Sorry for the hiatus!!

Dear Reader, sorry for the hiatus since February. I have been worried about the complete mess in pensions. It is a shame that the state retirement age is being raised in the United Kingdom. There should be coordination throughout the European Union. It does not make much sense us Brits toiling up to 70 when the French want to retire at 60 and to get an economic contribution from us via the Common Agricultural Policy (CAP). We might have to join the euro so as to make our influence felt!!

Sorry for the long hiatus in the blog!!

I have noticed that I have not discussed Indepdent Financial Adviser (IFA) matters in the United Kingdom (UK) since December 14th. The main highlight for 2009 for me was the retail distribution review and the continuing argument about commission versus fees. It looks like independent financial advice will be restricted to higher income people in Britain, if the customer has to pay fees.
The pensions industry is in a right mess and we still have to resolve the problem of zombie endowment funds.
www.searchifa.co.uk

UK pension rules get even more complicated!!

Thanks to UK chancellor Alistair Darling, pension rules are getting even more complicated. The government wants to hit "fat cats" but reducing higher rate pension relief to earners of £130,000 a year compared with the previous level of £150,000
will bring in extra revenue of £100m but hit wealth creators.
The Labour government is discriminating in favour of unfunded public sector pensions,
which the country can't afford. These liabilities are going up and up.
For instance, local authorities are already devoting a large size of their fire service budgets to service pensions.
With the uncertainties generated by the fact that the government can change the rules anytime it likes, I am surprised people still contribute to personal pensions.

I am going to repeat stuff from sister blog!!

I am going to repeat stuff from the sister blog "Accountancy Distilled", which today looked at the gold price. This has rallied 12 per cent since India bought 200 metric tonnes from the IMF in early November and is now $1,180.50 an ounce. This blog is not an investment newsletter with recommendations as such but the gold price probably shows us that there are quite a few nervous investors out there. You can buy
physical gold, gold certificates, gold futures, gold coins, gold jewellery and the shares of gold miners. I don't have any of these gold-linked assets but I wish I had a few Victorian
sovereigns for sentimental value.
The "Accountancy Distilled" blog started off with a bit of a rant against Gordon Brown in who,in his former incarnation of British Chancellor, ordered the independent Bank of England to sell gold at $252 an ounce against its advice. I suppose if the British central bank was not so spineless there could have been a few resignations about it but why walk the plank early when the pensions are so juicy?
I suppose now is not the time for IFAs to recommend gold purchases to their clients following the sharp rise. However, maybe it is not the time to be in fixed income gilts. This is not a recommendation but perhaps an observation!! Inflation is already rising quite sharply (petrol prices, New Year VAT increase) and if the Bank of England does not support the pound with an interest rate rise or two, then things
could get quite interesting.

Would it have been cheaper to nationalise RBS?

With state control of Royal Bank of Scotland (RBS) creeping up to 84 pct, I wonder if it would have been cheaper to nationalise the bank? This might have created a hornet's nest between London and Edinburgh but it might have been cheaper, since it looks like the bank is going to be broken up anyway. Selling insurance assets like Direct Line won't making it any easier to repay taxpayer support and kow-towing to the European Commission shows how weak the government is.
Probably the UK government's balance sheet would not have been big enough to formally take on the RBS assets but state control might have avoided the furore about banker bonuses. The UK Treasury is probably regretting its disinterest in RBS taking over ABN Amro, where it looks like Spanish bank Banco Santander waltzed off with the best assets of the Dutch group while the British bank just took on board a lot of toxic debt.
The UK government did at least save the banking system a year ago since the economy could not have coped with the collapse of RBS or of the Halifax. It is a shame that taxpayers and bank employees are going to pay dearly for the mistakes of the past.

We are in a right pickle over pensions in the UK.

The poor state of UK public finances apparently dictates a rise in the state pension age from 65 to perhaps 70. Yet at the same time companies can forcibly retire someone
at 65. So what are we going to do with the five year gap?
Contributing to pensions seems unnecessarily expensive and uncertain. Private pensions get hit by charges, which offsets the tax relief, while state pensions get hit by the government moving the goal posts.
We also won't be able to pay the goldplated pensions of council employees, members of parliament etc. The recent volatility of equities has shown that we can't rely on
share performance to pay on all types of pension promises.

