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Receipt from HMRC reading Capital Gains Tax

Explaining the government’s Capital Gains Tax review

By | Tax Planning | No Comments

A recent review of Capital Gains Tax suggests changes that could rake in £14 billion in additional revenue for the Treasury. We look at the implications for you.

 

Chancellor Rishi Sunak has earned lots of praise for his wide-ranging and unprecedented measures to help the UK combat the damaging effects of the coronavirus lockdowns. But already he is looking at ways to pay for them. One recent review of Capital Gains Tax (CGT) has recommended cutting the annual CGT allowance, and changing the rates at which CGT is taxed – moves which could earn billions of pounds for the Treasury, but could result in headaches and higher taxes for many of us.

 

What is CGT?

CGT is the tax people are expected to pay on the profit they make when they sell or dispose of an asset. The tax is calculated on the gain that is made rather than the total amount received. For CGT purposes, ‘chargeable’ assets will include property that is not your main home, shares that are not held in an ISA, and most personal possessions valued at more than £6,000 (with the exception of cars).

 

What is the annual CGT allowance?

Everyone is entitled to an annual CGT allowance of £12,300. This means that you will only have to pay CGT if the gains you have made on your assets are above this amount. So, if you sold shares at a profit of £15,000 this year, you would only pay CGT on £2,700 (the amount over the annual allowance).

 

What is the CGT rate?

According to the Treasury, some 265,000 individuals in the UK paid a combined total of £8.3 billion in CGT in the 2017/2018 tax year (the latest available figures). By comparison, in the same tax year, more than 31.2 million taxpayers paid a combined £180 billion in income tax. Higher rate taxpayers are expected to pay CGT at 28% on gains made from residential property, and at 20% on gains from other chargeable assets. Basic rate taxpayers usually pay CGT at 18% on residential property gains, and at 10% on other assets. But that could all be set to change.

 

The CGT review

In early November, the Office of Tax Simplification (OTS) published its eagerly anticipated report into CGT, commissioned by Rishi Sunak back in July. The report suggests that current CGT rules are “counter-intuitive” and have created “odd incentives” in several areas. It noted that the annual exemption could also “distort investment decisions”, pointing to 2017-18 tax year data showing that 50,000 people reported net gains just below the annual threshold.

Among the report’s findings, it suggested that the government should consider reducing the £12,300 annual CGT allowance, reducing it to between £2,000 and £4,000. It also suggested aligning CGT rates more closely with Income Tax, in a move that could raise up to £14 billion for the Exchequer. For higher rate taxpayers, that could mean the CGT tax rate increasing from 20% to something closer to 45%.

 

Who should be worried about changing the CGT rules?

The OTS proposals would most likely affect individuals with second homes, as well as those with large share portfolios sitting outside of tax-efficient ISAs. The proposals are also likely to cause bigger problems for owners of small companies who hold large sums of cash within their business with the aim of using the cash as a pension when they retire. The OTS also suggested that business owners should pay Income Tax rates on share-based remuneration and earnings retained in their companies. Other recommendations included changing Entrepreneurs’ Relief — recently renamed ‘Business Asset Disposal Relief’ — with an allowance focused on business owners approaching retirement.

 

How concerned should you be?

Firstly, there is no guarantee that these OTS proposals will end up as legislation. Yes, Rishi Sunak is keen to raise money to fill the fiscal hole left by the Covid-19 crisis. But any far-reaching CGT reforms are likely to prove unpopular with voters, and in particular those entrepreneurs and small business owners that do so much for the UK economy – and have faced such a difficult 2020. For now, the Treasury is keeping its cards close to its chest, saying only that “The government’s priority right now is supporting jobs and the economy”.

Secondly, it is very difficult to make future tax revenue calculations based on a ‘discretionary’ tax such as CGT. If the annual allowance is set too low, or CGT rates are too high, it may encourage individuals to hold onto their assets instead of selling them. If fewer people end up paying CGT, then the Treasury may find their hoped-for additional tax revenue predictions were over-optimistic, and that the CGT reforms have discouraged taxpayers from selling their assets and “distorted investment decisions” even further.

 

What actions should I be thinking about?

It is hard to predict what the Chancellor will ultimately decide, but with a coronavirus vaccine due for widespread distribution in 2021, it is fair to assume that the government’s attention will be turning from supporting jobs and the economy towards attempting to pay down some of the debt that has been run up this year. So, we feel now may well be a sensible time to undertake a review of your existing investment portfolios, to consider your CGT position and ensure your investments are as tax-efficient as possible.

In particular, this is a good time to focus on investments that have been held for some time, which may carry substantial gains. Whilst CGT is only one consideration when deciding on appropriate changes to an investment portfolio, the result of the OTS review may well mean that now is an ideal opportunity to consider existing investment portfolios in light of potential changes to come.

 

If you are interested in discussing your investments or tax planning with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Mature woman writing a Will

Make November the month you write your Will

By | Uncategorised | No Comments

If you’ve been putting off making a Will, now might be the right time to put it back on your to-do list. Throughout November, Will Aid is helping thousands of people to get their Wills written professionally, while also contributing to several charitable causes.

 

According to research from Royal London published in 2018, 54% of UK adults haven’t made a Will, and a worryingly high 5.4 million people in the UK don’t know how to go about making one. There are several reasons most people give for not making a Will. Procrastination is the most common reason, with lots planning to make one ‘when they get older’. A large proportion of people without a Will simply seem to believe that they don’t need to make one –  either because they feel they have very little value to leave behind or they are confident their estate would end up where they intended it to without one. But this may prove to be a mistake.

 

What does a Will do?

