Rules for the New Reality
Friday 27 February 2009
The New York Times has some interesting thoughts on what they call, “Rules for the New Reality”
I am not surprised at the survey findings as more investors we meet for the first time endorse these results…
''…when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.''
So these bad feelings have raised some questions… What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
This is what the New York Times went on to say… ''Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
A LONG LOOK AT RISK
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
A BALANCE SHEET AUDIT
Diversifying the risks in your portfolio is merely the beginning of the process. Tax diversification too, across a range of savings vehicles with different tax rules is important.
CUSTOMIZATION
A 100-page financial plan lands with a thud and comes with fancy leather binding. What you might not know, however, is that off-the-shelf software probably produced most of it.
TO EAT THE SAME DOG FOOD
When Dr. Marc Reichel, an anesthesiologist from Beaufort, S.C., grew tired of stockbrokers pitching investments they would never use themselves, he queried a new adviser about her own portfolio. “Unlike with my previous experiences, she said, ‘Sure, this is what I have, take a look,’ ” he said. “And it wasn’t just a one-time thing. It was ongoing.”
BOREDOM
You have the right to be bored by your financial life. There is no shame in putting things on autopilot, saving the same percentage of your income in a diverse collection of index funds for decades on end.
This philosophy drew skepticism in the 1990s for Spencer D. Sherman, when his clients wondered why he wasn’t putting them in individual technology stocks. But Mr. Sherman, a financial planner and the author of “The Cure for Money Madness,” thinks his clients would be better off seeking thrills far away from the financial markets.
“If you’re in a diversified passive portfolio, you have nothing to talk about at a cocktail party,” he said. “But why don’t people make investments a smaller part of their lives? It almost seems like people need to fulfill that desire for excitement somehow, and investing is an easy way to do it.”
WHAT YOU SHOULD NOT EXPECT
MARKET TIMING
It would’ve been nice if every wealth manager had moved clients to 100 percent cash positions around the middle of last year. The truly prescient might have put some money down on exchange traded funds that bet on the decline of various stock indexes.
But those who did probably didn’t call the top in 2000, or get back into the market in early 2003. Nor will they know when the current bear market will end. For the same reasons that most mutual fund managers consistently underperform market indexes over the long haul, especially after taxes and fees, your adviser is not clairvoyant, either.
LOW RISK, HIGH RETURN
The notion seemed abstract until December. Then, after years of smooth supposed returns, prosecutors accused the wizard Bernard L. Madoff of making it all up. Recently, the Texas financier Robert Allen Stanford came under scrutiny for peddling high-yielding C.D.’s that may have been too good to be true. Anyone who utters the phrase “low risk, high return” deserves close examination.
TO BE A PEST
Remember that you hire advisers in order to set some clear, long-term goals — which probably shouldn’t change every day in reaction to the ups and downs of the markets.
“One of my biggest roles is to take the emotion out and be a calming force,” said Lon Jefferies of Net Worth Advisory Group in Midvale, Utah. “If clients want to continually change their risk tolerance when the market drops another 300 points, that’s going to make it impossible for the relationship to succeed, because they’re changing the rules almost every day.”
Rather than calling every day to second-guess yourself and your adviser, set aside dates to sit down and examine your feelings.
CERTAINTY
This one may be the toughest to swallow. Jay Hutchins, of Comprehensive Planning Associates in Lebanon, N.H., never promises an outcome. The past year, he said, should make it easier for new clients to understand why.
Even a collection of Treasury bills and top-rated, immediate fixed annuities is not enough to establish certainty in his mind. “When you decide you’re going to build a house, you build the building accordingly and with prudence, depending on whether tornadoes or earthquakes are most likely to threaten it,” he said. “Then, an airplane flies into it. Did you do anything wrong to fail to plan for an airplane crash? Of course not. You plan for what is going to be most likely.”
While Mr. Hutchins is not yet ready to predict a return to the 1930s, he doesn’t believe it makes sense to place the likelihood of it happening at zero either.
Life, in general, is unpredictable.''
posted by Murray Round Wealth Management @ 15:39,
Mergers raise questions of value
Monday 23 February 2009
The FT reported on more fund manager mergers being expected this year.