Personal accounts delayed four years to 2016.

The latest big idea in the British pension mess, personal accounts, are to be delayed
four years to 2016. A total of 8 pct of pay will be contributed by employees (4 percentage points), employers (3 percentage points) and the government with 1 percentage point. However, Moira O'Neill of the Investors Chronicle quotes pensions expert Dr. Ros Altmann, who wonders what pension income will be achieved. Current forecasts are too optimistic given worsening annuity rates.
I think one concern is that pension income could be heavily taxed in the future to pay for the demographic bulge of old people. The state pension age could be lifted quite quickly to 70 in order to save money. It would be interesting to see what people would live on. I suppose the complexity over pensions could be reduced.

Tories should not axe FSA - Xavier Rolet.

Money Marketing cites a speech by the chief executive of the London Stock Exchange,
Xavier Rolet, that the Conservatives should not axe the UK regulator Financial Services Authority (FSA). Speaking at a fringe meeting of the Tory conference in Manchester, Rolet said the regulatory system in Britain had to be similar to that in Europe and in the United States otherwise it would make joint action on financial crises harder. The power of the FSA should not be fragmented over many different entities.
The Tories have said that they will scrap the FSA if they win next year's general election. The regulatory body has been given a bad press over its efforts to regulate the financial industry ranging from one person IFAs to major banks. The FSA's role in a tripartite system involving the Bank of England and the Treasury has been questioned. The Tories want a bigger regulatory role for the central bank.
Personally, I would try and reform the banks first and make them easier to regulate.

With RDR advisers will be looking at passive funds - Tora.

Investment guru Brian Tora, writing in a July edition of Money Marketing, notes that the independent finance advice (IFA) community will be looking at passive investment funds following the retail distribution review (RDR). IFAs have preferred commission from active funds but there will be RDR changes on adviser remuneration.
Tora reveals that at a recent presentation of investment trusts Aberdeen extolled the merits of its Edinburgh US Investment Trust. This passive fund has a tracking error of just 0.1 per cent. To declare an interest my son has a few shares in this trust.

Some 75 pct of funds fail to beat the index.

FSA chief Lord Adair Turner likes a nice hotel.

Money Marketing made a freedom of information request to ascertain that Lord Adair Turner, chairman of British financial regulator FSA, claimed £812 for two nights in a hotel during last February. Nice work if you can get it while FSA CEO Hector Sants
has a full time driver.
There is the perception amongst some independent financial advisers is that they get a hard time from the FSA while the regulator leaves the big banks well-alone. One IFA has recently called the banks giant selling machines.

A July issue of Investors Chronicle looks at RDR.

I should have commented on this article earlier but I did'nt. Sorry about that!!
A July issue of the Investors Chronicle got Martin Bamford and Jonathan Fry, well-known independent financial advisers (IFAs), to comment on the proposals of the Financial Services Authority (FSA)
with its retail distribution review (RDR).
Bamford is a chartered financial planner from Informed Choice while Fry runs his own
firm Jonathan Fry & Co. Fry was against the review proposals while Bamford was for.
As a consumer of financial advice I kind of side with Fry that paying directly for financial advice would not help low-income groups. The fee payments would come from taxed income and might be considerable. However, I have sympathy with Bamford's assertion that the commission bias of independent financial advice has led to the slew of recent investment scandals (with-profits anyone?). There is also a tendency for investment bonds to be recommended by IFAs, which is not very impartial.
Fry also notes that the British financial regulator FSA lives in an utopian world
He considers that more disclosure of costs would help
consumers.
Anyway with the Conservatives proposing to scrap the FSA, if it wins the next general election, then it will be interesting what will happen to the RDR.
I had to do some pension transfers recently and it was saddening to realise that I was paying three sets of costs with the money. First, the independent financial adviser (IFA),
second the Royal London unit Scottish Life and third the various investment fund managers. However, in
the IFA's defence there has had to be quite a bit chasing up in terms of the pension funds making the transfers. One source of delay is anti money-laundering legislation
and I wonder if the checks could be speeded up. Nobody would want to send their passport to a pension fund manager by post and then hope to get it back by the same postal system. An email could have sufficed with my passport number.
However, the chunks taken out by the various parties (the IFA, the pension fund platform and the investment fund managers) will mean that investment returns will have to be spot-on to get anywhere.