Your Will gives you the opportunity to clearly state your wishes about what should happen to your money, your possessions, and your property after you die. It also allows you to name the person or people you want to be in charge of organising your estate after your death (called your ‘executor’), and lets you give them specific instructions on how to carry out your wishes. This could be anything from appointing legal guardians for your children, making gifts of your possessions to family and friends, making arrangements for your pets, and your specific requests for your funeral.

 

Why is having a Will important?

Writing a Will puts the control over your wishes in your hands. But it also removes most of the complexity that comes with sorting out a person’s estate after their death, which is a particularly difficult and stressful period at the best of times. Knowing that you have a Will already in place can give you and your family peace of mind that the process of dealing with your estate has already been taken care of. And leaving a Will that states clearly who should get your possessions and your property when you die can prevent unnecessary distress for your loved ones after you’ve gone.

 

Providing clarity on your financial affairs

Writing a Will is particularly important for anyone who has children or other family members that depend on you financially, or if you would like to leave some of your possessions to people who are not considered part of your immediate family.

 

Writing a Will can also make your financial affairs clear to the taxman, and help reduce the amount of inheritance tax that could otherwise be payable on the value of the property and money you leave behind. For example, by specifying you are leaving the family home to your children or grandchildren, your estate can claim the main residence nil-rate band, which would allow it to benefit from up to an additional £175,000 in tax-free allowances in the 2020-2021 tax year.


Life Interests

Leaving a Will can also be tremendously important in more complicated family circumstances. For example, you can use a Will to provide a ‘Life Interest’ – which can prevent unpleasant and expensive legal battles between your loved ones after your death. Creating a Life Interest is particularly important for people who have divorced and have children from their first marriage. With a Life Interest, the deceased can make sure their new partner is legally entitled to stay in their home while ensuring it will be passed on to the children as part of their inheritance.

 

What happens if you don’t write a Will?

If you die without leaving a valid Will, this is called ‘intestacy’ or ‘dying intestate’. This means that if you live in England or Wales (the rules are different in Scotland), everything you own will be shared out under standard intestacy rules. In other words, the law gets to make the decisions on who gets what from your estate. Here are some of the most common problems that can arise from letting the law decide:

  • If you’re married, your husband or wife can inherit all of your estate even if you were separated at the time of your death. Your children might not get anything.
  • If you’re unmarried, and not in a civil partnership, your partner will not be legally entitled to anything when you die, no matter how long you were together.
  • If there is inheritance tax due on your estate, it could be significantly higher than necessary.
  • If you have children or grandchildren, the amount they are entitled to may depend on where you live in the UK.
  • If you die with no living close relatives, thanks to a law called bona vacantia, your entire estate could be handed to the Crown.

 

Stop putting it off

Some people worry about the costs involved with writing a Will, but in most cases it is not as expensive as you might think. And in November, you can arrange to have your Will written through Will Aid and make a charitable donation to several good causes at the same time.

 

What is Will Aid?

Will Aid is a partnership set up between the legal profession and nine of the UK’s best-loved charities. Since 1988, it has enabled helped raise more than £21 million for good causes, while ensuring that more people in the UK get peace of mind from having their Will professionally written. More than 500 solicitor firms nationwide took part in Will Aid last November, raising over £900,000 for charities working with some of the most vulnerable people in the UK and around the world.

 

How does Will Aid work?

Solicitors who are taking part in Will Aid will draw up a basic Will for clients without charging their usual fee. Instead, clients are invited to make a voluntary donation. The suggested donation is £100 for a single Will or £180 for couples. The donations are then given to nine of the UK’s biggest charities, including the NSPCC, Save The Children, Age UK, British Red Cross, and more.

 

Over the years, Will Aid has helped more than 300,000 people to put their financial affairs in order, make their last wishes known, and give them and their families peace of mind. If you would like to have your Will written through Will Aid, you can find your nearest participating solicitor and book an appointment on the Will Aid website.

Robo advice vs financial adviser

Why robo-advice won’t be taking over the world just yet

By | Financial Planning | No Comments

Trusting your finances to a digital investment platform might be cheap, but you can’t put a price on the peace of mind that personal financial advice gives you.

Technology has had an outsized impact on our lives for several years now. Every time you use a computer, your mobile phone, or take a trip in your car, algorithms are there, behind the scenes, helping to shape your decisions, whether you realise it or not. Algorithms even choose what we see on social media, they dictate which films we watch on Netflix, or what ends up in our basket when we shop online.

But when it comes to providing financial advice, algorithms are still lagging behind. Back in 2015, the introduction of ‘robo-advice’, which relied on computer-generated investment portfolios, was predicted to spell the beginning of the end for financial advisers. But five years later, although we have all grown used to doing most of our daily activities online, the machines don’t look like they’re winning this particular battle.

 

So, what exactly is robo-advice?

As you would expect, robo-advice is an online investment service where clients are asked a number of questions, including how much they wish to invest, how long they plan to invest the money for, and their general attitude towards risk. The answers to these questions are then used to invest the client’s money into one of several available investment portfolios. The money is then managed digitally for as long as the client wants to remain invested.

 

What are the positives of robo-advice?

First of all, robo-advice promises to keep the cost of the investment lower than you would expect if you tried to manage a diversified portfolio of investments yourself, or through a financial adviser. And by keeping things simple, it’s a very quick process to get a portfolio up and running. Once the questions have been answered, the client can have their funds invested within a day or so. For investors who have relatively small amounts to invest, it’s a good way of setting aside regular amounts without having to worry too much about keeping an eye on the investments.

 

What are the negatives of robo-advice?

Despite the name, robo advisers don’t usually offer financial advice. They use algorithms to know just enough about someone to place their money into a particular savings pot, but that’s about the extent of their ability to solve clients’ financial problems. For most people, robo-advice can only get them so far.

 

Why is robo-advice limiting?