How does this affect you as an investor?
With share prices falling, fund managers have seen their assets under management fall. This means falling income. Smaller funds could be merged as cost cutting takes place.
As the FT reports, "M&G has just gained approval to merge three funds: Balanced Portfolio will join with its Managed fund; Cautious Managed will move into Cautious Multi Asset; and Growth Portfolio will be merged with Managed Growth.The three funds to be merged are tiny: £12m, £29m and £7m respectively. M&G claimed the move would enhance returns by increasing the flexibility of the merged funds. However, a more immediate benefit for investors will be the reduction in the total expense ratio (TER) of the three merged funds.”
But when the mergers take place how do investors know if the risk and the mandates of the manager have not changed? Any merger of your investments will alter your portfolio mix and therefore a review should be prudent.
It is good news in theory if you stay with a fund that has lower costs, but costs are also being cut in the analysts and other support staff.
Now is the time to find out what your fund managers or advisers are doing with your money and how these managers are dealing with these changes. I do repeat myself in stating all investors need to be carrying out due diligence on their investments…it’s a message I will repeat again again and again.
posted by Murray Round Wealth Management @ 16:07,
The charges laid against us
Saturday 14 February 2009
John Kay is one of Britain’s leading economists. His interests focus on the relationships between economics and business. His career has spanned academic work and think tanks, business schools, company directorships, consultancies and investment companies. He has written a new book which was extracted in the FT. It is a rather good summary about investment charges.
He talks about trading. We use the analogy to trading as a bar of soap...the more you use it, the less you get. Of course some fund managers would argue otherwise, particularly when their jobs rely on trading but…
John Kay says “The effect of these costs on returns depends on the frequency with which you deal. Online trading is so inexpensive and easy that you may be tempted to trade often. But only one thing eats up investment returns faster than fees and commissions, and that is frequent trading. Do not succumb. Do not accept the invitation to subscribe to level two platforms or direct market access. The total costs of running your own portfolio should be less than 1 per cent per year.”
Whilst investors may say - "we only switch investments once or twice a year", yet if they are held within actively managed funds, the trading is much more often. Ask any fund manager how often they trade and what are the costs? You may be surprised of the answer!
He goes on to say “Investing in actively-managed funds will cost you more. The choice of funds, both open and closed-end, is unbelievably wide. There are more funds investing in shares than there are shares to invest in. This situation doesn’t make sense, and is both cause and effect of the high charges. Costs need to be high to recover the expenses of running so many different, mainly small, funds that all do much the same thing. At the same time, the high level of charges encourages financial services companies to set up even more funds.
The proliferation of funds means that choosing a fund may be no easier than choosing individual investments. The problem seems to multiply itself, as do the fees. The fees attract more advisers, and so on. This plethora of choice would be less confusing if all funds, managers and advisers were excellent, but most are not”
In our view he is correct. To illustrate his point regarding costs he goes on to say “If you own a mainstream British unit trust for five years, it is likely that the direct and indirect costs and charges you incur in buying, holding and selling that investment will total 3 per cent a year. Other investment funds may cost you more. The total charges on a fund of hedge funds are such that it might yield less than a government bond even if the underlying investments returned more than 10 per cent per year.”
Ouch. These are high fees, yet if investors see high earning funds making say 20% per annum, they may be prepared to pay 3% per year or more in fees. The net result is 17% to the investor. That sounds like a good deal. Yet the evidence shows that 20% returns each and every year are few and far between. If we knew as advisors which fund manager was going to produce such returns every year, we would be first in the queue of investors! Sadly, that's more of a pipe dream and not reality. Thankfully we live in the world of investment reality rather than a hopeful dream world, but if you, as an investor, do happen to choose the right fund manager at the right time, then you really need to put that call on luck not skill.
Rather than hoping for high returns, the solution is lower fund manager fees. Thankfully, lower fees are available, without sacrificing performance over time…if you know where to look.
Perhaps the queue should be at our door as it is possible to deliver a successful investment experience over time...we look forward to showing how.
posted by Murray Round Wealth Management @ 15:17,
Madoff and the lessons for all investors
Friday 6 February 2009
I was in Manhattan over the New Year and listening to the Madoff events made me think of why so many investors lost money.
