separately.
NSI pulls inflation linked savings product
20th July, 2010
NS&I, the government backed savings institution, has withdrawn its savings certificates from sale and reduced the rates on other products in a blow to savers struggling to make a return above inflation.
Higher than anticipated inflation, continued low interest rates and the desire to avoid risky investments at a time of market volatility and continued uncertainty over the health of Britain's banks has boosted the attraction of NS&I's inflation beating and 100% guaranteed products.
Both the Fixed Interest Savings Certificates and Index-linked Savings Certificates have been withdrawn. The rates paid on NS&I's Direct Saver and Income Bonds have been cut by 0.25%.
Boost for banks and building societies
The government must balance the need to help people save, while preventing NS&I from taking too much money that would otherwise be put with Britain's banks and building societies. The Treasury sets a target for NS&I each year, and the institution has now met this year's aim of balancing the funds coming into NS&I with the funds leaving it.
‘NS&I sales volumes in recent months across all three products have far exceeded those either anticipated or required by NS&I,' it stated today.
Andrew Hagger of Moneynet.co.uk, said it was a victory for banks and building societies, but another loss for savers: ‘By removing these certificates from sale and cutting rates on remaining accounts NS&I will enable the banks to improve their balance sheets, but there's nothing positive in today's announcement for the man on the street.
Jane Platt, NS&I's chief executive, said: ‘NS&I is extremely mindful of its responsibilities given its unique place at the heart of the UK savings sector. We continue to follow a policy of acting transparently and balancing the interests of our savers, the taxpayer and the stability of the wider financial services market.'
Although inflation has dipped for the last two months, a basic rate tax payer still needs to find a savings account paying 4%, and a higher rate tax payer 5.33%, in order to stop their savings pot effectively eroding away, according to Moneyfacts.
Sales stopped already
Direct sales of Savings Certificates from NS&I and those from Post Office counters have been stopped. NS&I said postal applications received today will be honoured, but all postal applications received after midnight will be returned to the customer. The new rates on Direct Saver and Income Bonds have now come into effect.
Eurozone crisis could hit structured products
7th July, 2010
Unstable structures?
Structured products such as guaranteed equity bonds could be hit by the fall-out from the eurozone crisis was the conclusion of Money Observer's Heather Connon in an article this week.
The collapse of US investment bank Lehman Brothers showed that an alarming number of structured products were making promises which were literally too good to be true. Now, the industry's fight to prove that it can offer low-risk, high-return products is being undermined again by the turbulence in Europe.
Will the latest concerns over the health of the banking sector spell the end for structured products?
While the name may not be familiar, the products almost certainly will be. More than £42 billion is invested in these products, which are promoted by virtually every bank and building society as a way of getting equity-type returns without the risk.
Their names sound reassuring - Target, Protected and Guaranteed are typical words - and their offering sounds simple enough: you get a certain percentage of the rise in the FTSE 100 or a similar type of index, which can be as low as 10 per cent or as high as 200 per cent. If the index falls, however, you will get all, or most, of your money back.
Yet the structure behind these products is far more complicated - a complexity which explains why so few investors and advisers were aware of how risky they were. Exposure to the underlying asset class is often achieved through a derivative product issued by an investment bank. The guarantees are also usually achieved through a financial product issued by an investment bank.
As the collapse of Lehman Brothers in 2008 showed, a derivative is only as good as the bank which stands behind it. Thousands of investors lost out last year as companies such as ARC Capital & Income, NDFA and DRL, all of which used Lehmans as counterparty, went bust. Then Keydata, which supplied structured products to many banks and building societies, collapsed amid a Serious Fraud Office investigation.
These disasters sparked a rather belated investigation into the structured products industry by the Financial Services Authority. As well as paving the way for investors who had lost money to make claims under the Financial Services Compensation Scheme, the regulator wrote to the biggest promoters of these plans telling them to review their sales and marketing procedures. The FSA is still investigating the area and is expected to announce its findings by the end of the year.
Structured product providers reacted by insisting they should not all be tarnished by the Lehman connection, citing a range of reasons that they were different: they use only top-rated banks as counterparties; they spread the risk among a number of different banks; they use government bonds to back their promise; their products are conservatively managed and so on.
Their protestations have had little impact: in Money Observer's own, admittedly unscientific, survey of financial advisers, none would recommend structured products. While they cited a variety of reasons, one was constant: it is impossible to assess the credit risk in these products without carrying out far more analysis and investigation than financial advisers are willing, or usually qualified, to carry out.
Perhaps because of the failure of that campaign - or possibly because they fear a bigger crackdown by regulators - the industry has gone to ground. Leading players such as Barclays and Morgan Stanley refused to be interviewed by Money Observer and even the UK Structured Products Association, the trade body set up to promote the industry, struggled to come up with a response to our questions.