If the events of 2020 have taught us anything, it is that life is unpredictable and sometimes more complicated than we would like it to be. The companies that offer robo-advice to customers want to convince people that financial advice can be stripped down to a computer-generated, algorithmic ‘paint by numbers’ approach. But the reality is that people’s needs are usually far more complex.

One of the most valuable aspects of having a relationship with a financial adviser or financial planner is that it goes far beyond just recommending and overseeing a specific investment.

 

It pays to have someone to talk to about money

Most people have an emotional relationship with money. Financial issues are the number one cause of arguments rows between married couples. It gives people sleepless nights, and can have a significant impact on their mental health. So, having a financial planner to talk to, someone to listen to your financial needs, hopes and fears, is still an essential part of the advice process – and not something that an algorithm can deal with (yet).

 

Keeping calm during a crisis

One of the ways that financial planners can really demonstrate their worth is through the value of their experience. This has been a strange year in investment terms. In the early months of the year, when the coronavirus pandemic – and subsequent lockdown – became a global threat, stock markets plunged in value. Inexperienced investors, or those without a financial adviser, often respond in times of crisis by selling their investments, and crystallising their losses.

But a good financial planner can take the emotion out of your financial decisions, help to put ‘apocalyptic’ media headlines into perspective, and make sure that your portfolio is best-positioned to take advantage of recent stock market falls, while also capitalising on longer-term trends. Financial planners can help to reduce the overall risk within your investment portfolio by recommending sophisticated investments, such as tax-efficient Venture Capital Trusts or Enterprise Investment Scheme plans, that simply aren’t available on robo-advice platforms.

In short, during volatile investment conditions, financial planners get the opportunity to get creative, demonstrate their experience and specialist skills, and to really prove their value to their clients. A robo adviser portfolio will just carry on regardless.

 

Financial planning that goes beyond investment

And of course, investment advice is just one aspect of what our financial planners do. The questions we ask during our fact-finding stage are not just restricted to finding out how much you want to invest and for how long. We are more interested in hearing you talk about your life goals, your plans for your retirement, the wealth you want to pass on to your children and grandchildren. We’re asking these questions because we want to help you plan your financial journey through life. All this information helps us to create a much deeper, lasting relationship with our clients throughout their relationship with us. And it means we’re ready to help when something unexpected happens.

 

Summary: a matter of trust

While algorithms have improved our way of life in many areas, often in areas we’re not even aware of, it’s also becoming more apparent that algorithms can themselves be flawed or contain hidden biases – after all, they are still programmed by humans.

The lack of take-up of the services offered by robo-advice companies suggests that most people are still deeply sceptical about leaving their financial future in the hands of computer programmes that don’t understand them or care about them.

For some people, using digital-only robo-advice is a cost-effective and simple way to start setting money aside for the future. But for the vast majority, there’s really no substitute to having an experienced financial planner giving you the confidence to make better informed investment decisions. When it comes to the really important questions, or those life-changing decisions, people will always prefer to talk to someone they trust. So, here’s our prediction for the future: financial planning will always be a people-first business.

 

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Big tech companies icons on phone

Taking a closer look at tech stocks

By | Investments | No Comments

Tech stocks have led the global equity market recovery since the spring. Some argue that valuations are becoming stretched, but this doesn’t look like a repeat of the dotcom bubble in 2000.

 

It has been a colossal, if uneven, year for the world’s largest technology companies. The NASDAQ index, home to America’s most prominent tech names, has increased by more than 30% since the beginning of 2020, consolidating a rise of more than 400% over the past decade. And, in what’s been an extremely turbulent year for most companies, the continued strong performance of tech giants such as Apple and Microsoft have been a major reason why the headline US S&P 500 index remains in positive territory over the year to date. Apple’s share price has doubled in value in the past six months, and with the valuation of the company passing $2tn USD in August, the company is worth more than the UK’s 100 biggest companies combined.

It is not hard to see why tech stocks have done so well this year. Lockdown has caused significant changes to people’s lifestyles, and accelerated trends that were already well underway. As well as spending large amounts of time in front of their phones, computers and tv screens, people are shopping online more, storing their personal and business information remotely in the cloud, and companies are increasingly relying on data to make their business decisions. These areas were already expanding rapidly before the coronavirus lockdowns forced people to stay at home, and businesses to rapidly alter their working practices.

In a period when a large number of sectors of the economy have seen profits shrink and businesses come under pressure, tech stocks, along with pharmaceuticals and household goods, are sectors that have continued to see growth.

 

The rally heats up during the summer

During the summer, tech stocks enjoyed a renewed surge, with a number of additional factors contributing to the outperformance. One reason appears to be the actions of Softbank, a tech-driven investment company in Japan which took large derivative positions in seven of the most high-profile tech stocks (Facebook, Microsoft, Salesforce, Netflix, Alphabet, Adobe and Amazon). Softbank apparently carried out a series of enormous, aggressive trades, costing an estimated $50 billion, that drove up valuations during August and whipped up investor appetite.

Another reason for the rise of tech stocks during the summer, although this one is more open to speculation, is that they were due in part to the numbers of ‘day traders’ in the US. These were people who had considerably more time on their hands to play the stock markets during the summer – the high number of coronavirus cases in the US caused a number of strict lockdowns across most states – and opted to make short-term bets on tech stocks.

After the strong gains seen this year, it was, therefore, not unexpected to see some consolidation in the tech sector over recent weeks, with some profit taking in companies such as Tesla, which have enjoyed a stellar performance this year. That said, US software stock Snowflake attracted significant demand at its initial public offering in September, rising substantially above the expected offer price amidst interest from Warren Buffett’s Berkshire Hathaway. This can be viewed as a positive sign that momentum in the sector remains intact.

 

Are we seeing a replay of the dotcom bubble?