On January 6th in the New York Times, Paul Sullivan wrote about The Rules That Madoff’s Investors Ignored. In fact memories of the Barlow Clowes affair came back to me…
The trick, if there was one, don’t offer the earth, but something that is believable..if only just. This is what Madoff did and similarly Barlow Clowes. If you have forgotten or never heard of Barlow Clowes, click here for information.
As Sullivan said “He didn’t dream up impenetrable financial products; he offered consistently better-than-average returns. Who wouldn’t want that? Delivering 20 percent every year for 30 years would have been too hard to believe (and pay out) while 5 percent would have sent most people searching for more elsewhere. Returning 10 to 12 percent year after year was a stroke of genius: it was within the realm of possibility, if just barely.”
Sullivan comes up with various rules, the first being the 10% rule. In other words, diversification. In hindsight it seems logical and prudent but it was forgotten. Whilst diversifying between say investment funds is good, but that is not real diversification. It would have perhaps helped the Madoff investors from total loss, but diversification according to your risk needs professional help.
Sullivan then talks about CONSISTENCY IS BAD. This opens up a number of issues, but consistency is what investors want. A contradiction exists. Sullivan states “It shows that consistency at the highest level isn’t bad; it’s impossible. There are too many variables that inhibit being great on a regular basis”
As an aside, why were with profits funds so popular? Consistency. Yet there are problems over with profits performance as most statistics show. Could it be that Sullivan is right..Consistency is impossible in the world of with profits as well?
His next Rule: “DON’T ASK, DON’T TELL’ As much as the steady returns were enticing, Mr. Madoff’s investors wanted to bask in the glow of being part of such an elite, select group. They didn’t ask enough questions and seemingly assumed the person who got them in had vetted him. But nothing in which you are putting millions of dollars is so wonderful that it cannot withstand scrutiny.”
The point is not the amounts involved but ensuring the funds you invest into can withstand scrutiny. This process is called carrying out due diligence. In our view, investors with an adviser or bank are unlikely to lose their wealth similar to some Madoff investors. What is at question is the risk you are taking compared to your expected return. Simply losing 1% or 2% per annum over time can make or break your wishes in retirement. It could mean retiring earlier…at age 60 rather than 65 for instance. The world cruise you have promised yourself becomes difficult to justify or even take. So the extra 1%, 2% or 3% each year…which appear to be relatively minor, do not make small differences, but massive differences to your wealth over time.
Sullivans last rule: “PUT MONEY IN BUCKETS Mortimer Zuckerman, the real estate developer and owner of The Daily News of New York, lost $30 million the right way — through his charitable foundation. As harsh as this may sound for the charity’s beneficiaries, he seems to have followed the popular wisdom of private bank investment strategists: divide your money into buckets to insure the money you need to live on will always be safe. Of course, Mr. Zuckerman may have gotten lucky in not losing money he depended on to live. Most strategists advise putting your riskiest assets into your philanthropy bucket — and so many people believed investing with Mr. Madoff was as safe as it got. “
This is a key area as many investors want to help successive generations - their children, grandchildren and also charities. What is important is to understand how much you need in your lifetime, and how much you can divest to others. This is complicated to assess, but is one of the areas we specialise in helping investors understand.
Have you got your money in buckets and do you know how much is in each respective one?
posted by Murray Round Wealth Management @ 10:26,
Madoff's investors: the full list
A 163 page document has been released listing more than 13,000 investors in Bernard Madoff's $50 billion alleged Ponzi scheme.
The list, which can be found on the Guardian website here, brings up some interesting names, from Hollywood celebrities to Swiss private banks.
Well known-names such as Rothschild and Kissinger occur more than once in the list, both as individual investors and also as part of family foundations.
Thankfully the majority of investors are not on this list, yet it is reminder that all investors need to carry out due diligence in whatever investments they make.
posted by Murray Round Wealth Management @ 09:29,
The offshore crusade has started…
Thursday 5 February 2009
Whilst the taxmen from the members Organisation for Economic Co-operation and Development (OECD) will focus their attention on the rich, it is the ripple effect that will impact on those offshore investors trying to avoid tax.
