Wednesday, July 30, 2008

Fund Managers (Asset Allocations)

At the beginning of July, I decided that it would be a good idea to approach investment managers with a view to establishing what their own personal asset allocations looked like at the moment. The initial approaches were limited to the companies that I hold a written letter of appointment from and who also have an active management investment team.

I wanted to establish whether these people, that are responsible for managing our cash, actually lived by the strategies that they adopt for other peoples money and whether they reflected the typical managed funds that they promote.

As of today, only two of the original nine companies that were approached, have supplied a meaningful response, in terms of the original request. Take a bow, Standard Life and Merrion Capital.

Even though assurances were given to the remainder regarding the way the information would be presented and that no individual ‘names’ would be used, they still declined to participate. I was very disappointed with this.

Hibernian refused point blank, without any coherent explanation whatsoever. Eagle Star also refused but they cited ‘privacy’ and fear of the information being interpreted as advice. Irish Life declined, as did Canada Life. There was no response from Friends First or Caledonian Life and Scottish Provident/Resolutions have indicated that they will be back to me shortly.

In an effort to understand the muted responses, I contacted an acquaintance at Clarus Investment Solutions to see if he would be willing to divulge this information. He had no problem in doing this as he considered it straightforward, non-sensitive and relevant to what they do as investment managers.

I was hoping that we could derive some meaningful interpretation of the information, even when we allowed for the fact that the individual managers would have varying risk profiles and objectives for their investments. I would have expected that the majority would have common allocations in equities, property and cash and that over the next few months their cash holdings would be fed into the other asset classes.

I can only speculate that some of the managers may have been embarrassed by their current asset holdings. It may well be that some are over-invested in equities and did not adjust their allocations in line with what was happening in the market. It may also be the case that others have adopted a more defensive strategy with their own money but are happy to hold 75/80% in equities on their managed funds.

So what can we establish from the information that was received from our three respondents? The allocations to property/equities and cash are similar at the moment. There would be a higher than normal percentage in cash but this is consistent with the uncertainty of current market conditions.

The cash content of their mix will be fed into other asset classes on a gradual basis, once the managers deem that the time is right for them, and that the asset splits will be consistent with their risk profiles and age and mirror a managed fund when things stabilize.

You can make your own call on those that did not respond.

Monday, July 28, 2008

"What's a pension?"

During a recent 'tucking in' routine, my daughter who was in senior infants, enquired about the exact nature of what I did 'at work'. "I know you help people by telling them what to do with their money, but how do you do that?

The reason the question was raised was because some of her friends were talking about what their Dads did at work. She had the basics of the answer but she was unsure as to how she could explain it to her friends.

Her sister had already gone to sleep, as she was bushed. Another busy day walking around in her Moms high heel shoes, carrying those over-sized handbags, pushing 'Baby Born' around in an undersized buggy while talking on a plastic mobile phone.

The 'thinker' was just lying there on the bunk retracing the events of the day and trying to reconcile things in her mind. So we had our little chat about the type of stuff that I do during the day and I happened to mention the word 'pension'.

"What's a pension?", she asked. "It's something that you pay money into, when you are working, so that when you stop working you can take money out of it to help you pay the bills." "Oh! So when my teacher left work to have her baby, she can get the money from her pension?" "Not quiet!"

Needless to say, the conversation went on for longer than anticipated. It ended when she had all the information reconciled in her head. She could now go to sleep, safe in the knowledge that if she needed to draw on this information at a later date, she could do so.

I love these little chats with her.

Friday, July 25, 2008

Industry Overview

I am working in an industry that I feel has an immediate need to turn its business model on its head as I think they are walking on a very fine tight rope .

In the last twenty years the overwhelming measure in how companies are performing is in how much market share they have, and where they rank in the industry charts at the end of the calendar year.

These rankings are based on ‘New Business’, as defined by the total amount of annual premiums and 10% of single premiums generated in the previous year.