Friends in need are friends indeed!!

Sorry for the corny title but I thought it was a good idea to get into the troubled affair of Friends Provident, which has recently unloaded investment manager Foreign and Colonial at a loss. The bid by Resolution for the British insurance company originally founded by Quakers seems just to be a bonanza for city firms. It seems an expensive way of getting Clive Cowdery et al on the Friends Provident board. I ploughed my way through the initial Friends Provident documentation as my wife has a few shares and an endowment policy with the company. Selling out for around 79 pence does not make much sense since the shareholding is a minimum from the original flotation so I suppose we will hang on and see what the Resolution deal brings. This could mean reduced service levels to endowment holders and poor prospects (to say the least) for
workers.
Money Marketing quotes a spokesman from the stockbrokers Charles Stanley, who said that "What we suspect has happened is that two groups of investors have put pressure on the Friends' board to do a deal, the first group being investors who wanted an exit from the stock and the other group being investors who have a stake in Resolution and realise that if Resolution is going to be successful in its consolidation project, then Friends had to be the first step." This quote is in the edition of August 20th.
Quite a few commentators say that it will be tricky for Resolution in terms of execution risk but I think there are a lot of insurance companies in the UK market place, which could be snapped up and make for easy cost-cutting.

With all the regulation in the world it looks bad for Keydata investors!!

On the front page of the Money Marketing edition for August 20th, one story highlights the plight of Keydata investors. I thought these kinds of disasters would not happen considering how much money the British quango (is it a quango?) the Financial Services Authority (FSA) absorbs every
year.
Dan Schwarzmann, a partner of PricewaterhouseCoopers (PWC) and joint administrator of Keydata, predicts that it is unlikely that creditors will receive much money back.
PWC has not yet found missing SLS Capital policies, where about 5,500 investors have investments.
Keydata was a structured investment provider put into administration by the FSA initially for the non-compliance of ISA retail investment plans.
This case is additional to the Lehman Brothers mess and at least the FSA cannot expect ordinary UK retail investors to evaluate counter-party
risk.
The following week's edition of Money Marketing has Paul Farrow quoting one angered Keydata investor, who said "The question of how £103m of investors' money could disappear from an FSA-regulated company is an utter scandal as is how non-compliant ISAs could be marketed for five years.
Paul Farrow wonders what was the role of HMRC in the checking of the ISAs?

The FSA is in the wars!!

The British regulatory body Financial Services Authority (FSA) seems to be in the wars. I would not have taken the road of the opposition party Conservative Party which announced that the FSA would be abolished, if the Tories won the forthcoming general election. I think it does'nt help morale and there might be actually a case for the tripartite process of regulation. The regulatory bodies of other countries do not seem to have performed well.
However, the FSA is the bane of the humble independent financial adviser (IFA) in the United Kingdom with masses of red tape and fees. Although I don't think the Bank of England would want to track the activities of the financial advice arena.

I am wondering about UK gilts again!!

There are warnings about a run over the British pound and I suppose UK gilt prices will wilt if this happens. However, if things get really bad economically and if we have deflation, then the relatively guaranteed income streams of UK government bonds
would become really attractive.
A mate of mine thinks Canadian dollars are a good bet because they are not printing extra. What do I know about currencies? SO, JUST TO REITERATE THIS IS NOT AN INVESTMENT ADVICE COLUMN although I love waffling about investments.
www.searchifa.co.uk
I suppose I would have to hide the Canadian dollars under the bed since foreign currency bank accounts are not a mainstream product in the United Kingdom.

PIBS look a bit of a risky investment.