Some people have drawn unfavourable comparisons of the performance of tech stocks over the last year to the dotcom ‘boom and bust’ that took place in the late 1990s and early 2000s. Back then, excessive speculation and wild valuations for internet-based start-ups such as pets.com, boo.com and lastminute.com helped to cause a huge market crash that cost investors more than $5 trillion.

But one of the biggest differences between then and now is that today’s tech companies are established names, not ambitious start-ups. Even if valuations appear stretched, their popularity is based on their widespread adoption globally, and they are already making huge profits, and should these profits continue to increase over future years, current valuations may be justified.

 

Political headwinds ahead for ‘Big Tech’

One of the biggest issues facing tech companies is that some of them are now just too big. In the US and Europe, politicians have expressed concerns that companies such as Facebook and Amazon are too dominant in their sectors, and may have to have their activities curbed and their monopolies broken up in the interests of fair competition and stronger rights for consumers and smaller businesses. These concerns have been overtaken by COVID-19 this year, but could return and have an impact on the value of affected tech stocks now that the US presidential election has passed.

 

What should investors think or do?

No one can predict with any certainty what is going to happen to tech stocks in the next five years. But if you believe in the long-term case for technology companies, one of the better ways to invest is to spread the investment risk by choosing a dedicated technology fund that offers a blend of established names and future potential winners. That way, even if some of the larger tech names underperform, newer entrants could still do well. Active fund managers are well aware of the speculation over the future of tech stocks and will be positioning their portfolios to ensure they don’t rely too heavily on a concentrated pool of companies. As always, our experienced financial planners can help to find the right fund to help you take advantage of the investment opportunities out there.

 

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Commercial property fund_FAS

The lowdown on UK commercial property funds

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Commercial property funds have been the subject of dealing restrictions since March, with investors unable to make withdrawals or redeem their investment. But as more commercial property funds start to reopen, are they still a good long-term investment?

 

When did commercial property funds get popular?

For individual investors, the concept of investing in commercial property as an asset class of its own first became popular in the late 1990s. They have grown in popularity over the next couple of decades, as investors welcomed the prospect of gaining exposure to an ‘alternative’ asset class that behaved differently to equities, bonds, and cash, offering an attractive income yield and relative capital stability.

 

Why do commercial property funds behave differently?

Commercial property funds, that invest primarily in ‘bricks and mortar’ property assets (as opposed to equities or investment trusts that hold property) behave differently to other quoted assets for a number of reasons. Firstly, the valuation method of commercial properties is different. Whereas traded securities (such as shares) are priced at a mid-point between the price at which buyers are willing to pay, and sellers willing to sell at, commercial property is valued by specialist valuers, who factor in demand, yield, location, and economic viability of the potential tenant, to derive a value. This valuation clearly cannot take place daily, and there is therefore a lag between the price of a commercial property fund and the underlying value of the portfolio. This can lead to ‘material uncertainty’ that the value placed on each asset held in the portfolio is fair.

The other significant difference that sets commercial property funds apart is that they are often far less ‘liquid’ than other investments available to other investors. Depending on the composition of the portfolio, a period of high redemption requests may force property funds to sell assets rapidly, potentially at a sub-optimal price, and these transactions can take time. For this reason, most property funds carry a balance in cash, but sometimes these cash reserves become depleted, which can lead to a suspension of dealing whilst property fund managers realise assets to replenish the cash reserves.

These suspensions, which have been in place since March 2020, have also occurred on a number of occasions over recent years. The first time it happened was in 2008, when the global financial crisis prompted an exodus from investors. The second time that the UK commercial property sector shut up shop came shortly after the Brexit referendum. The same thing happened again in December 2019, when a small number of managers suspended their commercial property funds by invoking material uncertainty clauses that said it was impossible to get fair valuations for their property portfolios. This time, the reasons given included continued Brexit uncertainty, as well as significant weaknesses for the UK retail sector, caused by the collapse of the UK high street and the continued boom of online retailers.

 

What has happened this year?

The coronavirus outbreak has had a significant impact on the UK commercial property sector. Back in March, many commercial property owners were forced to give their business tenants rent payment holidays. Some premises have been empty, and a number of businesses have become insolvent or downsized their operations significantly. With the UK on the brink of a possible second ‘winter’ lockdown, and with office workers being encouraged to work from home again, the sector continues to face several headwinds and a heightened state of uncertainty about the future.

In September, valuers cleared the way for commercial property funds to begin to reopen after recommending a ‘general lifting’ of material uncertainty clauses on the valuation of most UK real estate assets. In other words, valuers now believe it is now possible to ascertain an accurate valuation of the properties held within these funds, thus allowing some commercial property funds to lift suspensions and recommence dealing.

That said, there is no regulatory requirement to reopen funds that are currently suspended and many fund managers are wary of reopening their commercial property funds too early. If investors are still determined to sell their holdings, many funds could find themselves without enough liquidity to satisfy the demand and could be forced to suspend redemptions yet again.

 

What could the future look like?

Aware of the growing frustration among investors who cannot access their money, and fund managers who worry that large-scale redemptions could damage the long term strategy within their portfolios, the Financial Conduct Authority is looking at proposals that would establish a ‘notice period’ of several months between the investor requesting a fund redemption and having their investment returned to them.

The premise is that this would hopefully give fund managers enough time to ensure they had enough cash available to meet the redemption, and would also discourage short-term investors from investing in an asset class that doesn’t offer them daily liquidity. Pension funds and financial institutions are most likely to remain investors, for now at least.

 

But are commercial property funds still a sound investment?

It is clear that the commercial property landscape has changed as a result of Covid-19. For example, City centre office space may well see decreased demand due to changes in working patterns and similarly, in the short term, hotels may continue to struggle without the traditional influx of business passengers arriving from overseas to attend meetings.

At the same time, commercial property is a broad and varied sector. There is likely to be increased demand for industrial buildings and warehouses that can accommodate a greater reliance on online shopping for groceries and other goods. So, there will be some winners as well as losers within the UK commercial property funds universe.