In our previous blog about offshore investment, we explained that momentum is building, not least from the White House in the US.
The credit crisis has led to high levels of debt. This has to be repaid through increased tax revenue. Yet the current recession means tax revenues are likely to fall. It’s a big hole and someone has to pay.
According the BBC Panaorma, the UK taxpayer is losing £18.5bn in lost revenues from tax havens. It is therefore understandable why the tax havens will be under pressure.
Take a look at the BBC Panorma iplayer and make your own mind up.
Whilst it is fair no one should overpay tax, in fact, it is fair that every effort is made to minimise the liability, but as the crusading members from OECD build momentum to seize tax revenues, many investors maybe caught with possible legislation.Whilst some investors may do nothing until events force them into action,yet by default it is on death that all their plans may unfold. It is therefore worthwhile asking questions now.
If you are an offshore investor ask yourself this question, with the increase in activity on the tax havens, with the uncertainty created by the credit crisis and the often opaqueness of how your capital is invested, would you make the same decision today as you have in the past to invest offshore? If the answer is yes, there is no need to take any immediate action. But if you have any doubt, it is time is to ask questions about your money.
Here are some questions to help?
• If you withdraw the capital today, what will be your tax liability?
• If you withdraw capital today, what has been the return on your capital? How does that compare to alternatives?
• If you stay invested offshore, when is the right time to withdraw income or the capital?
• Do you have to become non resident to gain full tax benefits? If so, what are the practicalities of becoming non resident?
• What happens when you die? What is the tax liability? How will your beneficiaries obtain access to the funds?
• What happens if you are ill? Do the offshore providers accept UK law regarding powers of attorney?
• If you have instructed offshore trustees, have you met them? Are you clear about their powers?
• Finally, revisit the reasons why you invested capital offshore and establish if you have alternatives. If you are doing the best you can do, staying offshore maybe your best option.
Of course the taxman is not that bad…or is he?.ask The Beatles.
If you get a hat hat, I'll tax your hat
If you get a cat cat, I'll tax your cat
If you wipe your feet feet, I'll tax your mat
If you walk away away, I'll tax your [..]
Now my advise to those who die
(taxman!)
Declare the pennies on your eyes
(taxman!)
cause I'm the taxman
Yeah, I'm the taxman.
And you're working for no one, but me
(taxman!)
posted by Murray Round Wealth Management @ 16:46,
Investing offshore…it may not be as sunny as investors expected but there is a significant opportunity to take action…
Monday 2 February 2009
"There's a building in the Cayman Islands that houses supposedly 12,000 US-based corporations," said Mr Obama. "That's either the biggest building in the world or the biggest tax scam in the world, and we know which one it is."
Avoiding tax increases your return. After all it’s a cost and it’s natural for investors to keep tax payments to a minimum. But too often the tax tail wags the investment dog.
According to the FT, tax havens might be fighting losing battles…
"The political climate on the issue of tax havens has changed dramatically over the past three months," says Jeffrey Owens of the Paris-based Organisation for Economic Co-operation and Development. As the official who has driven the international crackdown on secrecy for more than a decade, he says the new climate could turn the reform promises extracted from many offshore centres into a reality. The financial crisis has intensified the attack on havens. The near-collapse of the west's banking industry has drastically increased governments' need to raise funds, brutally exposed the risks inherent in small countries with large financial sectors, and raised questions about the role of offshore centres in destabilising the system.”
… President Nicolas Sarkozy of France is among those questioning whether, at a time of taxpayer-funded bail-outs, banks should even be allowed to operate in tax havens.
So what does this mean to investors?
It is important to revisit the benefits of using an offshore centre for tax savings. In our experience, many investors think they are actually saving more money than is actually the case. Charges are often higher offshore which tend to be justified almost as an indirect share in the tax saving…if you are saving say 20% in tax what does it matter if the charges are 5%..you still win by 15%. Yet things are never quite what they seem.
If you have assets held offshore, how do you check if the benefits are still worthwhile? If you ask offshore managers or advisers their opinion it is unlikely the answer may be as impartial as you would want. Why? Let us assume if your income and livelihood was generated from an offshore centre, and investors pulling out means a loss of business, which in turn may mean a reduction in your income or even a loss of your job, is the answer you, as the investor, receive likely to be prone to bias?
