Tag: Independent Financal Advice

A New Deal For Britain..

.. a massive opportunity for your SSAS Pension.

There are some remarkable changes coming our way with regard to planning and building permissions for the conversion of commercial property to residential.

As we all know your small self-administered pension scheme (SSAS) is an ideal vehicle to purchase, develop and own commercial property; with some remarkably advantageous ways of funding potential purchases of commercial properties.

We also know that your SSAS isn’t allowed to hold residential property, but did you know that it is allowed to pay for any conversion from commercial to residential?

Meaning that, you can purchase commercial property with your SSAS, flip it to residential and develop it within the SSAS. Just as long as the property is removed from the SSAS Pension BEFORE it becomes habitable. For the avoidance of doubt, ‘habitable’ is defined as the point of which the certificate of habitation / completion is issued.

There are some VERY BIG changes coming to commercial property planning restrictions

In order to get the economy moving again, the Prime Minister has announced his ‘New Deal For Britain’. Within it are some remarkable opportunities for companies to utilise the power of their SSAS pensions, by developing commercial property for residential sale.

This September, we will see some of the biggest changes in planning regulations that have ever impacted upon the commercial property market.

If you have a SSAS pension, you could be perfectly placed to take full advantage of these. As of September this year a reform of the current system will introduce the following changes:

  • A vast amount of existing commercial property will be allowed to change its use to residential without the need for a planning application
  • Land and existing commercial buildings in town centres can change use without planning permission
  • Planning permission will no longer be required for the demolition and rebuild of vacant and redundant residential and commercial buildings, as long as they are rebuilt as homes
  • Commercial premises, including vacant shops, can be more easily swapped to residential housing
  • Far more types of commercial units will have the flexibility to be repurposed through the reform of the User Class Order.

This is a fundamental changing of the rules around converting commercial property to residential and this can be done advantageously through the use of your SSAS pension.

However the rules governing what you can and can’t do must be closely followed, or you’ll run the risk of exposing the SSAS to draconian taxes on the profits that your property dealings create.

To avoid unwanted taxes there are a few simple things you can do to ensure that things go as smoothly and as tax efficiently as possible:

  • Make sure that your SSAS sells the property to a cash buyer prior to the conversion to residential completing. This means that the completion then takes place outside of your SSAS
     
  • You can leave the capital appreciation inside the SSAS and avoid Capital Gains Tax if existing SSAS members, or a sponsoring company, purchases the incomplete property form the SSAS at market value. They can then finish the project and sell it, paying only the stamp duty and legal costs
  • The SSAS can even sell the uncompleted property subject to a deferred consideration contract. This way the property is removed from the SSAS before completion, but the buyer doesn’t have to pay the full purchase price over until the conversion is complete and they can then apply for a mortgage
  • A great way of ensuring that any property in question qualifies as a genuinely diverse commercial vehicle, and therefore unaffected by the normal residential property rules, is for a number of independent SSAS’s to come together in order to carry out bulk projects
  • Another way to not get taxed for converting or building is simply don’t convert or build. A SSAS can buy and demolish commercial property and then sell the land to a developer for a commercial gain
  • You can also take advantage of any 12 month loan window available by getting the SSAS to lend up to 50% of the funds value in order for the sponsoring company to purchase or convert the property; and repay the SSAS upon the completion of the sale.

There are all sorts of opportunities to take advantage of these coming changes with a SSAS Pension. If you don’t currently have one, then perhaps now’s the right time to convert an existing scheme to a SSAS, or set one up.

Whatever you are thinking, now is the time to act as it can take up to three months to get a new SSAS registered by HRMC. Especially as many of their staff have been moved to other departments in order to handle the furlough scheme.

If you are thinking about setting up a SSAS, in order to take advantage of these new changes in property legislation when they kick-in in September, then please get independent and professional advice.

Doing things right from the very start will save an awful lot of hassle and expense further down the line. Especially with something as complex as a SSAS Scheme, where the wrong advice, or no advice at all, could result in significant tax penalties.

As always, we at Bridgewater Financial Services are here to provide expert and independent advice on any questions you have regarding a SSAS pension, or any other financial enquiries you may have.

Your SSAS pension can provide for your family AND future generations too

You really are never to young to join a SSAS
Your small, self-administered pension scheme (SSAS) doesn’t just provide death and retirement benefits for its members in a tax efficient way – It can do way more for you and your family. Due to their restriction of having no more than 11 members, SSAS schemes are often favoured by smaller businesses where the company directors, family members and senior executives are the beneficiaries. Especially as they allow for members of the family who don’t work for the company to also be included.