But at the end of the day, individual investors need to think about whether they really want to hold an investment that they may not be able to access for months on end. Whatever your view, commercial property investments are certainly becoming a more complex proposition for individual investors.

 

This content is for information purposes only. It does not constitute investment advice or financial advice. If you are interested in discussing your financial plans or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

How to protect yourself against online spammers

How to protect yourself against financial scams and fraud

By | Uncategorised | One Comment

There has been an alarming rise in financial scams since the coronavirus lockdown. Here’s what you need to know about the different types of scam, and how to defend yourself.

 

Rise of financial scams during lockdown

According to recent research published by Barclays, there was a 66% increase in reported financial scams during the first six months of this year. And, in an effort to get around increased security measures from banks and other financial services firms, scammers are developing increasingly clever ways to persuade people to part with their personal details and even hand over their money themselves.

 

Impersonation frauds

One of the most popular ways is through something called ‘push payment fraud’. This occurs when the fraudster manages to convince the victim in ‘real-time’ to make a payment or transfer money from their bank account into another account controlled by the fraudster.

Here’s how this particular scam works. You receive a friendly phone call from someone claiming to represent your bank, HMRC, or a utility provider. The caller knows personal details about you, and the number they call from appears to be genuine (it could be the number on the back of your debit card, for example). The caller will tell you there has been some suspicious activity on your bank account – which means you need to open a new account and transfer all your money into it immediately.

In most instances, the first part of the fraud has already happened. Victims might have had their post intercepted or clicked on a ‘phishing’ email that handed over some of their financial or personal details to the scammer. That’s why they already know so much about you and your finances during the phone conversation.

 

A cunning confidence trick

The call is designed to make you feel anxious, or that you will be in trouble if you don’t take immediate action. It’s a psychological ploy, backed up with modern technology that convinces people the call is coming from a legitimate and trustworthy source. Before you know it, you’ve willingly handed over all of your money directly into the scammer’s account.

These impersonation scams were particularly prevalent during the early months of lockdown. Perhaps people were already more vulnerable than usual, had added money worries or scammers simply had more time to phish for people’s details and follow up with the impersonation part of the scam.

 

Investors need to be careful too

There are other impersonation scams out there to be aware of. The Financial Conduct Authority (FCA) has been warning people about the rise of “clone firms”, where criminals copy the names, websites, and literature from established investment companies and use them to target unsuspecting victims on sponsored links on search engines and through social media. Fraudsters will also ‘cold call’ investors directly, claiming to be from a company that the victim already has an investment with. In some instances, fraudsters have even set up email addresses in the names of actual staff members at investment management firms they are pretending to represent.

The fraudster will quickly gain the confidence of the investor and persuade them to make new investments or transfer existing investments. These new investments eventually turn out to be wildly over-priced, impossible to trade or they don’t even exist. Many investors only realise they have been conned when they contact the authentic investment firm to chase payments that haven’t arrived.

 

Pension freedoms have opened the door to fraudsters

Pensions have also become a target for criminal scams, especially since the introduction of pension freedoms that mean people can access their pensions early. People now have far more flexibility in what they do with their pension pot. For the fraudsters, this is an opportunity to get their hands on previously untapped wealth, and to rob people of their life savings.

Last month, the FCA and The Pensions Regulator estimated that more than £30 million had been lost in pension scams since 2017. Victims of pension scams, where fraudsters have managed to persuade the pension owner to transfer their pension to a fraudulent pension scheme, have lost an average of £91,000, and some unlucky victims have been robbed of more than £1 million of their hard-earned pension.

 

What can you do to protect yourself?

There are some common-sense steps you can take to help defend yourself against financial scammers. Here are some of the most useful ones to remember:

  • Don’t automatically trust an unexpected communication from your bank, HMRC or a company you’ve done business with, and don’t ‘confirm’ your personal details or agree to transfer any money.
  • Pay alert to messages from your bank or other service provider that ask you to click on an email link – they could be phishing for your personal details.
  • If you’ve been called by someone claiming to be from your bank, end the call and then phone the official bank number from a different phone (scammers can keep the line open if you call back from the same phone).
  • Reject ‘out of the blue’ investment offers, and remember that if something sounds too good to be true, it usually is.
  • Be wary of cold callers trying to flatter you, pressure you, or scare you. Don’t allow yourself to feel rushed into making a financial decision.
  • Trust your instinct. If something feels suspicious, report it.
  • Always get professional financial advice between switching investments or making changes to your pension arrangements.

Summary

The Citizens Advice Bureau warns that the most vulnerable people are often at greater risk of being contacted by a scammer. But the reality is that these are sophisticated, ruthless criminals who go to great lengths to present themselves as genuine. It’s easy to be deceived, especially when the scammers know so much about you and are preying on your personal fears. But knowing how the fraudsters operate is an important first step to ensuring you don’t give them what they want.

 

You can report potential scams by calling ActionFraud on 0300 123 2040, or visiting actionfraud.police.co.uk

 

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Signing a will

Trustees’ duties and powers when making investment decisions

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The role of a trustee is one that should not be entered into lightly, as it carries risks and responsibilities. Whether appointed as a trustee under a will or standing as a trustee of a trust established during an individual’s lifetime, there are specific duties that trustees must comply with.

In this article, we will consider those duties and responsibilities in more detail and specific requirements in respect of trust investments.

 

How is a trustee appointed?

In the case of will trusts, unless otherwise stated in the will, the executors of the will also act as trustee of any trusts that are established by the will. In other trust matters, such as where funds are set aside for a child under the age of 18 via a trust investment or insurance policy, then parents, close family or trusted friends are often invited to stand as a trustee. It is recommended that there are at least two trustees appointed, although in the case of land, a maximum of four trustees can stand. All trustees need to act unanimously in their decision making, and therefore the greater the number of trustees, the greater the possibility of disagreement.