As far as I can establish, the remuneration packages available to all managers, from the top down, are based on the generation of this ‘New Business’. In my opinion, this overhead, along with the general costs associated with acquiring new business is beginning to take its toll on the profitability of Life Assurance Companies.

It would appear that the new business being put on the books is not lasting long enough for these companies to make it profitable. The reason that this is happening is that large tranches of new business are being moved around between each of the players on a regular basis.

I read somewhere recently that the average time that a pension plan, in the UK, stays with an insurer is just 4 years. This is nuts. It seems that the main reason for this is to generate commissions for advisors and I think that this is not sustainable for much longer.

The industry needs to take a good look how they can develop a business model where this mass movement of customers from one insurer to another is nipped in the bud. Suffice to say, the consumer is the one that may ultimately pay the price for these actions.

If the model was changed to a basis where ‘Retention of Business’ played a more substantial role as the main measure of a company's performance and profitability, it would have a positive effect, in time, on the bottom line for the companies and the way in which these companies and their agents are viewed by consumers.

Of course there will be exceptions. These can take the form of consumers abandoning an ‘old’ type plan with prohibitive charges, in favour of a new competitively priced one.

Overall, I would be concerned that the existing structure will begin to show its cracks and start creaking under the weight of the costs associated with acquiring business in the not too distant future.

Tuesday, July 22, 2008

Kids & Money (Life Lessons)

Those of you that are familiar with ‘Dragons Den’ will know who Peter Jones is. If you have never seen the programme, it’s a ‘reality’ show where budding entrepreneurs ‘pitch’ their business idea or product to five self-made multi-millionaires(Dragons), with a view to securing some capital for their ventures. In return, the ‘Dragons’ agree to take a share in the business for the capital invested.

Peter Jones is one of these ‘Dragons’, and along with Theo Paphitis, was a guest on ‘Top Gear’ on Sunday Night. Their challenge on this show was to go around a track in a ‘reasonably priced car’ (1600cc) in as quick a time as possible.

As part of the informal introduction, Jeremy Clarkson asked Peter about the way he had set up a trust fund for his kids and I though the response was worthy of a mention here.

Instead of handing over large wads of cash to his kids for little or no reason, what he has done is set up a trust, which his kids are paid annual amounts from, dependent on how much they earn in their own chosen careers. So, if one of his kids earned £30,000, they would also receive another £30,000 from the trust.

He has also, very cleverly, weighted the careers in such a way that if one of the kids chooses to do, say nursing, they would receive a higher multiple of salary. The nurse that earned £20,000 might have received £50,000 from the trust. I presume that the object of this exercise was to compensate a career path that would not generate a large basic salary by deeming the career more rewarding to society.

The notion of a trust fund may be beyond a lot of our means, but this structure does show how a little lateral thinking, with money, can teach kids an invaluable lesson in life.

PS – Peter was faster than Theo in the ‘Top Gear Challenge’

Friday, July 18, 2008

The Advisory Process (Advice & Product)

Your decision on which advisor to go and visit will probably depend on a personal recommendation or on how broad you want the advice to be (see ‘Which Advisor?General Information).

Once you are sitting face to face with the advisor, you should probably start by asking about how the advisor is going to charge for their time and any products that may need to be put in place. Agree on the method, or combination of methods, of payment at outset

The methods of remuneration should be included in the advisors Terms of Business that you will be given at your initial meeting. It is a good idea to request these before the meeting, so that you have time to study them. If you do not understand any of the payment terms (or any other terms of business), ask for an explanation.

If you are comfortable with the answers, the next step should be the completion of a ‘Fact Find’ or ‘Financial Review’. This process should elicit as much relevant financial information as possible. It will give the advisor a ‘picture’ of your current position, determine what your appetite for risk is and highlight priorities.

When the transaction that you are interested in involves a pension, investment or long-term savings product, it is my opinion that a second meeting should be required. This would give the advisor time to study the information provided and come up with a proposal that suits your needs.