That is extremely worrying because, while Lehman's collapse may be fading into history, credit risk remains a major issue - in fact, it could soon be thrust back to the top of investors' worries. The Greek crisis has turned the spotlight on to the financial health of Europe's banks again. There are constant rumours about which banks are dangerously exposed to the debt of the Greek government, or to that of Spain and Portugal, which are in almost as parlous a financial position.
Investors were particularly nervous ahead of the publication of the results of a ‘stress-test' of Europe's banks, being carried out under the auspices of the European Central Bank. The impact of a sovereign debt crisis is likely to be one of the key variables which banking regulators will be testing for.
Martin Bamford, managing director of Informed Choice and a chartered financial planner, warns: ‘The eurozone crisis could trigger further bank collapses which could undermine the backing of some structured products in the UK. The trouble is, it is close to impossible to understand where the financial protection actually rests with a structured product.'
Tim Cockerill, head of collective investment research at Ashcourt Rowan, agrees. ‘It is clear there are significant stresses in the [European] banking system. Counterparty risk is a big issue. Recent experience has shown that [a bank] can be rated highly but the reality is different.'
Robert Lockie, a partner in Bloomsbury Financial Planning, says: ‘I have not got the time, and I suspect most advisers do not, to go and dig into the detail of the operations of the guaranteeing banks and to ferret out the potential liabilities which might be lurking there. A lot of derivative instruments are not on the balance sheet anyway.
‘And your bank may have no derivative exposure but it may have lent to other banks which do. And you have to monitor changes in the future. Is it worth doing all that for a £50,000 investment in a structured product?'
The fact that guarantees underwritten by banks can be unexpectedly flimsy is not the only - or even the major - reason for avoiding structured products. There are plenty of other drawbacks too.
It is impossible to work out what your investment will be worth. The products promise a return of, say, 50 per cent of the gain on the FTSE 100 between two dates but, apart from the impossibility of forecasting what that gain will be, different providers calculate the gains in different ways. And, for much of the past five years, there has been no gain so investors will have had to fall back on the guarantee that they will get just get their money back - so why lock yourself in and pay the costs of these products to get a return worse than a building society?
‘It is an extra layer of complextity which does not have much practical benefit,' says Lockie. ‘If you want a return half as as much as the FTSE 100, just invest half your portfolio in it.'
Of course, anyone buying a unit or investment trust is also buying blind as no-one can predict how they will perform. But it is easy to buy and sell these trusts; with structured products, investors are locked in for a fixed term and could face big losses if they try to get out before the product matures. And, while some products lock in returns as they go along, others can be severely affected by a sudden stock market crash just before they mature.
‘They are sold by banks and building societies - that tells you all you need to know,' says Mark Dampier, head of research at Hargreaves Lansdown. Indeed, many of the mis-selling scandals of recent years - like precipice bonds, endowment mortgages and payment protection insurance - have been products which are sold mainly by banks and building societies.
‘I have never seen anything I particularly wanted to buy which has a fixed investment term - I want something I will be able to roll over, ' added Dampier.
He also points out that structured products generally pay no income during their term. ‘A dividend is a massive part of investment returns, if you take the dividend away, you take away a big chunk of these returns.'
While charges are rarely spelled out in detail, the complex structures and expensive guarantees mean they are an expensive way to invest. The lack of transparency about these costs is indicative of how complicated they are.
‘My over-riding view is that, the simpler and more transparent a product is, the better,' said Cockerill. ‘That way, you do not risk unpleasant surprises.'
The Investment Management Association has complained that these products carry far fewer restrictions about the way they are sold, and how they can be marketed, than unit trusts - yet they have been shown to be far riskier.
The irony is that, when the measures outlined in the Retail Distribution Review, which governs how advisers must behave, come into effect in 2012, advisers will have to consider structured products for their clients.
‘Our view here is that we can take a view generally as a firm that we will not use them, giving reasons,' says Lockie. ‘If a client wants them we will have to tell them to go elsewhere.'
The view of local Chartered Financial Planners; Thornton Associates Managing Director Sharon Sutton is that 'Sometimes their use can be justified but then it should be as only a small proportion of a client's overall portfolio, and essentially it should be tradeable daily on a secondary market. Most are not.'
Insurance Giant Uses Isle of Man Firm for Advice
22nd June, 2010
AEGON has produced a comprehensive range of online support material, helping advisers understand the requirement for change ahead of the retail distribution review and how to plan for the future success of their business.
The new ‘How to' zone of AEGON's Business Brain website includes videos and interactive presentations highlighting the seven different elements of business planning: business vision, goals, finding opportunities, exploiting opportunities, what should an action plan look like, measurement and keeping it going.
The support material also includes valuable information helping advisers identify where they want their business to be in the future, and how to get there by putting together a comprehensive action plan.
The new ‘how to' zone looks at the key reasons why advisers fail to plan and suggests solutions to overcome these obstacles. It then goes on to outline the support available, including the seven steps of pulling together a business plan.
