Happy New Year
I wish you all of the best for 2013 and I hope that the economy, the weather, and most of all your good fortune improve over 2013. The initial surge in the stock market is certainly a good sign, and it I am hoping that the incessant rain of 2012 has stopped.
In the area of financial advice 2013 is a watershed and I would like to think that you and I are all in this together to make things better for everyone. If projections are right and 46% of advisers will be gone within 12 to 18 months, there will not only be many less advisers but many less insurance companies and platforms for you to choose from. The much respected ‘IFA’ [Independent Financial Adviser] may be consigned to history or at the least to a minority source of advice and for many we must all wonder where their advice will come from over the next year or so.
I was proud to become an IFA in February 1992 because it meant that I could put my clients centre stage without prejudice or influence. Good client advice was and always has been my sole purpose for me changing from my teaching career and remains the primary reason why I will not retire. At 64 it would have been a simple solution to get out and leave my clients to themselves, but there lies my dilemma – I care about the clients that I have worked with for so many years and I want to ensure that they continue to be looked after with the same care that time and economics will allow. I have only ever seen my task as an ‘us’ relationship and you will be aware of this. What happens to the 46% of clients who will no longer have an adviser I am concerned about but I can do little. And what about the other 54% who have an adviser who chooses to stop being independent and become a ‘restricted’ adviser? I think that we all could do with some clarification and perhaps a history lesson would not be ought of place!
‘Polarisation’ took place in mid-1988 and after that point advisers either represented one insurance company and sold the financial products of that company or represented the client and advised from ‘all insurance & investment companies’. The term “independent financial adviser” – a term specific to the UK – was born and over the last 24 years the acronym IFA has earned the respect and understanding of the public.
On the journey since 1988 there have been many changes. For example multi-tied advisers were allowed authorisation who chose a panel of insurers from whom they chose products to sell. For the FSA perceived or actual commission bias was an issue and there were many attempts over the last 24 years to remove it which had a measure of success. However the FSA was not satisfied and with effect from 1st January 2013 abolished commission on investment products and now advise must be provided on a fee only basis.
The term ‘independent’ was born with polarisation in 1988 and in 2013 it may have outlived its usefulness. Certainly one of the consequences of the implementation of the Retail Distribution Review on 1st January 2013 is that the clarity of whether an adviser is ‘independent’ or ‘tied’ has gone. The new category of ‘restricted’ adviser is now operating in between and we will all have to keep our eyes open to see what happens next.
I think the changes will take all of us a while to comprehend and I quote from Wikipedia (accepting its limitations) as follows:
“From the end of 2012 there will be two types of Financial Advisor: independent or restricted, and IFAs will no longer be allowed to receive commissions from financial services companies on new sales of investments. Instead they will have to set their own fees, based on the services they offer, and agree fees with their client before providing any services. Any advice that doesn’t meet this standard must be labeled as restricted. IFAs should also be able to demonstrate to the FSA that they review all the suitable products in a market and give fair, unbiased and unrestricted advice. These changes are intended to make their charges more transparent and advice more genuinely independent.
However, some banks, building societies and insurance advisers could switch to offering an ‘information only’ (non-advised) service instead, where fees won’t be apparent. Advisers will also be allowed to keep earning it on products they have sold before the end of 2012, and still charge a regular fee if they are providing an ongoing service such as reviewing and advising on a client’s investments. Neither do these new rules apply to the sale of cash savings products, general insurance, protection products (term life insurance, critical illness cover, income protection insurance etc) or mortgages, unless they are sold at the same time as a regulated investment product.”
Does Wikipedia’s explanation make it easier? – Let me know what you think!
I know that some of you follow me on Facebook, Twitter, and LinkedIn so that you will be familiar with looking at photos of me with bells, ribbons, and hankies. For the last 30 years I have been out on Boxing day collecting for St Giles Hospice and for anyone that wants some fresh air before the cold turkey for Boxing day lunch we will be at the Fox and Hounds at Shenstone followed by The Railway. We dance from about 12 noon until 2 p.m. and usually manage to collect a couple of hundred pounds before going home to get warm. This Boxing Day we were rained off and had to stop early but we still managed to collect £202 for St Giles. Some of the photos are on my Facebook page.
I’m looking forward to seeing you in 2013
Ric Edelman’s “Rescue Your Money”
For several months last year I was reviewing “The 7 Secrets of Money” – My blogs are still available if you would like to go back and have a look. I am currently reviewing Ric Edelman’s “Rescue Your Money” and when we come to Chapter 5 what do we find? – “The Secret” – it seems that someone else from the opposite side of the pond is aware of the conspiracy to keep the best away from the ordinary investor.
Ric starts chapter 5 with: –
“Stocks might crash, bonds can fall, real estate may collapse, gold and oil prices can plummet, banks can fail, money market funds can lose money and prohibit withdrawals, interest rates can approach zero … so what’s an investor to do? The answer is simply: do everything.”
When investing it’s easy to talk about what has done well, but no one is able to predict with any consistency what is about to do well.
Therefore, you must buy everything. Do it all. In other words, diversify.
Ric examines 16 asset classes over the ten year period from 1999 to 2008 and found that if you invested the same amount into all sixteen of those major asset classes and market sectors during that ten-year period, you would have earned an average of 5 per cent per year. But if you failed to invest in the two best performing asset classes of each year (which changed each year), your average return would have been only 1.8 per cent.
And it doesn’t matter how much experience you have, how expert you are, how many years you have been advising, and how much money you have managed, no one can predict with any certainty which asset class or market sectors will do best next year.
“There are only two kinds of investors: those who don’t know, and those who don’t know that they don’t know.”
And I would substitute ‘advisors’ for ‘investors’ and I am proud to be in the first camp i.e. I know that I don’t know.
The good news is that when you invest you don’t have to pick the winner – being close is good enough to win and as Warren Buffett said: “It is better to be approximately right than precisely wrong”.
You know that investing is as much about risk as it is about return, yet the media highlight the latter and ignore the former. All investors desire high returns but they want to avoid big losses and this is how diversification can help. You might think that if you lower your risk you lower your return but this doesn’t have to be the case. The facts show that a diversified portfolio will have the lowest volatility and produce the highest average annual returns. If you want any more you’ll have to get Ric’s book and look at the charts and the fact and figures.
Are you an ‘optimiser’ or a ‘maximiser’ ask yourself the following question:-
Do you want to earn 10% or do you want to earn 8% with only half the risk?
My clients almost always opt for the 8% choice and to use Ric’s analogy:-
“A merry-go-round is a much smoother ride, and it ends up at the same place as the roller coaster: Without making you nauseous.”
So now you know ‘the secret’ but to succeed you must apply two crucial elements and that’s the subject for next month.
If you would like to follow Ric Edelman why not subscribe to Ric’s email “The Truth about money” by clicking this link?