A transaction for life insurance can be decided on pretty quickly. Unless of course, you need to confirm what you have already or what levels of cover that you may have through your work.

If you are agreeable with the guidance being provided and that the most suitable product is selected, your advisor should provide you with a full disclosure ‘quotation’ or any other preliminary certificates that shed light on the costs and expenses of the product. Do take the time to look at these and ask for explanations.

You will also be provided with a ‘Reasons Why Letter’. This letter details the course of action suggested by the advisor and the reasons why they are recommending the product or funds for you. The advisor and client will sign this as part of the agreed advice and you should be given a copy for your records.

At this stage the advisor will complete any necessary proposal forms and provide you with a ‘Section 30 Receipt’ for any payments.

When the policy is issued by the life office you should get the ‘Original’ policy document’. Make sure that it is the original that you have and not a ‘Copy’.

Monday, July 14, 2008

Blogger Interview - Gerard Sheehy

I am having a little difficulty in deciding what to write under the 'Social & Personal' label. What I mean is, what can I write under this heading that would be on any interest to someone else that does not know me from Adam?.

Some of the print media carry interviews, with people we have heard of, about their business and finances. I guess that these interviews must be popular with readers, as otherwise they would have been consigned to the scrapheap a long time ago.

What I will attempt to do here is interview someone, you have not heard of, with questions that come to mind at random. If you want to aske me another question that does not require an 'advisory' answer, please feel free to do so.

What was the best business decision you made? Its a toss up between deciding to work for myself and exiting the General Insurance business.

Have you ever lost money investing? Lost a lot (to me) of money investing directly in shares. Just didn't do the research. An expensive lesson but learnt my lesson.

Do you own property abroad? Yes. I purchased an apartment 'off-plan' in Tenerife in 1999 with a friend of mine and our friends and families use it constantly. I also have a 50% share in some small commercial units near Helsinki airport ( I should add, that the bank will 'own' these for a good number of years to come).

What 'Business Model' do you aspire to? It has to be the 'Low-Cost' one. Keep the overheads down so that you can pass the savings back to the consumer.

What did you do with your SSIA money? Reinvested it in unit-linked funds and continued to add to it monthly since.

What car do you drive? A VW Golf.

Do you own your own home? No! The bank, my wife and I co-own it.

How does the economic slowdown effect you? Much the same as everyone else. A limited supply of money with an increasing demand on it. The market for investment products has slowed down along with the steady requests for mortgage related life insurance. The pension and PRSA business is holding its own.

Do you have a Pension, Life Insurance, Income Protection, and Health Insurance? Yes, I have all of them.

What's your favourite movie? It depends on the mood. My Cousin Vinny / The Shawshank Redemption / Rabbit Proof Fence / Not One Less

Have you ever won money? One of my 'vices' is having a few bets on the horses. On occasion I have been on the winning side but on the laws of average I will loose 25% of what I wager. This might seem like a mad exercise for someone in my business but there is a whole social dynamic involved in the experience and the sums wagered are minute. I did win €75 a few weeks ago on a prize bond I forgot I had.

Friday, July 11, 2008

"Mei guan xi" (It's Okay")

The night before last my youngest daughter asked if she could watch the DVD of 'Aladdin'. I hesitated at first and then proceeded to the cabinet where the DVDs are stored. Whilst there, I came across one that I had ordered from the US some time ago, but never got to view it as the player was incompatible. I had forgotten that it was there and it never dawned on me since to try it on the PC.

So, I began to play it and I told my daughter that I would put on 'Alladin' when I had finished having a quick look at this forgotten one. The musical introduction attracted her attention and she wanted to take a look also. I was dubious about this as I was unsure about the content and whether it was suitable for her young eyes and ears. I told her to come back in in five minutes and maybe we would watch it together, if it was okay.