Not only that, but a SSAS pension is an asset that can be passed down the family through the generations. Best of all, as a pension it’s legally protected from personal or company creditors so it’s a safe place for the long-term storage of assets.

The big benefit to your family
As investments are held in the names of all of the SSAS trustees, this common ownership means that each member of the SSAS holds a specific portion of the SSAS’s assets. This makes ownership of assets like properties far cheaper and simpler to deal with than they would be if the asset were shared between three or more self-invested pensions (SIPP). The other big benefit of a SSAS, is that individuals can choose their own investments, which is really handy if the business is involved in property or land. Also, where individuals are saving in order to invest in property or land, a SSAS can really help fulfil that ambition (see my previous blog on SSAS property purchase).

What happens when a member retires?
Once a member of the SSAS retires, they have the same options as any other member of a defined contribution pension scheme. This means that you can secure a guaranteed income, take an income from the fund or a combination of the two. If the SSAS is invested in property that is generating and income, this can effectively be remitted out to the member to support their retirement.

Flexibility when it comes to your retirement day
A SSAS allows entrepreneurs to delay the time that they start retirement, as they often retire later than those in employment. It also allows for early retirement from the age of 55 years. Your SSAS will even let you carry on working part-time, receiving some pension and some income at the same time.

Tax Efficient Death Benefits
SSAS benefits payable on death are not normally subject to inheritance tax. If the scheme member dies before the age of 75, their family members can inherit their fund and take tax free withdrawals for life. After the age of 75, payments are subject to income tax at the beneficiary’s normal income tax rate. The fund can be passed down through the generations as long as it lasts. Unlike a conventional non-pension trust, there is no limitation on how long the trust can last. So the pension fund could be providing valuable benefits to multiple generations of the family of the original members. Beneficiaries are immediately entitled to draw benefits and they do not need to wait until they are at least 55.

Other benefits of SSAS to family businesses
Your SSAS can also be a great way to increase your purchasing power, if you’re looking to accrue assets for the future. Please see my previous blogs on using your SSAS to borrow funds for property and stock purchases.

Get it right from day one
With something as complicated as a SSAS, it’s vitally important that you get the right kind of professional advice from a qualified and expert financial adviser who knows this area well. The wrong advice, or no advice at all, could result in significant tax penalties.

As always, we at Bridgewater Financial Services are here to provide expert and independent advice on any questions you have regarding A SSAS pension, or any other financial enquiries you may have.

Stay safe

Smart thinking AIMed to reduce your inheritance task exposure

An IHT opportunity you may not know about

As the game of cat and mouse continues with the government and taxpayers, the scope of tax planning opportunities that are legitimately open for high earners has been steadily reducing in number and variety.

The latest industry figures show that taxpayers paid £5.3bn in inheritance tax in the last year to February 2018. That’s a rise from the £4.7bn paid in 2016/17. UHY Hacker Young, have suggested that there is a real scope to use Business Relief (BR) to further lessen Inheritance Tax (IHT) bills to HMRC. With forecasts predicting that the value of BR to have risen 8% in 2017/18, from £655m in 2016/17.

Investing in the Alternative Investment Market (AIM), with an Inheritance Tax (IHT) Plan,enables qualifying taxpayers to reduce IHT bills, through investments made in unlisted companies and other business assets.Not only that, but both investors and the government seem to like what’s on offer; as it can produce healthy savings and returns, as well as contributing to the wider economy and create jobs and growth.

An alternative to a Trust that’s worth considering

When you invest in the AIM market, most companies are eligible for Business Relief (BR); and, if held for at least two years, the shares are classed as business assets, so are completely free from IHT.

An AIM Portfolio IHT Plan can also provide you with greater flexibility than a trust and can also be less expensive and time-consuming to set up.

Unlike a Trust, you don’t have to wait for seven years in order for your assets to escape the remit of IHT, as your AIM IHT Plan qualifies for tax relief after just two years as opposed to seven – provided the AIM shares continue to be held thereafter.

Another benefit over a Trust, is that you no longer run the risk of losing access to your investments, as you retain control of your assets at all times. You are also free to increase contributions in the future, as well as possibly earning equity related returns on your AIMs investments.

You can even utilize an existing, or new, (ISA) 

You can either transfer an existing ISA, or set one up in your AIM IHT Plan. Which has the double advantage of the holdings in the AIM companies qualifying for BR. You’ll also be exempt from any income tax on dividends and capital gains tax on profitable disposals. 