In truth, this credit crisis and recession are opening up questions and issues nobody thought possible. It is therefore the responsibility of investors to carry out due diligence, especially with offshore investments.
The FT summed up their article by saying” The tiny states and protectorates that thrived in the free-wheeling second half of the 20th century are left struggling to shore up their defences against the coming storm. But as big countries try to block the leakage of much-needed tax revenues and stanch the flow of dirty money, sympathy for the tax havens is in short supply.”
What you should do now….
Investors with offshore investments should be establishing if the benefits of remaining offshore are as significant as they believed when they first made the decision to invest. Is the tax saving as great as they expected? What is their opportunity cost of the capital?
Yet there are opportunities....Remember also, when markets are low, and the tax needs to be crystallised, and this is a significant opportunity to do so. I was told a simple analogy when thinking of changing your investment portfolio…. “If you going to change planes, its better to do so when they are on the ground” In other words, lower valuations will mean lower taxes.
If tax havens are going to be targeted and squeezed perhaps taking action now might prove to be the best decision you can make.
posted by Murray Round Wealth Management @ 16:53,
Phew, how to not only blow my socks off but…
Sunday 1 February 2009
Perhaps one of the best quotes that is appropriate at this time come from Warren Buffett. When times are good, investors tend not to ask too many questions about how performance may have been achieved…who cares as long as they did it! But when the downturn arrives and boy, has it arrived with the banking crisis feeding the recession, it is a time to sort the men out from the boys or as Buffett says “...only when the tide goes out do you discover who's been swimming naked.”
But when I read Luke Johnson comments, I wondered if the tide would ever come back in.
Here are a few words “It is clear that as a society we must learn something painful and radical – how to live within our means – because the credit just is not there any more. The easy money is all gone, and there will be no more for a long time.
Previous assumptions simply do not apply. Homeowners should forget about houses going up in value – all that is history. They are places to live in. So cut back on your outgoings. Pay rises are off the agenda. Wholesale pay cuts may yet become common. Put some cash aside if you possibly can; you might lose your job. I fear most citizens’ plans for the future must be put on hold. This is not something happening to other people – we are all in trouble.
‘Prepare for a wrenching, unstoppable redistribution of wealth – and I am not talking about domestic taxes’ Business must adjust to the idea that this stagnation could last for many years. The age of free money from mad lenders is finished. The growth game is over. Whole swathes of industry are on life support. The banks are in desperate straits. If their management cannot see that, then they are even more incompetent than they are portrayed.”
You perhaps now take on board my opening "phew" and are your socks still on???
Yet opinions are opinions and we have no way of knowing what the future may hold and there are reasoned judgements wherever you may look. It partly depends if you see the glass half full or not. Human nature is resilient and forever moving forward but the question Luke Johnson is making is how much time may be spent in a stagnant phase. Irrespective of your thoughts, your money still needs a home. Your pensions need management. I think what Luke Johnson does is open up a debate that 6 months ago was never on anyone’s agenda…at least not publicly.
With new information, investors should be able to make more informed decisions.
I hope that investors everywhere will read some of our comments and take tips from many of the questions available on our blog and ask their advisers and fund managers more pertinent questions about their money.
We are now in a different world that existed only a few months ago and we all need to ask more questions.If you have any doubt what to ask, please feel free to talk to us.
Here’s a final point made by Luke Johnson “After all, who wants to face up to the bleak reality that confronts us? The experts say we will not suffer a repeat of the 1930s slump. Indeed, we have to contend with fresh issues. Like the fact that there are 1.5bn recent additions to the capitalist workforce in China and India – hard-working, increasingly well-educated people, all keen to better themselves. Meanwhile, modern logistics and communications mean trade and production can take place almost anywhere if it makes economic sense.
So why should industrious Asians earn a tiny fraction of what citizens in the west earn? Especially when they have so much of the cash and productive resources, while we have deficits, high costs and poor demographics.”
Do you now want more information about what decisions are being made with your money?
posted by Murray Round Wealth Management @ 16:29,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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