Two minutes later she is back (she is too young to tell the time) and recognises the people on the screen as being from China, a place that she has heard alot about. There were some references to abortion, abandonment and killing/infanticide at the beginning and I knew that if they came up again she would not ask the meanings. If she did, she knows that some stuff is not for kids and would accept the “I will tell you when you are a little older” answer. Her sister, who is 27 months older, would push it a bit further.

The National Geographic documentary follows a group of Americans as they embark on a journey to China to meet the newest members of their families. One of the couples are bringing their daughter with them, and the camera gives them alot of attention. For us, this is very significant.

We watch it in relative silence until we come to what's referred to as 'Gotcha Day!'. The building that they are entering is very familiar to me, not the room that they are in, but some other room nearby. This is the building where these folks will meet the newest additions to their families.

The meetings are very emotional as foster mothers place their cares in the arms of the new Moms and Dads. My daughter can feel that I am holding back the tears and decides that a dialogue is in order, “It's okay” she said and rubbed my face, she's 5 in a couple of months. “Did my sister hug me like that when she met me in China?”, she sees the reaction of the little girl that is back in China for the first time since she was adopted (her sisters story is identical). “Yes she did, and you were crying like those babies too.” “Are those the 'Nannys' holding the babies?” “Yes.”

These are some more of the little pieces of her life jig-saw. She knows where we all first met and who was there. She knows that she was very scared but still loves to hear the finer details of the meeting and about what her new Mom, Dad and sister did and said. We never got to say thanks to her 'Nanny' who looked after her for the first 11 months of her life. All we know at this stage is that she has a Claddagh ring and a picture of where her foster child was going to live.

I am sure that when the girls are older we will travel back and try to fill in some more pieces that are missing from their past. We are unsure as to how difficult this may be, especially in relation to the biological Moms and Dads. I can only guess that it may be both moving and painful to retrace those early months.

Not flesh of my flesh,
nor bone of my bone,
but still miraculously my own.
Never forget for a single
minute, you didn't grow
under my heart - but in it.
*Fleur Heylinger

Thursday, July 10, 2008


I would like to thank Marie Boran for her constructive comments that were printed today, in the Independent and on (link provided in ‘press coverage’ below)

As with any new venture, which this blog is, it is invaluable to get feedback from all potential readers so that you gain a better understanding of whether you are hitting the mark or not.

The main aim is to help consumers with gaining a better understanding of pension and investment products so that they choose correctly when the time is right, a type of self-empowerment so to speak.

So, as I had already dispensed with the tie (which I always regarded as being for someone else’s comfort) I will now un-tuck the shirt and see what happens.

I’m not so sure I am ready to wear the sandals ‘to work’ yet, though.

Tust! - Banking

I am being constantly asked whether I think that now is a good time to buy bank share. My immediate answer is, that I am not authorised to advise on investing in shares directly and that they should contact a stockbroker. The definition of what I can and cannot advise on seems to get lost in translation somewhere along the line.

What I usually ask the punter is, 'do you trust your bank?’ The answer is always the same 'No!’ 'So why would you buy shares in a company that you don't trust? I mean, you would not invest money through me, if you did not trust me?'

This usually gives them food for thought, that is, until the next time you meet them and they ask the same question 'Now that they are down another 15%, they must be good value?' 'Sorry, same answer as last time.'

It would appear that there is this perception that there is a killing to be made on these particular stocks. I can only guess that the interest is being whipped up by the ones that are holding on to paper losses and by the 'feeling' that they can't go any lower.

I do not presume to have an informed view on the direction of bank stocks but, for me, a few things just don't add up.

 The original estimates of what the credit write downs might be have been grossly underestimated (translate : have no idea where it will end)
 They are having difficulty borrowing from their peers, so they want you to lend them the money to lend to other clients at higher rates
 Fund managers are deserting them and it is unlikely that the Irish bank stocks will be bought back any time soon
 There seems to be no confidence from any quarter in the banking system
 The staff are in denial as regards how bad things are but they are beginning to feel demoralised &
 Why are there no larger institutions stepping in to takeover the smaller outfits? Surely, it's only a matter of time?