How are savings on Inheritance Tax achieved? 

Providing you have held the shares for over two years then, under the current taxation rules, there us unlimited exemption from IHT on all shares that qualify for BR held by you when you pass away.  

Pretty much all of the companies traded on AIM, with the exception of those principally engaged in property or investment activities, qualify for BR. Which means that, under the current legislation, all of the applicable shares in your AIM portfolio will be seen to be business assets, which means that they are exempt from IHT if owned for more than two years.

As the IHT exemption is only available on the qualifying shares, held at the point of death, any AIM IHT Plan should be viewed as a medium to long-term investment, with a view to keeping it for a minimum of five years. 

Upon your death, your portfolio can be sold, or transferred to a spouse, without attracting IHT. 

Is an AIM IHT Plan right for you? 

If you’re concerned that a large portion of your wealth may not get to the people you wish to leave it to, because of the likely IHT charges to be made on your estate, then the AIM IHT Plan could be just what you are looking for.

As it provides you with an investment opportunity that could not only deliver a strong performance, but can also reduce your IHT liability. 

If you are considering investing in an AIM IHT Plan, then it’s important that you get the right kind of independent advice. As it should always be viewed as a long-term investment option that carries a slightly higher risk than other investments and my not necessarily be the best option for your immediate requirements.

The usual minimum investment you should consider with an AIM IHT Plan is £100,000. An additional contribution of a minimum of £25,000, or the full annual ISA contribution, can be made at any time after you start the plan.

A cautionary word about the Plan

Firstly, it’s important to appreciate that the current rate of IHT as well as the value of this option regarding IHT savings and the exemption afforded by an AIM IHT Plan could all change in the future.  

Having said that, BR has been around for a number of years and under various different Governments, and doesn’t appear to be drawing attention in any of the current manifestoes. 

It is important to recognise the long-term, and higher risk, aspect of the plan. As I would suggest that you especially consider the following points, in order to ascertain whether this type of investment fits your personal investment profile:

  • As most AIM shares tend to be illiquid, it might be more difficult to sell them. Also obtaining reliable information regarding their value and the risks they are exposed too can also more difficult to find.
  • Any AIM company can revert to private status. This would mean that shares may become impossible to trade and the value and protection offered by AIM would end. 
  • Like the FTSE, past performance is no guide to the future and the value of shares purchased on AIM (and income received) may go down as well as up; and you may not get back your full investment
  • Not all investments into the AIM market qualify for BR, plus the amount of tax relief available may change at any time. 

Need to know more?
As always, if you have any questions regarding your current or future financial situation, especially around AIM IHT Plans, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Dealing With Redundancy – what to do right now.

TC Plane
What you need to do, if you are facing redundancy

With the shock collapse of Thomas Cook, leaving over 21,000 people now facing certain redundancy and countless thousands working in support industries with an equally uncertain future, I thought that I might share some thoughts on what to do if you are facing immediate redundancy.

What to do right now

Finding yourself facing redundancy may have a profound psychological effect upon you, but it’s also a time when you need to be strong and take some immediate action.

If you are being made redundant, then you should spend today doing the following things as a matter of urgency. Taking back control of things starts here:

Claim everything you are entitled to. Nobody want’s to sign on, but you’ve been paying into the system; and it’s there for your benefit too. So sign on today, as you may be eligible to claim benefits such as Universal Credit, whilst you are looking for a new job.

There are also other benefits such as Housing Benefits, Council Tax Reductions, Jobseeker’s Allowance and Tax Credits that may be available to you. Here’s a link to the Citizens Advice Benefit Checker, that will quickly show you what benefits you are entitled to:
https://www.citizensadvice.org.uk/benefits/benefits-introduction/what-benefits-can-i-get/

Deal with your mortgage. As you won’t know just how long you will be without an income, notify your mortgage lender (and other lenders) today. That way, if you have problems keeping up payments, they will likely work with you to overcome short-term difficulties and may offer things like payment holidays, or a switch to interest only repayments. They are usually helpful and sympathetic, but they can only offer assistance if they are aware of what’s going on – so tell them as quickly as possible.

Claim on any policies. If you took out insurance against being made redundant, that should cover your mortgage and loan repayments, so claim today. The process of being paid out may take some time, so start the ball rolling now, to help avoid missed payments whilst you wait for the insurance money.