 

What are the duties of a trustee?

The primary responsibility of a trustee is that he or she owes duties of honesty, integrity, loyalty, and good faith to the beneficiaries of the trust.

To comply with legislation, trustees must understand and observe the terms of the trust. These are set out in the trust deed, which is often a will, or other trust instrument, such as an insurance company deed, and establish who the beneficiaries are, what assets are to be held within the trust, and any other instructions that the trustees need to follow. The trust deed may confer powers on the trustees to carry out actions, which are also defined by law.

Whilst following the terms of the trust, trustees need to show impartiality towards beneficiaries and cannot allow a beneficiary to suffer at the expense of another. This is particularly relevant where an individual beneficiary receives income from trust assets, and other beneficiaries receive capital.

It is important that trustees keep good records of decisions made and accurate and up to date accounts, so that beneficiaries can be provided with relevant information when it is requested.

 

Dealing with trust investments

The Trustee Act 2000 introduced updated default rules for investments made by trustees. Unless the powers conferred by the Act are over-ridden within the trust deed, the Act provides significantly wider investment powers than were previously in place, and gives trustees the power to invest the trust capital as if they were the absolute owners themselves.

A statutory duty of care applies to all trustees, whereby he or she must exercise such care and skill as ‘is reasonable in the circumstances’. A trustee acting in a professional capacity, or having special knowledge and experience, would be subject to a higher duty of care. This statutory duty applies to decisions taken when investments are made or reviewed, property or land is purchased, managed or insured, or a decision taken to appoint a third party to assist in the investment process.

The standard investment criteria set out in the Trustee Act 2000 stipulate three key elements that must be adhered to. Firstly, trustees need to ensure that the investments selected are suitable for the trust in question. Factors that trustees need to consider here is the objective of the trust and requirements of beneficiaries, the time horizon for investment, and the level of risk to which trust investments are exposed.

Secondly, investments need to show sufficient diversification, as appropriate to the trust in question. For the majority of cases, this means that the investment strategy needs to allocate funds across different assets (such as equities, fixed interest securities, property and cash) geographies and sectors. The precise level of diversification will need to pay due consideration to the terms of the trust. For example, in the case of a trust holding £5,000 for the benefit of a child who will be 18 in a year’s time, it is highly likely that a cash deposit would be appropriate and the need for diversification would be low. Conversely, a large trust fund providing income to a beneficiary and capital to residual beneficiaries in the future, would be expected to invest in an adequately diversified portfolio.

Thirdly, trustees need to keep investments under regular review. This is often overlooked by trustees, and the importance of this requirement cannot be overstated. In today’s rapidly changing investment landscape, arranging an investment portfolio and not reviewing the suitability and performance on a regular basis could lead to significant underperformance, and invite criticism from beneficiaries.

 

The need to obtain advice

The Trustee Act requires trustees obtain qualified investment advice when considering exercising the power of investment or reviewing existing trust investments. The only exclusion to this requirement is where trustees reasonably consider obtaining advice to be an unnecessary step, for example, where a trustee possesses the relevant skills to reach a decision. Given the potential risk of criticism or litigation from beneficiaries, we wouldn’t expect to see many trustees make decisions themselves without seeking appropriate advice.

To assist with the regular review of trust investments, trustees are able to delegate certain functions, for example, ongoing management of trust investments, to an agent, who acts on the trustees’ behalf. When delegating this responsibility to a professional, there needs to be firm agreement in place as to the objectives of the trust investments, the level of risk and any other guidance, such as the need to produce income, that is relevant.

Many trustees look to appoint an adviser who can manage funds on a discretionary basis, so that the trust portfolio is kept under close review and changes are made to the investment portfolio as appropriate. Our FAS Concepts discretionary managed service is an ideal solution for trustees to consider.

 

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

woman hand holding red and green apple

Advisory vs discretionary investment management

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When appointing a wealth manager to provide advice on an investment portfolio, clients are often faced with the choice of selecting between an advisory and discretionary investment approach. We set out the key differences and highlight the potential benefits of model portfolios and our FAS Concepts investment approach, as opposed to traditional discretionary managed portfolios offered by fund houses and banks.

 

Advisory vs discretionary – what is the difference?

If a client selects advisory management, this is where the investment adviser makes recommendations based on the client’s individual circumstances needs and objectives, and attitude to investment risk. Should any changes to the portfolio be appropriate – for example to switch out of an underperforming investment or change asset allocation – then the express permission of the client is required before the adviser firm can make the changes.

By choosing discretionary management, the first part of the advice process remains the same. A portfolio of investments is established based on the client’s circumstances, attitude to risk and objectives. The main difference is by also establishing a risk profile, the advice firm can make changes to the portfolio within the defined boundaries of the risk profile without consulting the client first to gain their express approval.

Each of these options has advantages and drawbacks. Advisory portfolio management does allow a greater level of client engagement, as clients can get the opportunity of reviewing each suggested change recommended by their adviser. This does afford the client an element of control, although in practice, the majority of advisory clients tend to follow the advice given and accept the recommended changes. The downside of this approach is that it can be laborious and slow, which may not be best practice in today’s fast-moving investment markets.

The Discretionary route has the advantage of offering the potential for investment decisions to be placed in a timely manner, free from the delays introduced by the necessary client contact under Advisory management. That said, by handing over control under discretion, investors cannot dictate precise terms of the strategy adopted, or have an input prior to decisions being taken.

 

FAS Concepts

At FAS, we offer both advisory and discretionary portfolio options to our clients. We have historically acted for clients on an advisory basis but introduced our own discretionary managed portfolio service, FAS Concepts, to provide the full range of services to our clients.