Sometimes you have to rely on your gut feeling. It looks like the handlebars have come off the bike and there is no control or direction, except for a temporary balancing act. You know you are going to get hurt but you try to minimise the pain in the fall.

On the positive side, some good may come of the crisis in the form of changes to what banks can and cannot do in the future. Otherwise, no lessons will have been learnt.

For the record, I would have a similar opinion on Life Assurance Companies and also feel that their existing business model has to be changed. But that's for another day.

Wednesday, July 9, 2008

Trim the Fat!

In times of an economic downturn we have to look at ways in which we can put more money back in our pockets. The business owner will try and add value to their business by engaging in cost-effective expense reduction strategies.

So, how does the average man or woman employ the same principals to reduce costs and add value to the financial products they hold?. How can the consumer add that extra bit of value to their pension/investment fund in times of low or negative returns?

The mantra from various Consumer groups is to either 'Switch and Save' or 'Shop Around', especially in relation to phone, insurance, mortgage and current account providers. To do this, we have to take more responsibility for the decisions we make by reviewing what we've got and doing additional research on what else is available in the market.

The same basic principles apply when focusing on charges on pension and investment products.

Consumers have to take a more active role in the decision making process and in the amount of research that they do. Apathy is not your financial friend.

By moving to a low-cost provider we are sending a strong message to financial institutions. It's time that they started 'trimming their own fat' by providing us with more cost-effective products. Who knows, it may even have a positive effect on the uptake of these products?

Businesses redirect cost savings to reduce debt or add value, why should it be no different for the end consumer of financial products?. Consumers could use the savings made to accelerate their mortgage payments or counterbalance increasing interest rates.

The cost savings from pensions and investments are different to other products in that they may be dependent on external factors.It is only after a prolonged period of time that the benefits are visible and by then, the damage may be done. The ideal time to focus on charges is before you sign the dotted line but that does not exclude you from reviewing what you already have .

Monday, July 7, 2008

Indexation Caveat

If someone is considering taking out life insurance they will also have to decide if they would like to have the cover ‘index linked’. This option allows you to increase the value of the cover you are buying today so that it keeps pace with inflation.

The option does not apply to mortgage protection (decreasing term insurance) as the cover reduces over the term to reflect the decrease in the balance outstanding on your mortgage.

I did a review of the Term Insurance rates available from the life offices, based on their quotation software as at 4th July and what I found is that, choosing the lowest premium at the outset may cost you more over the full term of the policy.

All the companies surveyed increase the cover by 5% per annum but the rate of increase on the premium can vary between 5% and 8%.

What does this mean in practical terms?

On the calculation that I did, the cheapest initial premium was €30.07 per month but the premium increased at 8%. One of the more expensive products was priced at €40.55 per month and this increased at 5%.

The total premiums paid, over the term of the policy, for the ‘cheapest’ (at outset) product was €16,512.76 and the total paid for the more ‘expensive’ product was €16,095.24

What can you do?

a) Choose a higher level of cover at the outset and ignore indexation
b) Keep a close eye on the rate of increase for the premiums
c) Get a few quotes and study the ‘disclosure’ document on costs and charges
d) Ask an advisor to find the policy with the lowest ‘total premiums paid’ for the duration of the plan
e) Watch out for policies that state the increase in premium/benefit will be 5% or by such amount as the Actuary deems appropriate. This can really come back to bite you.

Sunday, July 6, 2008

Kids & Money (Starting Early)

At what age should we start talking to our kids about saving, and the mechanics of money?

In my opinion (from personal experience) around the age of 5 is good but not everyone has a Dad/Mum that has a job that entails telling people what they could do with their money, but that does not preclude you from starting early.

Before the kids arrived we had a habit of putting any loose change into money jar. As they got that little bit older it was agreed that the contents of this jar would be theirs and any loose change they got, also went into this. When it is full they help with the ‘counting’ of the contents and put it in the money bags.