Work out your budget. Calculate what your assets and liabilities are, along with other household income and expenditure. That way you’ll get a clear picture of your current financial standing. Cut any unnecessary expenditure and prioritise remaining expenses in order of importance. Knowing exactly where you are financially will significantly help with any negative emotions you may be having.

Once you’ve done the basics, then it’s time to tackle the rest

I can’t stress how important it is to have done the above points – for both your financial and mental health. Once you’ve dealt with immediate actions, then it’s time to think about the following:

Get professional advice. If the whole situation seems daunting, reach out for some help. Talk to a properly qualified financial planner. You don’t know what you don’t know – and getting expert advice could save you a great deal of stress and money.

Clear existing debts. If you can, clear any outstanding credit cards or loans. Especially because the cost of most debts vastly exceeds any interest you’ll be earning on savings.

But keep access to emergency funds just in case you need them.

Those you can’t clear, move to the cheapest rate. Your credit score may take a post redundancy knock, so now’s the time to move debt to the best possible rate, such as the interest free balance transfers of certain credit cards

Once you’ve received your redundancy payment

Following the receipt of your final lump sum, there are one or two things you may want to consider.

Top up your pension. You could choose to take advantage of the tax relief available on the first £30,000, as you top up your existing pension from your redundancy payment.

Invest for your future. If you cleared your debts, and have a nest egg, you may want to consider your redundancy payment as a windfall and use it to make some longer-term investments.

Early retirement. You may even be in a position that your financial situation allows you to consider an early retirement, or at least a significant step away from the world of work.

Redundancy is a strange and stressful time

Facing redundancy can be emotionally draining and it’s easy to try to avoid meeting it head on. However, if you want to lessen the impact it may have on you, both psychologically and financially, then early planning and preparation is the answer.

Sorting out your existing finances and planning for the short and long-term future are fundamental and very wise moves. Talk to your financial adviser about the points I’ve highlighted in this blog. Then explore those areas of your individual finances that will also be impacted.

It’s not the end of the world, on the contrary, it’s a new beginning; and taking charge of the situation is your first step down the road to a brighter future.

As always, if you have any questions regarding your current or future financial situation, especially if you think that redundancy may be a future possibility, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Some helpful links:

https://www.citizensadvice.org.uk/work/leaving-a-job/redundancy/preparing-for-after-redundancy/

https://www.gov.uk/redundancy-your-rights

http://www.executivestyle.com.au/what-they-dont-tell-you-about-being-made-redundant-gwacfd

Tax Year End Planning Checklist

The end of the tax year is approaching again; therefore it’s time to think about maximising allowances, minimising taxes and taking all the other steps to ensure your tax position will be as favourable as possible going forward. Although there are still almost two months left, it’s better to start now rather than leave it all to the last days, for some of the necessary steps can take some time to process.

When going through the checklist below, you may find this page useful. It contains all the key thresholds, rates and allowances for 2015-16 as well as 2016-17.

Income Tax and National Insurance

If possible, delaying an invoice (if you are self employed), salary, bonus or dividend payment (if you have a company) until 6 April can save, or defer, a considerable amount of taxes. Company owners should also find the right mix of salary and dividends to minimise taxes. Don’t forget to include all of them when making the decision – personal income tax, both employee’s and employer’s NI, corporation tax and dividend tax.

The key figures are:

  • £5,824 = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 = Primary Threshold – employee’s NI (12%) kicks in
  • £8,112 = Secondary Threshold – employer’s NI (13.8%) kicks in
  • £10,600 = Personal Allowance – basic rate income tax (20%) kicks in
  • £31,786 = higher rate income tax (40%) kicks in

Many company owners choose to pay themselves a salary equal to the Primary or Secondary Threshold, in order to avoid paying NI, and take the rest in dividends. However, if your company is eligible for the Employment Allowance (first £2,000 of employer’s NI free), it could make sense to pay yourself up to the Personal Allowance (£10,600) in salary. Of course, your other income, family situation and other circumstances could alter the figures and must always be considered.

Pension Contributions

Making pension contributions can save you a lot of money in taxes, as long as you stay within your annual allowance, which is £40,000 for the 2015-16 tax year. At the moment, pension contributions are subject to tax relief at your marginal tax rate, which makes them particularly attractive to higher and additional rate taxpayers.

Normally you need to make the contributions before the tax year end (5 April), but this time it is recommended to act before the Budget Statement, which is due on 16 March.