John Joe McGinley, Business Consultancy Manager, Strategic Accounts said;
"Every adviser business from time to time should take a look at its current structure, vision and operating model, especially in light of the changes brought about by the retail distribution review. We have worked with a number of advisers to develop a practical range of web based support material to help them develop their business proposition and identify the remuneration strategy they can adopt when the retail distribution review comes into force.
"In the past we have helped advisers understand the theory behind the importance of businesses putting in place a thorough business plan and we will continue to do so. However we have now taken this one step further by introducing practical support material, taking advisers through each step of the process."
Sharon Sutton from Thornton Associates, the Isle of Man's only Chartered Financial Planners, who worked with AEGON in developing the material said:
"AEGON has launched a very comprehensive range of online support material which is useful for any adviser who is looking to revisit or develop their business model. The ‘how to' zone provides practical step by step guides, ensuring that all businesses, regardless of where they are on the planning cycle can benefit."
Advisers can view and download the material at: http://businessbrain.aegonse.co.uk/how_to_zone/index.html
The best returns are made when it feels uncomfortable to be investing
15th June, 2010
How can Greece, a country that accounts for only 2% of Eurozone GDP, cause such trauma? According to a recent FT article, European companies have written off EUR 300bn in debt over the past year because of late payments, more than Greece's total outstanding debt, without causing a ripple in the markets. How can such a "fly" - a tiny country that owes less than even one company, A.I.G. - create such a major financial crater?
The situation in the Eurozone is of course a concern and many threats to economic stability and a smooth recovery remain, but we are still reasonably relaxed about equity market valuations and are placing stall on the continuing levels of improving corporate sector data coming through. Governments do deserve credit for their on-going judgement in finding appropriate solutions to problems that continue to emerge from what were unprecedented events and so their responses have had to be adaptable.
Looking beyond short term concerns, the global economy's recovery is gathering pace, while headwinds from monetary tightening are still some way off for the developed economies so expect improvement in the values of growth assets.
Conditions are still unsettled, but they have been for the past two years or so and we have come to learn that if you are managing a long term portfolio then you have to look beyond this and ride through the periods of volatility whilst always keeping a close focus on whether the landscape has actually changed. Look to be opportunistic rather than panic because it is a fact of investment life that the best returns are made when it feels uncomfortable to be investing.
Given the extent to which markets have come off recently (FTSE down 15% over the past few weeks), our client portfolio valuations reveal significantly better figures which show how they are operated in terms of care, patience, judgement and the backbone that the level of diversification in the strategy employed brings to the overall result. So we are in pretty good shape and it certainly could be looking a lot worse. Damage has also been limited by a commitment to the US where dollar strength has offset underlying falls.
New monies added today would most likely be allocated to more diverse asset classes and investment vehicles - each one playing a differing role and bringing a different slant to the overall mix. Equity weighting decisions are controlled by the use of less volatile asset classes where funds are put to work, particular regard being given to the real risk strategy as carefully determined by a clients tolerance.
So, if you are a long term investor and want to have a financial planner that understands your risk profile, tax planning opportunities, and how that fits into your plan not run out of money before you run out of life then contact us at Thornton Associates Ltd, the Isle of Man's first firm of Chartered Financial Planners.
INVESTORS SHOULD STAY CALM AND CARRY ON
19th May, 2010
RECENT stock market volatility has been lucrative for City traders who make millions betting on market swings, but it isn't much fun for ordinary investors.
With the FTSE 100 plunging 10 per cent due to the Greek crisis, then rebounding 5 per cent in a single day after the £650 billion eurozone bail-out by the casino of Europe (the ECB), people have seen the value of their pensions and investments swing dramatically.
We can expect plenty more volatility as markets battle to recover in an age of austerity. So how to survive?
Stay calm
Most investors should keep calm and carry on, says Martin Bamford, chartered financial planner at independent financial adviser (IFA) Informed Choice. "Many people are investing for the long term, say five, 10, 20 or even 30 years to provide income in retirement," he says.
"Over such a long period current stock market woes will one day seem like a blip. We have been through a tough time but things should improve. Most investors can do nothing except grit their teeth and stick with it."
He advises not to sell investments now as it will crystallise losses, and adds: "We saw after the eurozone bail-out how quickly share prices can bounce back. So be patient and give your investments time to recover their lost value."
Take the long view
If you are going to invest in stocks and shares volatility is a fact of life, says Gavin Haynes, managing director at IFA Whitechurch Securities. He adds: "You should ignore the day-to-day uncertainty and concentrate on the underlying value of the stocks and funds you are investing in.
If you choose your investments carefully, you should still make money from investing in equities in the long run."
When investing new money, you can reduce the risk by drip-feeding smaller regular amounts rather than throwing in all your money in one go. "It is upsetting to invest a large lump sum only to see the value of your investment instantly fall 10 per cent," he says.