The notes were a different matter. Accounts were opened in their names and any gifts of money were lodged here. The contents of the jar were lodged to the accounts also.

They knew someone, close to them, who was in college and they thought that it was something they would like to do also. They were aware that you needed money to go to college so, when asked what they were going to buy with all the money they were saving, the reply was, ‘It’s for college’.

At this age they are too young to earn some money by helping out. It was agreed with the 6 year old that every so often, if she did not demand too much stuff, that I would pay her interest on the money she saved. I could not believe how quickly she grasped the concept. ‘If I don’t spend my money, I will get more money? Wow!’ ‘What if I want to buy something?’ ‘If it’s small we can get it for you, but if it’s something big you should probably wait for a birthday or ask Santa for it.’

It was with the younger of the two that the issue of the bank arose. ‘Can we get the Princess Barbie DVD?’ ‘No, I have no money on me.’ ‘But you can get it from the bank!’ It was at this stage that we started the conversation on how the money got in the bank in the first place, that it had to be earned from the work that you do, and that there was not an unlimited supply of it when it was needed. She took it on board!

It’s a good idea to get the kids involved in opening an account and to let them hold on to the book. Include them in the ‘counting’ of the loose change.

If you make a deal on paying ‘interest’ when they don’t spend their money, you have to stick with it and pay it when it’s due. Make an issue of it.

Let them have their own purse or wallet where they can keep a limited amount of money for emergencies or holidays.

Next stop, investing and compounding………….

PS : If you have a simple method that works for you and your kids, please add it as a comment.

Friday, July 4, 2008

Which Advisor?

During the course of our lifetime we will, at some stage, need to consider whether it would be to our benefit to avail of the services of a Financial Advisor. The predicament we are faced with is, 'Who/Where do we get the advice from'?

The answer to these questions lies in your own level of understanding of the types of services that are on offer and how much research you are willing to undertake. Financial Advisors can offer you two distinct types of service. These are, an 'Advisory Service' and an 'Execution Only Service'.

The majority of business transacted by advisors is on an 'Advisory' basis. This is where you the client wants to be mentored and guided on what financial products or course of action would be most appropriate to their individual circumstances.

The client will need to decide whether the services of an Authorised Advisor, Multi-Agency Intermediary or Tied-Agent is best for them.

An Authorised Advisor can provide you with broad based financial advice on all the products in the market, that they are authorised to advise you on.

A Multi-Agency Intermediary can provide you with financial advice from the companies products that they hold a letter of appointment from.

A Tied-Agent can only advise you on the single group of products from the company that they are 'tied' to.

The debate continues as to which type of advisor is 'best', but most commentators lean towards the AA or MAI. The reality of the market however would indicate that there is a large volume of business still being conducted by Tied-Agents. These are mainly the people that you are referred to in your local bank or the direct sales forces of individual companies.

It is a good idea to get a strong recommendation from someone that you trust (stating why they have put forward the person).

You could also be up-front with two or three advisors and state that you are trying to decide on who to do business with. You could write or talk to them and ask them directly why you should do business with them. But, do have some general questions written down on what you hope to achieve from the 'interview' and ask for their Terms of Business before hand.

Thursday, July 3, 2008

Charges for Pension and Investment products

The following is an alphabetical list of the types of charges that may apply to the Investment and Pension products that are available in the Irish market today.

Allocation Rate - This term applies to the amount of money that will be invested in your policy/plan from the contribution or payment that you make. A 97% allocation rate on €10,000 would mean that €9,700 is actually invested so there is an up-front charge of €300.

Annual Management Charge - The institution that looks after your policy/plan charge you a percentage of the value of your fund each year for 'managing' your money in the funds selected. This charge is made every year while your fund is under management and is applied whether your fund increases or decreases in value.

Bid/Offer Spread - This 'spread' is usually about 5% of your payment and is made when you go to 'sell' or cash in your investment.