The PIBS issued by UK building societies look a bit of a risky investment with the possibility that coupons will not be paid. The rescue of West Bromwich Building Society has shown their true position in the pecking order for creditors and it is not good. The securities were bought for their yields but unfortunately the yields have gone up.
The PIBS of demutualised building societies converted into perpetual subordinated bonds. While the Nationwide, the flagbearer for the industry, is offering a running yield of 11 pct on its issue of 7.25 pct according to the Investors Chronicle, which highlights the risks and rewards of this area. The original investors in the Nationwide issue have taken a battering on the capital performance of
the PIBS.
This is an esoteric part of the market and perhaps not one for many financial advisers.
www.searchifa.co.uk

Financial advisers are going to have to get used to charging fees.

British financial advisers (IFAs)are going to have to get used to charging fees
from the end of 2012 rather than charging commission. The UK regulator the Financial Services Authority (FSA) estimates compliance costs of £430m and an additional £40m of annual ongoing costs for the £12bn investment advice industry. This is according to the Sunday Telegraph.
The FSA wants all investment advisers, whether independent or connected to a bank, to obtain a qualification equivalent to a first year at university.
However, the Association of British Insurers (ABI) wonders about the complexity of
options such as independent advice, restricted advice and basic advice.
www.searchifa.co.uk
I think the complex area of pensions will prove a rewarding area for IFAs. I have had to transfer sums from a company pension and I had to have a personal financial adviser to handle the transaction. The British tax legislation is so complex you really need your hand holding.

Public sector expenditure cuts are on the horizon.

In the United Kingdom public sector expenditure cuts are on the horizon. David Cameron, the Tory leader, has finally got a grudging admission from British premier Gordon Brown. There was a thoughtful article in today's Daily Telegraph, which argued that the main problem is collapsing tax revenues. Currently, benefits outstrip
income tax revenues but I don't know if Labour will get away with their trick in
2005 of winning the election then sharply increasing stealth taxes.
I think UK Chancellor Alistair Darling is praying for a quick end to the recession but he is not helping his reputation for honesty by not having a comprehensive spending review.
www.searchifa.co.uk
To be fair to the UK, other countries are in similar situations such as Spain, Greece
and Italy. In Ireland, there have been tough spending cuts. However, we are in electoral limbo and this is exacerbated by Gordon Brown's seeming determination to struggle on until 2010. This is too long given the cabinet's propensity to implode.
I don't think we can have another ministerial reshuffle. An October general election might be better for Labour.
Also, Shadow Chancellor George Osborne might find it difficult to promote austerity measures when it is perceived he comes from quite a privileged background. Labour will be relentless about Old Etonians, investment versus spending cuts and the fact that some Tory policies don't stack up. Apparently, its educational policy is quietly
collapsing.

Another return to the tricky problem of emerging markets.

Forgive me if I return to the tricky problem of emerging markets, which are seen by some as a key area for future investment. Developed economies will not be able to match their growth rates and investors putting something away for their retirements should for collective investment schemes in emerging markets. However, I can't see these emerging markets paying out dividends to their former colonial masters. Also, the West is still the final buyer of quite a few goods from the emerging markets.
www.searchifa.co.uk
The United States has exported quite a bit of its industry to the Far East but Obama might persuade American corporates to bring it back. We have outsourced call centres
to India but these could easily be brought back, especially if unemployment rockets.
This is probably not very free trade but the U.S Congress has already introduced "Made in America" legislation, which has upset Canada.

Paul Krugman says UK economy is well-positioned.

The distinguished U.S economist Paul Krugman says the UK economy is well-positioned compared with its European counterparts due to policies such as low interest rates.
He gives a lot of credit to British Prime Minister Gordon Brown.
However, the UK economic landscape has changed radically.
It is good to be positive but the City of London will not be a major producer of tax revenues while the car industry in Britain is getting a real battering. Exports will not be helped by a recovery of sterling against the euro and the dollar.
If the "green shoots" of recovery consolidate, then we will have to work out how to pay the bill for the UK government's borrowings. Some commentators are predicting ten years of higher taxes and lower public spending.
Some observers say the banking sector is now stable. However, Royal Bank of Scotland
(RBS) and Lloyds will be quite interested in getting down the state holdings and possibly less interested in refinancing British industry.
However, building societies seem vulnerable and the Nationwide cannot rescue them all. The recent downgrades in their credit ratings will possibly persuade the building societies to reduce their lending so as to improve their financial strength.