James Sellon was recently interviewed by Spears Magazine for an article about how focusing on what clients actually want and need is giving some wealth managers an edge over the formulaic offerings of giant corporations. To read the full article entitled Just About Managing, please click here.
Following on from Tor’s ‘Shirtsleeves to Shirtsleeves’ post a few weeks ago I wanted to expand on the theme of mastering the challenge of family wealth. It is a truism that family wealth gets dwindled away across three generations but it is interesting to dig further and to look at the families that have managed to avoid this.
It is widely expected that should Hillary Clinton enter the White House in January that taxes for the wealthy will rise. Clinton suggests that taxes will be higher for those Americans who earn more than $250,000. For those who are earning more than $5mm per year Clinton moots that there will an additional 4% tax levied.
For US residents this is an immediate hit to the bottom line. It is unknown as to which tax year Clinton might impose these tax rises and, as such, attention should be given as to whether one wants to crystallise tax liabilities this tax year rather than next.
For those Americans living in the UK the tax rises will probably mean that the highest US marginal tax rates will become more in line with the UK marginal tax rates and as such should not result in additional taxation. The key is ensuring that all US income taxation is off-settable against UK income tax under the US/UK Double Tax Treaty. Care should be taken as to crystallising tax liabilities in an attempt to shelter against US taxes if UK taxes are due on any investment portfolio. As a result of Brexit the UK tax liability on US portfolios is likely to have ballooned given sterling’s depreciation.
If these tax rises are passed the UK will become more attractive than the likes of New York and California as a tax destination as US Citizens living in the UK generally do not pay State or Local taxation.
For more details please click here to read a recent Bloomberg article on this topic.
Almost everyone worries about money, what the future may hold, and the decisions and choices that they will face along the way. Yet few realise that wealth planning is the key to sorting it all out. Everybody needs it, but only a few have unlocked its true value.
For those who have, the equation between the value that they receive from their wealth manager and the fees that they pay needs to make sense. Yet, because the benefits of good advice are often received in the far-off future, it is sometimes easy to miss, or dismiss, the value received along the way. Market noise, emotions and periods of what may seem like inactivity on a wealth manager’s behalf, can also impact on the perception of value. It is often easy to appreciate the value received in the first year, and easy to forget or appreciate the value on an ongoing basis. The wealth planning relationship can be broken down into three key phases of value.
Over the past decade I have been in countless meetings with expatriates living in the UK contemplating the question of where they should eventually hang up their hat. We advise that the tax leg should never wag the happiness dog however for many, the after tax income on retirement has a meaningful bearing on their quality of life.
“Wealth is a monster. It takes a month to learn to control it financially. And many years to learn to control it psychologically” – excerpt from The Magus, John Fowles, 1968.
I was reading these lines only a few weeks ago and I paused to reflect how our clients at Maseco are feeling given the recent market turbulence. I was considering how all equity investors are feeling at the end of January after seeing many indexes post over a 10% loss. Are they feeling happy, sad, worried, are they panicking, are they wishing they could have done something in advance? Most of these feelings are entirely normal, if not rational.
Many of us experienced the dot com crisis, the financial crisis, the European sovereign debt crisis and the ‘whatever we call it today’ crisis. Looking back at your life over these last fifteen years is there a positive correlation between how happy you are and the economic events that surround you? For some, that were treating the financial markets as a slot machine, or didn’t have adequate diversification across their portfolio, their emotional balance would have been seriously affected by market gyrations. When we experience market falls it affects one’s belief systems and we naturally start to question the logic. This can make us anxious, worried, and feel a need to control the uncontrollable.
For most I do not think that this is the case. If one has made sensible, smart and rational decisions about the structuring of wealth then the market gyrations should not upset the emotional apple cart.
Everyone is different and a 10% swing in the value of a portfolio will affect everyone differently. Some will sell, some will do nothing and some will buy more – all three investor types will have completely different portfolio returns that will be largely based on their psychological relationship with risk. It is these choices that can affect our retirement, our lifestyle and ultimately our happiness. Generally our psychological relationship with risk is hard wired.
John Fowles reckons we are also hard wired about happiness:
“However in the end I did discover what some rich people never discover – that we all have a certain capacity for happiness and unhappiness. And that the economic hazards of life do not seriously affect it”.
When I was young the standard dinner party line was… son… whatever you do…. get onto the property ladder. The old adage was if you stretch yourself over time (but still only within what you can afford) inflation should eat away at the debt, coupled with house price appreciation will mean your loan to value is reduced and you will probably be able to remortgage at better, possibly lower rates. This framework may have worked for a time when we saw positive inflation and interest rates that were coming down from double digit levels. It seemed like a one way bet and we all experienced it and believed that as such it was true. For quite a while house prices only moved in one direction. Consider the position we are in now. Interest rates at rock bottom levels and asset prices arguably at elevated levels. What could happen now if you follow that old advice and stretch yourself when buying a property? In the UK at the moment most mortgages are fixed for a short period of time, so it is hard to budget long term.
Imagine a situation where house prices drop by 5% over the next two years and interest rates increase. Those home ‘owners’ that stretched themselves previously are likely to see their loan to value reduce as well as their mortgage payment increase. This would be acutely felt in the monthly cash flows and in a rising interest rate environment where house price appreciation doesn’t materialise the notion of stretching oneself seems frankly unwise with hindsight. They could also be in a position where they cannot remortgage because the loan to value is too high. Maybe one should have considered more about what one needs than what one wants when buying the forever home.
I attended a Harvard Business School alumni event this week where Sir Ronald Cohen was setting out the case for impact investing. Impact investing is where one makes an investment decision not only on the grounds of risk and return but also on the social impact it generates. Ronald is arguably the father of social investing in the UK and also the father of venture cap investing (he started Apax Partners in 1972).
Sir Ronald pioneered the first social impact bond in the UK. A social impact bond is a contract with the public sector (or foundation) where a commitment is made for an improved social outcome that result in public sector savings. It is not really a ‘bond’ in the financial sense as its payoff is more equity based. Sir Ronald was explaining that this type of financial innovation can potentially solve a social problem, by putting a framework around success or failure (of the social problem), which one can therefore price, this creates a risk and reward dynamic and can attract private investors. The challenge with these type of structures comes in the measurement of success and failure and the significant amount of work needed to go into the design and structuring of each transaction.
Well there is certainly a hotbed of excitement in our office this week as George Osborne throws his weight behind an NFL team having a permanent base in London. There has been speculation that rather than creating a new team, an existing team (maybe the Jacksonville Jaguars) are relocated to London.
Josh and I were in Austin & Boston last week meeting with other advisers at the top of their fields and discussing issues surrounding best practice and fiduciary duty. The concept of an investment adviser acting as a fiduciary to client’s wealth is given a very high profile in the US but we wonder if in the UK, this is something of an exception rather than the norm? The changing regulatory structure on how advisers charge for their services has brought about sweeping changes in how advisers are positioning themselves when working with their clients and perhaps now is the time to look more deeply and perhaps laterally, at the way we define service.