Contribution Charge - Similar to an allocation rate, especially on regular contribution pension or investment plans. For example, a Standard PRSA can have a maximum contribution charge of 5%. If you agree to invest €300 per month then €15 of this is take as a charge on every payment you make. So, €285 is invested in your plan.

Early Encashment Charge - If you invest €10,000, and it is your intention to leave this for a period of 10 years, this will not concern you. This charge is made if you cash in your investment 'early' (normally in the first 5 years). The typical scale could be 5%,4%,3%,2%,1% (of your payment) in years 1,2,3,4,5 respectively.

Execution-Only Fee - A fee charged by an advisor for setting up a product where you have selected the product provider that you want to deal with and the type of plan that suits you best.

Fee Based Advice - You pay an advisor a fee for his/her advice on what the best course of action is for you in respect of formulating a financial plan of action.

Initial Commission - Commission paid to an advisor/agent in the first year of setting up a product. This is normally paid from an allocation rate charge, bid/offer spread, contribution charge or nil-allocation period.

Nil-Allocation Period - A specific period on a regular contribution policy/plan where no money is invested in your plan eg. 3 to 6 months.

Override Commission - A payment made by an institution to an advisor/agent outside of the normal commission structure. This payment does not impact the cost to you. It is sometimes paid to an advisor/agent for placing a certain volume of business with the institution.

Policy Fee - A regular charge that is taken monthly or annually, by the institution, from the payments that you make. It is normally about €2 or €4 per month and will continue to be deducted even if you stop paying into the plan.

Renewal Commission - A payment made by the institution to the advisor/agent every year for the duration of the plan. This is normally paid out of a contribution charge.

Trailer Commission - An annual payment made to an advisor/agent for the duration of the policy/plan. This charge is made on the value of the funds that you have invested and can be in the range of 0.05% to 1% of the value of your fund.

Not all of these charges will apply to individual products but there may be a combination of a few of them on the product that you may be buying. You should ask for a written breakdown of these charges before you purchase a product.

I hope I have not forgotten any?

Wednesday, July 2, 2008

Second thoughts on Equity Funds?

It has become increasingly prevalent, from observing the content of some personal finance discussion forums, that people are beginning to panic about their equity related funds.

Some of these individuals have re-invested their SSIA dosh and have continued to save a few bob every month. I would go so far as to say that they do understand the up/down nature of these funds but they are now full of doubt as to whether they made the right investment decision.

This uncertainty raises a few questions:-

1. If the investor understood that the value of their investment can fall as well as rise, why are they panicking at this early stage of what should be a medium to long term plan?
2. Why have these investors resorted to asking these questions on discussion forums?. Surely, their first port of call should be with the person who advised them on the product.
3. If the initial plan was to try and beat the returns available from deposit accounts and outrun inflation, why are they now considering switching their funds to cash?
4. I would assume that their advisor would have formulated an investment strategy, with the agreement of the client, by recommending funds that in line with the level of risk that the investor was willing to take. If this is the case, why are the funds now unpalatable for the client?

The advisory process is a two-way street. It is a hand holding exercises, where the consumer is guided through products that should match their risk appetite. It would be customary that clients would be advised on the merits of spreading their investments over different asset classes so that not all their eggs are in the one basket.

It could be that the consumer is suffering from one, or a combination of the following.

i) Their less risk averse friends can talk of nothing except the great deals that are currently available on deposit accounts which makes them feel foolish for taking a risk.
ii) Are they suffering from a short-term memory lapse? They should have seen the way that their SSIA funds performed badly in the early years and then finished with a flurry.
iii) A lack of understanding on the long-term nature of these investments and not being aware that, by investing more money now they are buying more units in the fund than they were 12 months ago.
iv) The advice was not suitable to the consumer initially and the investment strategy chosen was too risky.
v) High charges are accelerating the erosion in value of the investment.

You should give some serious thought as to what course of action you want to take in evaluating this dilemma.