There is high risk that Chancellor George Osborne will announce important changes which may affect the tax relief. The exact outcome is not known, but experts have been speculating about a flat rate replacing the marginal tax rate (this would effectively reduce or eliminate the tax relief for higher and additional rate taxpayers). The Chancellor has also mentioned the idea of cancelling the pension tax relief altogether and using a completely new mechanism for taxing pensions in the future, perhaps similar to ISAs (after-tax money in and tax-free money out).

It is not clear if this will eventually materialise and when any changes would come into effect. However, pension tax relief has clearly been one of the Chancellor’s primary targets in the effort to reduce the deficit and raise tax revenue. In light of the uncertainty, the safest approach is to make pension contributions before 16 March to avoid potential disappointment.

Note that if you didn’t use your full allowance in the three previous tax years, you might still be able to get that money in, on top of this year’s £40,000. The previous three years’ allowances were £50,000, £50,000 and £40,000, respectively. One condition is that your total contribution must not exceed your earned income for the current tax year. Another thing to watch out for is the lifetime allowance (currently £1.25m, but falling to £1m in April), as exceeding that could be costly when you retire.

NISAs

If you have the cash, you should always use your annual NISA allowance to the maximum. A NISA is a tax wrapper which allows you to build savings and investments without incurring taxes on income and capital gains going forward. The allowance is £15,240 for 2015-16 and it is use it or lose it – if you don’t deposit the money by 5 April, this year’s allowance is gone forever. You may also want to use your partner’s and your children’s allowances (£4,080 per child under the so called “Junior ISA”).

If you have existing cash ISA accounts, now is also a good time to review them and check the interest rates. Banks like to lure savers with attractive rates, only to slash them after 12 months or some other period. In such case you may want to transfer the funds elsewhere. There are two things to keep in mind:

  • Always transfer from ISA to another ISA directly. If you do it via your regular bank account, once you have withdrawn the money, it loses the ISA status (and withdrawals do not increase your annual allowance – that will only change the next tax year).
  • Each tax year you can only deposit money to one cash ISA account and one stocks and shares ISA account.

Capital Gains Tax

You can often save on capital gains tax even outside ISAs. There is an annual CGT allowance, which makes the first £11,100 (for 2015-16) of capital gains tax-free. You need to realise these by the tax year end; otherwise the current year’s allowance is lost forever.

Depending on the investments you are holding, whether there are unrealised gains or losses and whether you want to sell any of them, the decisions to make can become quite complicated, but may save you a lot in taxes. A potentially large CGT bill can be reduced (by crystallising losses) or deferred (if you wait with the sale until 6 April). On the other hand, if you are well within your CGT allowance you can crystallise gains to reduce future taxes.

Always keep in mind that tax issues are an integral part of any investment strategy (and tactics), as taxes can affect net return substantially. At the same time, don’t forget to consider transaction costs.

Inheritance Tax

If your estate is likely to exceed the IHT threshold (£325,000 for individuals or £650,000 for couples), you may want to take steps to reduce it. Estate planning can obviously become very complex, but the easiest thing you can do is make gifts to your beneficiaries. These are subject to annual allowance of £3,000. If you didn’t use the allowance last year, it can still be used now (making it £6,000 in total), but after the tax year end it is lost. As long as you live for seven years after the gift, it is out of your estate.

Other Considerations

The above are the most common points which apply to most people. Depending on your circumstances, there may be other opportunities, further allowances and other things to do before the tax year end. In any case, it is best to discuss your entire financial and tax position with your adviser, as some actions might have unexpected consequences. Don’t forget the key date is 5 April, with the exception of pension contributions where it is safer to act before 16 March this year. Also remember that some actions will require longer time to process and don’t leave everything to the last days.

 

 

 

 

The Seven Roles of an Advisor

What is a financial advisor for? One view is that advisors have unique insights into market direction that give their clients an advantage. But of the many roles a professional advisor should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an advisor, a broker, an analyst or a financial journalist.

Some folk may still think an advisor’s role is to deliver them market-beating returns year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

But in reality, the value a professional advisor brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility, and emotions, are running high.

The best of this new breed play multiple and nuanced roles with their clients, beginning with the needs, risk appetites and circumstances of each individual and irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with the rest of people’s complex lives.

Indeed, there are at least seven hats an advisor can wear to help clients without ever once having to look into a crystal ball:

The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.

The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.

The listener: The emotions triggered by financial uncertainty are real. A good advisor will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.

The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.

The architect: Once these lessons are understood, the advisor becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.