"But if you invest a regular monthly amount you actually benefit if share prices fall, as you get more stock for your money provided prices have bounced back by the time you cash in your investments."
Keep your nerve
If you can't take current volatility, perhaps you should avoid stocks and shares altogether, suggests Mark Dampier, head of research at Hargreaves Lansdown. "Investing is all about improving the quality of your life but that won't happen if you're scared to death about what will happen to your money," he says.
Even lower risk stock market funds, such as those in the "cautious managed" sector, are still risky. The average cautious managed fund is down 2 per cent over the past three years, according to trustnet.com, yet rose 17 per cent over the past year.
The drawback is that if you shun the stock market returns elsewhere are much lower, says Dampier, adding: "Many savings accounts are paying less than 1 per cent which isn't much use to anybody. In the longer run stocks and shares should give you a better return than cash, despite the risks. Although if you are investing for less than five years you should probably stick to cash."
Corporate bond funds could be a good halfway house between cash and shares. They invest in IOUs issued by companies to raise money and pay a steady rate of interest with the possibility of capital growth.
Recent performance has been disappointing, with the average UK bond fund returning just 11 per cent over the past three years, but the M&G Strategic Corporate Bond returned an impressive 36 per cent.
"Corporate bonds should help shield you from volatility but they aren't without their dangers," says Dampier. "They won't look so attractive if inflation returns because they pay a fixed rate of interest."
Despite recent volatility, he is optimistic about future stock market returns, adding: "I'm quite bullish at the moment. I still think the FTSE 100 could rise over 6,000 this year, up from about 5,300 currently. Volatility can work in your favour as well as against you."
Look for absolute returns
A type of investment called "absolute return" funds aim to shield investors from volatility by trying to deliver a positive return of between 7 per cent and 10 per cent a year, regardless of whether markets are rising or falling.
They work a little like hedge funds, using complex derivatives to bet against falling stocks and cash in when prices drop, as well as investing in stocks they expect to go up.
Dampier says: "Managers of absolute return funds have massive freedom to decide when and how to invest so performance can be variable. You have to have a lot of faith in the manager. I would recommend Philip Gibbs of Jupiter Absolute Return. I also like Standard Life Global Absolute Return Strategies which has delivered positive returns with low volatility during the recent market."
Absolute return funds have delivered steady returns throughout the credit crunch and recession, although they underperformed in last year's stock market rally. The other drawback is that charges can be up to 20 per cent of any profits they make, eating into your returns.
Ian Hudson, principal at IFA Hudson Green & Associates, recommends another steady investment fund, Axa Distribution, launched in 1975 and managed by Jim Stride for the past 25 years.
Just over half the fund is invested in stocks and shares, mostly quality blue-chip companies paying good dividends, with the remainder in Government gilts. It avoided the worst of the autumn 2008 crash and grew 13 per cent last year.
Hudson says: "Axa Distribution is relatively low risk, has a competitive annual charge of 1 per cent and you can either draw dividend income or reinvest it for the future. It ticks all the boxes
House View
At Thornton Associates, Chartered Financial Planners, we believe in a diversified investment asset, risk assessed approach to provide a real client-focussed ongoing service that helps clients, whether you are a private individual, trustee or small business owner, to get what you want; helping you identify, achieve and maintain your desired lifestyle without ever running out of money. That is what we, as financial planners do best, and when interest rates have fallen off a cliff, clients require our help more than ever. it is worth remembering that risk to capital is not the only risk to consider
posted by Sharon Sutton
Greece; who holds all the debt?
29th April, 2010
With foreigners holding c. 80% of Greek debt, many countries face direct exposure NOT just contagion risk - BIS Q3 data shows (all quoted in US$)
- FRANCE $75 bn (some highly exposed banks)
- SWITZERLAND $63 bn
- GERMANY $43 bn
- US $16 bn
- PORTUGAL $10 bn
Another source (FBR) gives slightly different numbers ;
Greece Exposure - French Banks were estimated to have the greatest exposure to Greece, followed by Switzerland and Germany (BIS data as at 3Q09).
This explains the weakness in French names. With c. E200bn Greek loans outstanding owned outside of Greece, fair assumption is that French would own about E30bn, Germany E20bn. This is outside of the direct holding in Greek banks .Credit Agricole owns 91% of Emporiki Bank (TEMP GA) with total loans outstanding in excess of E20bn. In terms of exposure to Greek Gov't debt (BIS Data), France holds 24.9% of total, Germany 14.3% and rest of Europe 18.8%, Switzerland 21.1%, Britain 4.1%.