Waiting for the sun to shine

This time of the year is normally quiet for me and I could easily escape out of here for a few weeks and not be missed. The ‘important’ stuff can easily be sorted out, these days, by phone or internet. My family and I are heading to Tenerife next month and I wish that I could just press the fast forward button.

Needless to say, the weather here at present is not helping with any increases in business activity. I find that people get around to making hard personal finance decisions that have been put on the long finger, when the sun is shining.

The ‘sun’ isn’t really shining either, in any of the media outlets that we rely on for our news. The gradual erosion in confidence in all things ‘financial’ seems to be taking its toll and consumer sentiment is being pummelled by one gloomy story after another.

I think that we have to remind ourselves that these things run in cycles and that at some date in the future things will turn again, just as the sun will shine for more than 10 minutes at a time.

Those of you who invest on a regular basis are probably feeling that little bit better than those without. Your funds are down serious percentages in the last 12 months but at least you have ‘funds’ that you can call on to offset against rising monthly costs. So, well done on that hard personal finance decision you made some time back that now provides you with more options.

To those of you who intend investing on a regular basis at some stage in the future, start your research now and stop waiting for the ‘sun’ to shine before you make that hard decision.

Tuesday, July 1, 2008

Mortgage Protection

This type of policy is sometimes called ‘Decreasing Term Insurance’ as the level of cover decreases as your outstanding mortgage balance decreases. It is the cheapest form of life cover available and the premium stays the same for the duration of the policy.

The majority of quotes that are issued on this type of policy make the assumption that your mortgage will be repaid if interest rates are less than or equal to 6%. If your mortgage interest rate exceeds this for a prolonged period of time, there may be a shortfall between what the policy pays out and the balance outstanding on your mortgage at the date of a claim.

With interest rates heading towards this 'threshold' rate at present it might be prudent to choose a policy that makes a higher rate assumption. Most insurers will allow you to select a rate of up to 9%. If you choose this higher rate, be prepared to pay a slightly higher premium.

There was a time when at least one insurer guaranteed to repay the mortgage irrespective of the interest rate but demand was low as consumers were unwilling to pay the additional cost which gave the absolute peace of mind. The cheapest option won on the day.

It may be time for insurers to reintroduce this guarantee on mortgage protection, as the exact direction of interest rates are uncertain. The cost of this guarantee is not prohibitive and robust competition for new business in this sector would ensure that rates remain competitive.

There is nothing worse than paying for an insurance policy that does not give you the cover that you want and leaves you out of pocket at a claim stage.

Bank Deposit 'Frenzy'

Consumers that save their money in Deposit accounts have never had it so good. The banks are falling over themselves trying to outdo one another so that they can, either keep their existing customers happy or ebb the flow of funds to their competitors.

Naturally, if you are investment risk averse or you want to have access to short-term savings in the event of some unforeseen circumstances, this is good news.

The astute investor will also hold some of their assets in cash savings so that they can take advantage of sound investment opportunities that come their way at a later date.

But, why is all this happening now? What is the deposit taking community’s motivation for this frenzy?

We are a small nation of some 4m people and it would appear that we are relatively wealthy. The size of the deposit market would indicate that it is a worthwhile target for banks and building societies from outside the country. They would not be competing for it otherwise, right?

In an effort to delve into the psyche of the banks, it may be time to tune into their favourite radio station, Wii FM (What’s in it For Me).

 Are they suffering from pangs of guilt for previous misdemeanour's so as to create a positive profile?
 Do they think that inertia will set in once the headline rates disappear and consumers will stay put. Is it all about market share?
 Are there any liquidity concerns that we should be aware of?
 When the frenzy passes, will these deposits be ‘cannibalized’ or recycled into more profitable (for the bank) ‘Investment’ products?
 Is this a new form of ‘free’ advertising as the press scurry to announce the latest headline rate?

The jury is still out for me on this one and it is only with time that the true answer will come to the fore.

Perhaps I am tuned into the wrong radio station?