When we devised our FAS Concepts investment approach, we were very keen to differentiate our discretionary service from the services offered by large fund houses, banks and other institutions that offer discretionary management. We have undertaken countless reviews of discretionary portfolios managed by some of the UK’s largest institutions and found a number of areas where we feel our FAS Concepts approach offers a significant advantage.

The first of these advantages is cost. We tend to find discretionary portfolios to be expensive when you factor in the cost of management, and the cost of the underlying investments themselves. These charges have a cumulative effect over time and dampen returns.

Secondly, many discretionary fund managers build portfolios that feature very similar investment approaches, and indeed similar stocks and funds, to each other. In our many years of experience, we have noticed a trend when reviewing discretionary portfolios that performance across different managers closely correlate with each other and appear to be more focused on relative index performance than achieving strong absolute returns.

Thirdly, traditional discretionary management is often concentrated on UK investments, with heavy exposure to UK directly held Equities and Gilts. We have long been advocates of global investing, and we feel that the current economic and market conditions will continue to favour this approach.

 

FAS Concepts for individuals and trustees

The FAS Concepts service is a model portfolio service that provides a range of discretionary managed portfolios designed to fit common client needs and objectives. Each portfolio has a stated objective, either providing capital growth or a mix of growth and natural income, and a risk level based on asset allocation.

Our in-house investment committee meets at least four times a year, and following the decisions taken by the committee, changes are made to each model portfolio, either replacing funds where appropriate or rebalancing positions to keep the portfolio within closely defined risk parameters. As all portfolios aligned to a model are changed at the same time, this provides consistency of performance.

In addition to providing a cost effective and responsive discretionary approach to individuals, our FAS Concepts service is an ideal solution for trust investments. Through our regular review of the investment portfolios, and automatic changes based on market conditions and investment performance, this can help ensure trustees meet their obligations under the Trustee Act to keep the trust investment portfolio under review.

Our professional trustee clients have told us that using the discretionary approach alleviates the need for busy professionals to be dealing with recommendations and documents that require a signature under an advisory portfolio service.

Finally, we can assist trustees in meeting their reporting duties through our detailed investment reports, which include relevant industry benchmark performance for comparison purposes.

We are proud of how cost competitive the FAS Concepts service is when compared to traditional discretionary fund management. By working closely with platforms, partners and individual fund houses, and using a blend of actively managed and passive funds, we aim to ensure that the FAS Concepts service is keenly priced.

 

If you would like more information regarding our FAS Concepts service, please do get in touch with us here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Sustainable development

Is Socially Responsible Investing (SRI) effective?

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As we enter a new decade, the environmental impact of the way we live is in sharp focus. As a result, more investors are considering the construction of their portfolio, to see whether it aligns with their core values in respect of the environment and social responsibility. According to the Global Sustainable Investment Alliance, as at the end of 2018, over $30tn was invested globally in responsible investment strategies, a significant jump of 34% over a period of two years.

In this article, we look at the increasing popularity of SRI investment, ways to access portfolios designed to meet SRI criteria, and whether these portfolios can deliver strong returns for investors.

 

What is SRI investing?

SRI investing aims to invest money in companies and funds that have positive social impacts. Each investment fund with a stated SRI objective will set out its own criteria as to how investment positions are selected; however, most SRI investment funds will automatically exclude investment in companies involved in tobacco, alcohol, and gambling, and will often also exclude companies whose activities are in fossil fuels, weaponry, and animal testing.

SRI managers can select investments via a negative or positive screening method. The former seeks to eliminate those companies engaged in activities listed above, whilst the latter may include a company where the board is gender-diverse or is making strides towards improving its environmental impact. As a result, positive screening tends to allow a wide range of companies from which the manager can construct a portfolio but potentially may carry investments that sit outside of an individual’s ethical preference. These screening methods are sometimes referred to as ‘light’ or ‘dark’ green, to signify the strictness of the criteria used.

SRI investments are often spoken about at the same time as ESG investing. ESG stands for Environmental, Social and Governance, and ESG investment strategies will consider the impact of these three key areas – the environmental impact of a company’s operations, social risks (such as health and safety and human rights), and standards in the way companies are run.

Where ESG and SRI differ is that a company which has a positive ESG score, and therefore may be included in a fund using ESG criteria, could be involved in an area that is precluded from SRI investment as being unethical, for example, a company involved in fossil fuels may pass ESG filters, but not be considered for SRI investment.

 

The SRI Market in 2020

The first UK investment funds with a mandate to invest in a responsible manner were launched in the 1980s. Early adoption of this investment strategy posed significant issues, in that fund managers were selecting from a very small pool of investments that met the necessary criteria. As a result, performance from SRI funds has, historically, fallen behind more traditional investment management without SRI filters, and investors that chose to invest ‘ethically’ had to make a decision whether their core beliefs justified the potential for underperformance over the longer term.

With an increasing number of companies now meeting SRI criteria, fund managers of SRI portfolios now have a much wider range from which to construct portfolios, and the gap in performance between traditional investment portfolios and constructed SRI portfolios has now narrowed significantly. Indeed, over the last year, we have found that SRI portfolios have outperformed traditional investment strategies, and we feel this is a result of a combination of two factors.

Firstly, many companies are themselves gravitating towards social responsibility, and therefore the range of companies available for investment within an SRI orientated fund has increased. With a greater number of companies that pass the screening methods, active fund managers can select from an increased range, which can lead to better outcomes. Secondly, many traditional industries that SRI funds would avoid, such as gambling and fossil fuels, have struggled over the course of last year, whereas technology and pharmaceuticals, which generally pass SRI filters, have outperformed.

 

The Future of SRI investing

It is clear from the trends we are seeing that SRI investing is here to stay. Recent analysis shows that one dollar in every four dollars invested in the US is made into SRI or ESG funds.