A current synopsis on the Greek crisis;
- Greek debt crisis is a result of poor fiscal management, hence this has to be rectified to avoid throwing good money after bad
- Greeks need to sign off on 3-year program to consolidate the budget and agree to outside monitoring (EU/IMF), giving up 'fiscal independence' until credibility is restored
- Current market rates on Greek debt and rating downgrades have made it impossible for Greece to muddle through on its own: choice is between aid or default
- Fiscal crisis has major implications for the European banking sector: European banks find themselves with large exposure to Greek government debt and Greek banks
- Currently they can use Greek government bonds to draw funds from the ECB on repo basis, i.e. they can pass on default risk onto ECB balance sheet
- If Greece defaults, European banks will face write down losses, but ECB as well. Substantial damage to the EMU system
- EU leaders will attempt to avoid a default by expediting an enlarged aid program (to be increased from €30bn to €120bn)
- Bank and insurance exposure to Greece:
- French and German banks have biggest exposure to Greece (about €80bn to the government and another €120bn to banks and private borrowers).
- Potentially biggest individual banks: Commerzbank, BNP. Credit Agricole and SocGen partially own Greek banks. But Landesbanken and Sparkassen should have a far bigger combined share. Hypo RE is apparently involved with €10bn. Investment in GGBs was popular with bank treasurers because of slightly higher yields and the ability to use them as collateral to draw cheap liquidity from the ECB at the same time. Risks of rising Greek debt burden were overlooked (‘Europe's sub-prime problem?)
- In France Insurance companies hold €20bn in Greek government bonds.
- After French and German banks, UK banks have 3rd largest exposure. Banks from the 3 countries hold about a third of Greek government debt.
- Knock-on effect on other countries:
- If Greece reschedules its debt, the crisis may move on to Portugal, Spain, Ireland. German banks have €240bn exposure to Spain, again with strong involvement of German public banks. German and UK banks are the biggest creditors to Irish banks.
Exclusivity of Corporate Chartered Status
24th April, 2010
As holders of corporate Chartered Financial Planners status (and personally holding a Chartered title), we clearly recognise the value of technical capability, continuing development, standards and ethical practice - the cornerstones of professionalism.
Research conducted on behalf of the CII by YouGov has already confirmed that ‘Chartered' enjoys the strongest recognition among consumers in terms of titles they would associate with professionalism. Corporate Chartered status can enhance your standing with new and potential customers and other professional firms.
As an important differentiator in a competitive market, it can deliver tangible business benefits. In recent research among existing Chartered Financial Planners, we found the responses to questions regarding the value of Chartered status were overwhelmingly positive:
- 85% of Chartered Financial Planners said Chartered status improved their standing with professional connections
- 84% said the same regarding prospective customers
- 79% said the same regarding potential new staff
- 60% of Chartered Financial Planners said Chartered status helped win new business
• 53% said the same regarding increased referrals.
And this remains an exclusive club - in the UK there are less than 300 firms of Chartered Financial Planners. You can see a full listing at www.cii.co.uk/chartereddirectory
Thornton Associates remain the sole holders of Chartered status in either the Isle of Man, Jersey or Guernsey and Sharon Sutton remains the sole Chartered Financial Planner in the Isle of Man
Launch of Financial Planners & Insurance Brokers Association
19th April, 2010
A new financial association was launched on Tuesday 13th April at the Claremont Hotel.
The Financial Planners and Insurance Brokers Assocation (FPIBA) has been formed with several aims in mind: to provide a forum for discussion of matters of common interest to members; to act as a representative body for the members with government and regulators when needed; and to encourage the ongoing achievement of high standards and ethical business conduct.
At the launch, the formation and election of officers and committee members was finalised:
Chairman - Stewart Murphy (Westwinds Financial), Deputy Chairman - Kevin Wood (Conister Bank), Secretary - Dave Smart (Blackfords and Treasurer - Steve Costain (Costain Insurance Consultants).
The additional Committee members are: Jonathan Corlett (CTH), Tim Rattray (Rossborough Insurance), Sharon Sutton (Thornton Associates), Simon Pickering (CFS Consultants), Gerald Chase (Financial Options) and Nigel Gregg (MAC Financial).
The FPIBA will hold regular meetings with both the FSC & IPA to discuss contemporary issues, and offer a collective response to regulatory matters and consultation documents.
FPIBA representatives have already been invited by Paul Heckles, Head of Enforcement at the FSC, to join the Joint Anti Money Laundering Advisory Group (JAMLAG).
They met at the beginning of April and unanimously approved inviting the FPIBA to future meeting and join the consultation process of replacing the Criminal Justice (Money Laundering) code 2008.
They are already part of the consultative group dealing with the taxation of investment for Isle of Man residents put together by the Tax Office, been consulted as an interested party on the Reciprocal Health Agreement, and other governmental bodies.
The FSC and IPA have expressed their satisfaction that the body has been formed.
see http://www.isleofman.com/News/article.aspx?article=25545&area=4
Shhhh....Don't mention the word 'Pension'
23rd March, 2010
Don't mention the ‘P' word!