The coach: Even when the strategy is in place, doubts and fears inevitably will arise. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.

The guardian: Beyond these experiences is a long-term role for the advisor as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.
These are just seven valuable roles an advisor can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client’s eyes may be as an independent voice.

Knowing the advisor is independent—and not plugging product—can lead the client to trust the advisor as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge of each individual.

Now, how can you put a price on that?

Gravel Road Investing

Owners of all-purpose motor vehicles often appreciate their cars most when they leave smooth city freeways for rough gravel country roads. In investment, highly diversified portfolios can provide similar reassurance.

In blue skies and open highways, flimsy city sedans might cruise along just as well as sturdier sports utility vehicles. But the real test of the vehicle occurs when the road and weather conditions deteriorate.

That’s why people who travel through different terrains often invest in a SUV that can accommodate a range of environments, but without sacrificing too much in fuel economy, efficiency and performance.

Structuring an appropriate portfolio involves similar decisions. You need an allocation that can withstand a range of investment climates while being mindful of fees and taxes.

When certain sectors or stocks are performing strongly, it can be tempting to chase returns in one area. But if the underlying conditions deteriorate, you can end up like a motorist with a flat on a desert road and without a spare.

Likewise, when the market performs badly, the temptation might be to hunker down completely. But if the investment skies brighten and the roads improve, you can risk missing out on better returns elsewhere.

One common solution is to shift strategies according to the climate. But this is a tough, and potentially costly, challenge. It is the equivalent of keeping two cars in the garage when you only need one. You’re paying double the insurance, double the registration and double the upkeep costs.

An alternative is to build a single diversified portfolio. That means spreading risk in a way that helps ensure your portfolio captures what global markets have to offer while reducing unnecessary risks. In any one period, some parts of the portfolio will do well. Others will do poorly. You can’t predict which. But that is the point of diversification.

Now, it is important to remember that you can never completely remove risk in any investment. Even a well-diversified portfolio is not bulletproof. We saw that in 2008-09 when there were broad losses in markets.

But you can still work to minimise risks you don’t need to take. These include exposing your portfolio unduly to the influences of individual stocks or sectors or countries or relying on the luck of the draw.

An example is those people who made big bets on mining stocks in recent years or on technology stocks in the late 1990s. These concentrated bets might pay off for a little while, but it is hard to build a consistent strategy out of them. And those fads aren’t free. It’s hard to get your timing right and it can be costly if you’re buying and selling in a hurry.

By contrast, owning a diversified portfolio is like having an all-weather, all-roads, fuel-efficient vehicle in your garage. This way you’re smoothing out some of the bumps in the road and taking out the guesswork.

Because you can never be sure which markets will outperform from year to year, diversification increases the reliability of the outcomes and helps you capture what the global markets have to offer.

Add discipline and efficient implementation to the mix and you get a structured solution that is both low-cost and tax-efficient.

Just as expert engineers can design fuel-efficient vehicles for all conditions, astute financial advisors know how to construct globally diversified portfolios to help you capture what the markets offer in an efficient way while reducing the influence of random forces.

There will be rough roads ahead, for sure. But with the right investment vehicle, the ride will be a more comfortable one.

Article by

Jim Parker, Vice President, Dimensional Fund Advisers

Regulators tell Solicitors to only refer to Independent Financial Advisers

New guidance has been issued by the Solicitors’ Regulation Authority (SRA) stating that Solicitors must not refer clients to tied or multi-tied advisers; i.e. advisers who are not truly independent.

The SRA has stated that it is aware that some law firms have been approached by multi-tied and tied advisers seeking to enter into restrictive arrangements to provide financial services to the law firms’ clients. It reiterated that firms must always act in the best interests of their clients. This means that they must refer clients to independent financial advisers for investment advice.’

According to Sifa (the body representing independent financial advisers who specialising in working with law firms), there is confusion among solicitors about the status of financial advisers and this has resulted in widespread breached of the Solicitors’ Code of Conduct. Sifa said it had received numerous calls from IFAs reporting instances of solicitors referring clients to St James’ Place.

This was a subject alluded to in an earlier Blog entitled Confusion on Sources of Financial Advice I have also commented here in more detail about the differences between Independent and Tied Advice.

So, if you are a Solicitor or indeed anyone seeking financial planning advice make sure that you ask the adviser whether they are genuinely independent. Solicitors can be sanctioned for failing to do so and individuals are likely to suffer from a restricted choice and, in all probability, high charges