Given that many companies now issue their own sustainability report, it is likely that those companies that do not embrace SRI issues and take them seriously may find themselves cast adrift, not only from investors but also from doing business with companies who take their responsibility seriously and do not wish to tarnish their reputation. As a result, we expect to see more companies striving to meet sustainability targets.

In addition to actively managed SRI funds, passive investment options have also emerged over recent years, offering access to Global Index funds that meet SRI criteria. This offers a low-cost way of investing in Global Equities, and an increasing range of Ethical Bond funds now provide the opportunities for Fixed Interest investors to gain access to good performing funds that only lend to those companies who meet SRI criteria.

Finally, younger generations, who are generally more conscious of ethical investment themes, will enter the investment world through pensions and other long-term investment plans. We feel this will increase the demand for SRI compliant portfolios.

 

Accessing SRI investments through FAS Concepts

At FAS, we have devised two discretionary managed investment portfolios that meet SRI criteria. Since launch, these have proved popular, and provide access to global investment markets by selecting investment funds that both pass our standard in-house analysis, but also meet necessary SRI criteria.

 

If you would like to discuss SRI investing or would prefer an existing investment portfolio managed elsewhere to be managed in a responsible manner, then please get in touch, here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

volunteers packing donation boxes in charity food bank.

Investing for charities

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One of the biggest responsibilities facing charity trustees is how to invest donations and other financial support received in an appropriate manner. In this article, we explain why charities should look to invest funds, some of the issues that need due consideration, and how FAS can assist in this process.

 

Why should charities invest?

Charity trustees need to consider investing the funds they receive, rather than leaving large amounts on cash deposit, to try and achieve a better return on the monies held, to further the aims of the charity. This return could be in the form of growth, which allows greater charitable work to be carried out in the future, or to provide an income to support the charity’s ongoing operations. Furthermore, trustees need to consider the eroding effects of inflation on funds held, as keeping significant sums on cash deposit is likely to see the real value of funds fall over time.

 

What can charities invest in?

Charity trustees have a wide range of investment options open to them. In addition to straightforward cash deposits, charities can invest in shares of listed companies (Equities), interest-bearing loans (Gilts and Corporate Bonds), property or land, and Collective Investments (which may invest in one or more of these main asset classes). Not all of these asset classes will be appropriate to all charity situations and independent financial advice should be sought before charity trustees make any investment decision.

In all cases, trustees must consider the suitability of any investment for their charity. This will be influenced by the agreed level of risk and other factors, such as the size of the investment fund and the aims and objectives of the charity, together with the need to diversify the investment portfolio.

 

Considerations for trustees

When beginning the process of deciding how best to deal with charity funds, the first consideration is to assess the overall financial position of the charity and determine any immediate financial needs. Appropriate levels of funds should be held as cash to cover these short-term requirements, and these should be kept separate from funds that can be considered for longer-term investment. A breakdown of expected income should also be prepared, to ascertain whether the income the charity expects to receive is sufficient to meet planned expenditure, or whether investment income or withdrawals will be needed.

For funds that are not needed in the short-term, trustees can move on to consider an investment strategy. Helpfully, there is government guidance set out to assist trustees in the investment process.

By law, trustees need to act within the charity investment powers, exercise care and skill where making decisions, and diversify investments wherever possible.  Charity trustees must also consider the risk of any investment made and limit this risk to an acceptable level. The Charity Commission recommends that trustees should decide on an overall investment policy and agree on the balance of risk and reward that is right for the charity; naturally, the aims, objectives of the charity, and size of the funds available for investment will all have a bearing on these decisions.

In addition, trustees also need to ensure that investments align with any environmental, social, and governance factors that are pertinent to the charity’s ethos and values. An example of where this can produce an adverse public reaction was the decision by the Church of England investment managers to invest part of their funds in one of the key backers of payday lender Wonga. Whilst this position was quickly rectified once the link was discovered, it is a good reminder of the importance of looking very carefully at the investment portfolio and determining whether the investment policy conflicts with the ethical stance taken.

 

The value of advice – how can FAS assist with charitable investments?

Given the high degree of responsibility placed on trustees to make appropriate investment decisions with charity funds, it is vital that trustees consider taking investment advice as set out in the Charity Commission guidance. Naturally, the board of trustees may have individuals with some investment experience, although even in this case, we would suggest that an external view from an independent professional could offer an objective opinion.

In addition to obtaining initial advice as to how charity funds are invested, keeping those investments under regular review is crucially important. In addition, where charity investments are already in place, trustees should be considering the following points:

  • Are the investments performing well compared to markets and recognised benchmarks?
  • Does the asset allocation of the portfolio continue to fit with the trustees’ preference for investment risk?
  • Does the portfolio continue to fit with the ethos and values of the charity?
  • Are there external economic factors that could affect the portfolio in the medium and long term?
  • Are there any short-term funding requirements where decisions to realise investments are needed?

Obtaining independent advice may well be of benefit in considering these and other points. FAS is a chartered, independent practice, that can give an impartial and unbiased view on existing investment portfolios, or to trustees looking to establish a new investment portfolio.

FAS Concepts, our discretionary management service, is an ideal solution to assist charity trustees. We have devised socially responsible investment portfolios that meet stated ethical criteria, enabling trustees to invest in a managed portfolio of assets that fit with the aims and policies of the charity, whilst seeking to limit volatility.

Our discretionary managed portfolios are reviewed at least four times a year and changes made to the portfolio based on individual fund performance and prevailing economic conditions. These regular reviews will fulfill the requirement for charity trustees to review the investments in place and save time and cost compared to an advisory investment process. Lastly, our comprehensive reporting package provides clear information on portfolio performance, including performance measurement against recognised benchmarks, further assisting trustees in compliance with the requirements.

 

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.