Sharon Sutton, Chartered Financial Planner at independent financial advisers, Thornton Associates Ltd writes: There is no standard answer to ‘how much do I need to save for retirement?
There are general pension-saving 'rules of thumb' often floated around, but the scale of your retirement funding challenge depends entirely on your own, individual circumstances.
Try following these basic steps to figure out how much you should save personally:
1. Calculate how much income you need when you retire.
This means look at your spending today and consider which items will change or remain the same when you retire.
You might stop spending money on some things but start spending money on others. For example by the time you reach retirement age you might have paid off your mortgage, but you might plan to start spending more money on travel, property maintenance and if you pay for healthcare you will find private medical premiums will substantially increase.
2. Next consider the income (and where it will come from) in retirement. Your pension might not be the only income you have, so factor in income from property rental or investments as well. Don't forget the State pension(s), as this makes an important contribution to overall levels of income in retirement.
3. You can convert your pension income requirement into a target capital sum by dividing it by a reasonable annuity rate. Look these up on the annuity tables supplied by the FSA; see http://www.fsa.gov.uk/tables
For example, if you need income of £20,000 a year and you can get an annuity rate of 5.4%, you need a pension fund of just over £370,000. Don't forget factor in income tax and any tax-free cash payment you plan to take from your pension fund for capital expenditure, such as mortgage repayment or buying a motor home.
4. When you know how big your pension fund needs to be, you can start looking at projections to work out how much your contributions need to be between now and retirement. Investment growth will help you reach your goal, so use a compound interest calculator (see; http://www.thisismoney.co.uk/pension-pot-calculator) to tell you how much you need to pay into a pension.
You must keep these calculations under regular review because your set of assumptions made today are likely to look very different next year or in a decade.
There is a general rule of thumb, where if you divide your current age by two and put this percentage of your salary into a pension.
So, if you are 30 when you start saving for retirement, you need to save 15% of your salary to ensure a financially comfortable retirement. If you wait until you are 50 before you starting saving for retirement, you will need to save a quarter of your salary to stand a chance of avoiding a retirement in poverty.
Sources; Cazalet consulting and Informed Choice Ltd.
CII Student of the year award for Sharon Sutton
2nd March, 2010
CII Student of the year award for Sharon Sutton
pictured above: Sue Gee, President CII IOM & Sharon Sutton
Sharon Sutton was awarded the Glyn Gilbert award for Academic Excellence by Sue Gee, President of the Isle of Man Insurance & Financial Services Institute (CII local branch) at their recent annual dinner.
Sharon obtained Chartered Financial Planner status for herself and her company in 2009 and was delighted to receive the award on behalf of Thornton Associates and her family whom have been so supportive throughout. Husband Julian, step son Dave & daughter in law Gemma were there to see the award made, along with staff and friends
see http://tinyurl.com/ygzmpv6
Seven Saves in 2010
17th February, 2010
During such tough economic times and with a more challenging Isle of Man local budget just announced, it is understandable that so many people stick their heads in the sand when it comes to their money. see http://bit.ly/axSutw
By applying few simple financial resolutions, you can transform your personal finances getting to the end of 2010 in a much healthier financial position. Here are seven saves for 2010. 1 - Make your own budget It surprises me how many people have simply no idea how much money they spend each month - or where the money goes. This is the roadmap to working out where you want to get to. Working out and sticking to a monthly budget is all about spending less than you earn. If you achieve this, month on month, you will be in a better financial position at the end of 2010 than you were at the start. By deciding in advance where you will spend your money, you should make it easier to avoid the temptation to spend on frivolous/unnecessary items. Review it on a regular basis so you can compare where you planned to spend your money with where you actually spent it. 2 - Avoid being ‘in the red' Short term debt (credit cards, store cards, overdrafts, etc) are expensive. Debt is a drag on your ability to meet other financial goals and an emotional drag on your attitude towards money and personal finances. Make clearing short-term debt a priority before starting to save towards other plans. Prioritise debt over savings. Don't take on more short-term debt. I like the idea of setting and marking a "free-from-debt" day on your calendar. If you do, make sure you achieve it. 3 - Plan for the future Starting a pension should be a big priority for many people in 2010. We constantly hear that we will need to save more and work for longer. This has a lot to do with us living longer (if you want to see that in graph form see fig.1) and lower interest rates (which broadly determine annuity rates) which means you need a larger pot of money to generate income to live off. You cannot rely on the State for a sustainable level of income in retirement so this means you need to use a pension or other investment vehicle to create your own sources of income for later life; if you ever want to stop work that is. 4 - Pay less tax Nobody wants to pay tax but it is the social responsibility of those who earn to pay it. However, many of us fail to take the simple steps that enable us to pay less tax and maximise our tax allowances. The steps you can take to pay less tax include making tax relieved contributions into pensions either personally or via an employer arranged scheme where by sacrificing salary by paying directly into such a scheme, not only do you receive income tax relief at source, but also get National Insurance Contribution savings for both you and your employer - who in turn may consider adding their NI saving into your pension as a further incentive/enhancement. A trip to your financial planner may help you arrange this and identify further opportunities to save paying tax on your investments - and ensure you find out all relevant social/state benefits and allowances are being claimed/assessed for. We don't have ISA's and Child trust funds in the Isle of Man so it is important you plan using the tools available. 5 - Make a will If you don't have a Will, you must make one. You can write your own Will but there are some major risks involved with a DIY approach, so meet with an advocate to get this organised. If you die without a Will, i.e. ‘Intestate', your estate will not be distributed according to your wishes; in many cases where remarriages have occurred, the family structure can be more complex (it is worth pointing out here that marriage voids existing wills unless made in contemplation of the marriage). So don't risk dying ‘Intestate'. Anyone making a will, especially with any connection to the UK should consider the tax consequences of making it (or transferring ownership of assets when you are alive for that matter), not only to you personally, but to your beneficiaries. Ensure you obtain financial advice in this area to avoid giving you or your loved ones an unwelcome tax bill. At the same time give some thought to family financial protection, particularly what would happen to your family from a financial perspective if you were to die, lose your income or contract a critical illness such as cancer- we all know someone whose life has been affected by cancer. It is possible to insure against most risks but you need to quantify them first. If you have existing life assurance plans, review them to make sure they remain competitive and appropriately structured. For example you might discover that the cover you have in place is now redundant or that you are paying over the odds for the level of cover you have. 6 - Always shop around Always shop around. The Internet makes it quick and easy to compare prices on just about any product or service. These days you can use the Internet on your mobile phone handset to compare prices when you are physically in the store about to make a purchasing decision. This can be useful if you need some ammunition to haggle with the shop assistant before parting with your cash. However, do consider the benefits of shopping ‘local'; you're keeping someone in a job who supports the same economy in which we all participate. They may be collecting VAT for our economy and are unlikely to have the same buying power whilst having to pay for heat, light, rent and salaries. I would also question whether Amazon would turn up with a loan washing machine when ours broke 3 weeks ago like the MEA did (thank you). 7 - Meet with an Independent Financial Adviser During 2010 carry out a comprehensive review of your personal finances with an impartial Financial Planning professional who has access to the tools and knowledge needed to improve your current and future position. Most IFA's offer a free initial consultation with no obligation so they can identify areas that they can help you with and you can grill them about their qualifications, experiences and charges. Figure 1; actual and forecast showing the number of people per 1000 living beyond age 90 in the UK Sharon Sutton is a Chartered Financial Planner at Thornton Associates Ltd; www.thorntonfs.com She is a member of the IOM CII local council, the Personal Finance Society & a committe member of the FPIBA Sources; www.brilliantwithmoney.co.uk www.courts.im http://cazalet-consulting.com/ follow Sharon on twitter; http://twitter.com/sharonsutton99
Consultation on proposed taxation of IOM residents via investments
18th January, 2010
TAXATION OF INVESTMENT PRODUCTS
A CONSULTATION DOCUMENT
Since the beginning of the year the Treasury has been working with representatives from private sector professions to review the taxation of investment products.
As a result of the review, the Income Tax Division, on behalf of Treasury, has today published a consultation document outlining proposals for the introduction of a new taxation regime for certain investment products in the Isle of Man.
The document aims to generate debate and gather views to assist the drafting of new legislation.
It is primarily concerned with the taxation of insurance bonds and roll-up funds. There is currently a lack of certainty as to the taxation treatment of these products and the proposed new regime aims to remove this uncertainty by:
•· defining which products will be subject to income tax and which will fall outside the charge
•· defining when and how an income tax charge will be raised.
Those wishing to submit their views on the proposals are invited to do so by 29 January 2010.
The consultation document is available on the Income Tax Division website at:
http://www.gov.im/treasury/incometax/consultations.gov
Sharon Sutton, MD and Chartered Financial Planner is a committee member of the Financial Planners and Insurance Brokers Association and as such part of the consultative process in communicating with the Government, regulators and other professional bodies. Updates to follow.
5 Financial Products to Avoid
30th December, 2009
Is your New Year's Resolution to sort out your finances? To help you avoid some of the pitfalls Sharon Sutton, MD and Chartered Financial Planner at Thornton Associates Ltd describes where you should not start.
Some financial products leave you wondering why they were designed in the first place.
Here are five that you should probably avoid, without a very good reason. They are in no particular order.
1 - Structured Investment Products
You might be familiar with these if you have had any dealings with your bank during the past twelve months; they try to offer you an alternative to the historically low interest rate on cash you are currently receiving either directly or through financial advisers. If you are retired, you are most likely to be their target market. They offer to ‘guarantee' your capital but provide investment returns, typically as a percentage of stockmarket returns usually over a three to six year period.
Healthy levels of commission paid to the ‘adviser' is probably their only attractive feature; it isn't going to benefit you, the investor. If the stockmarket falls, you get your original capital back, assuming the financial institution providing the guarantee is able to meet their liabilities at the end of the term - this is called the counterparty risk and is usually hidden away in the small print. If the stockmarket rises, your returns are likely to be capped, so you don't benefit from the entire increase.
Comparing these products is made challenging by their differing features. They also tend to have a limited shelf life, with the products sold in ‘tranches' until the allocation runs out and a new product is designed.
Sometimes their use can be justified but then it should be as only a small proportion of a client's overall portfolio, and essentially it should be tradeable daily on a secondary market. Most are not.
2 - Equity release
Most applicable to the Baby boomers - Our ageing population usually has limited pension provision and often consider the value in their properties to be their pension. Equity release products are effectively mortgages for older people, offering the ability to access cash from your home at the time you need it most.
Most of these products are expensive and inflexible and in our view should only ever really be considered as a last resort for people in need of cash in retirement.
The two main types to consider are - ones where the interest charges on the mortgage ‘roll up' and ones where part or all of the property value is sold to the equity release provider.
With the former, you are paying interest charges on interest charges. The compound effect of this can make it an incredibly expensive proposition, particularly if you live for longer than expected. With the latter, you are unlikely to receive anywhere near the true value of your property. A typical value paid is 40-60% of the property value. The limited choice of providers is another downside.
The inflexibility of these plans makes them difficult to deal with should your circumstances change during retirement. They can also result in little or no value being left to pass on to your beneficiaries when you die.
3 - Payment Protection Insurance
Payment Protection Insurance (PPI) is often sold alongside mortgages, personal loans and credit cards. It aims to offer you some financial protection should you lose your job and be unable to keep up payments on your debts. The reality when you come to make a claim can be very different from what you expect.
There are clear rules about how PPI should be sold with loans, but research from Which? has found over one million mis-sold policies in the UK. PPI is not compulsory when taking out a loan. Some sales advisers will lead their customers into believing this is the case to make a sale and earn their commission.
PPI is an extremely expensive product and the claims records of providers should not give you much confidence that any claim would be met, particularly if you are self-employed where additional exclusions often exist.
As an absolute minimum you should shop around to find the best deal. The PPI policy on offer from the same provider as your loan or credit card is unlikely to be the most competitive. You should also read and re-read the small print to check for exclusions and make sure that the policy will actually cover you given your personal circumstances.
4 -Savings Plans sold as (International) ‘Pensions'
These are made to look like pensions with all sorts of confusing references like ‘enhanced allocation' and ‘initial' and ‘accumulation' units. These can hide large amounts of commission paid to the Financial/Bank Adviser. There can be limited fund choices, no value in surrendering or stopping the plan in the first 3 to 5 years coinciding with the ‘clawback' period of commission paid to your adviser. This does not allow much of your cash to be invested ‘without strings attached'. NB. it should be noted pension schemes are also inaccessible until you reach your selected retirement age.
Often there is no disclosure of commission. The illustrations do not show the full effect of the charges on your hard earned funds, often sold in the Middle and Far East markets where regulation is not as rigorous. Beware if no comparison is made with other (better value) savings options available across a very wide market.
Because they are not real pension schemes there is no tax relief available on contributions; a valuable benefit to forfeit if you are paying income tax at 18%; tax rates may increase with government seeking to drive up revenues. Those selling such contracts would argue correctly that income drawn from pensions is taxable in retirement whereas the proceeds from a savings plan is not (currently); in both cases funds roll-up free from tax. The outcome of the current consultative document on the ‘taxation of investment products' may change the tax treatment of savings plans but not pensions.
5 - Any financial product you do not properly understand
If you can't fully understand the mechanics of a financial product within five minutes of receiving an explanation from a competent financial expert, you should probably walk away. The best financial products are usually the simplest .
Complexity is sometimes built into financial products to make them more alluring to investors who feel they are accessing something particularly special that is going to make them lots of money. The reality may be hiding a multitude of sins and risks, e.g. a 'Professional or Experienced Investor Fund' - in case there is any doubt, even when bought through a life office; the underlying assets remain the same. The clue is in the title.
Difficult to understand financial products are those most likely to give you grief in the future. There is no need for complexity in your financial planning. Simple works and has been proven to work for centuries. Complex comes and goes depending on market conditions. Today's complex fad could be tomorrow's mis-selling scandal.
Congratulations if you have made the decision to make a start on/review your financial planning.
Ensure your adviser is well qualified and impartial.
Sharon Sutton is a Chartered Financial Planner at Thornton Associates Ltd and a member of the Financial Planners and Insurance Brokers Association committee, and local Chartered Insurance Institute council member
Sources; Informed Choice's Martin Bamford and Brilliantwithmoney.co.uk, DeutscheBank Private Wealth Management, Royal London 360.