Buying an investment fund may incur a sales charge (although today this should not be the case). Depending on your route to the purchase: platform or direct.

A back-end load/charge fund structure gives the appearance of a “no sales load” fund, but it is actually a full sales load fund in disguise, with financial advisers paid a sales fee of 5% too 8% by the fund up front.

This disguise is supported by a lack of transparency which enables the sales process for back-end load funds to be based on a client proposition of “no subscription charge and a redemption/exit charge which reduces annually and disappears altogether after five years”.

This can be positioned as an immediate up-front saving of 5% on the published subscription fee, with 100% of the investor’s money buying shares in the fund. It also holds out the appealing prospect of combining that discount with no exit fee if the fund is held for over five years.

This is a proposition which offshore financial advisers find relatively easy to sell and which is supported by the literature produced by these funds.

These ‘loads’ are effectively sales fees which are used to remunerate offshore financial advisers selling funds to retail investors.

Research show that, in virtually every instance, a front-end load share class will outperform the equivalent back-end load share class by at least 10% over three years. It is clear that the longer the back-end load share class is held, the bigger the gap between front-end and back-end performance. While the impact on a financial adviser’s remuneration is neutral.

It will seldom be in the best interests of the investor to place their money into the back-end load share class rather than the front-end load share class

A quantitative comparison of the front and back-end load share classes of prominent funds in the offshore (which have both share classes) confirms that back-end load funds generally produce poorer returns for investors.

This is most pronounced when the fund classes have been established for three years or more, as this gives a fairer indication of the compounding effect if higher annual charges over time.

Spoting a back end charge

If there is a term or period of time that the fund needs to be held then there is back-end load/charge.

Black Monday thirty years on

Black Monday is still etched on the collective consciousness of the investment industry, a reminder of the caprices of markets and how quickly they can turn. This volatility remains a key deterrent for investors, and a reason why many are woefully under-exposed to the stock market.

The losses seen on Black Monday remain the largest single intra-day falls of the last thirty years It has helped teach investors a few salutary lessons: the importance of diversification, regular savings and the need to stay invested It should be a reminder to be a little cautious when things are going well The losses seen on 19 October 1987 remain the biggest daily falls in the level of the S&P 500 and FTSE 100 over the last 30 years. The S&P 500 index plunged 20.5% and the FTSE 100 dropped 10.8% in a single day. The losses seen in the wake of the Lehmans bankruptcy come close, with declines of around 9% in October 2008.

Nevertheless, Black Monday should remind us of some investment truisms. The first is that when it works, diversification is really effective. Data from Seven Investment Management, shows that while the FTSE 100 and S&P 500 were down 33% and 28% respectively in October and November 1987, gold was up 8%. Justin Urquhart Stewart, co-founder and head of corporate development said: “A well designed portfolio, like a well-made yacht, can help ride out the storms and sail through troubles to the calmer seas beyond.

It should remind investors to be a little bit cautious when things are going very well. Black Monday came after a lengthy period of sustained stock market gains, with stock markets growing at a pace of up to 30% per year in the preceding five years. Valuations were at record highs.

It also shows that it pays to wait out a crash. Figures from Hargreaves Lansdown show that in 1987 a £10,000 investment was reduced to £6,610 in a matter of weeks, but by 1997 that investment would be worth £32,690, and today it would be worth £104,340.

Finally, of course, it is the best argument for regular savings. It demonstrates the destructive forces of fear and greed and how they combine to create volatility. Investors have a few weapons to deal with this and regular savings is one.

The anniversary has prompted talk of whether the circumstances are ripe for another ‘Black Monday’ and there are some similarities: valuations are high and the bull run has been in place for some time. However, there is a notable lack of complacency. This has been a distinctly unpopular bull market and for that reason alone, the next Black Monday may be some way off.

Stress Testing?

If you are planning your finances through a cash flow model - trying to predict the future - you should be able to understand how your finances shape up in a downturn. This can be termed stress testing – could you cope if your capital ran out completely or could manage on a lower income during the downturn to ensure that the capital is not depleted by too much? It is important to bring potential changes in inflation into the ‘stress test’ and to build in a sufficient buffer to cover unexpected expenditure.

There could be a number of scenarios that will be considered as part of a stress test.

stress test.PNG

Sell In May and come back again on St Leger Day?

Any investors who followed the old market maxim “Sell In May” won’t feel too sore, as the FTSE 100 made awfully hard work of scratching out a 2% capital gain during the summer months.

But a gain is a gain and the index’s ability to make any progress at all in the face of the ongoing Brexit negotiations, heated rhetoric between North Korea and the USA and a spotty summer reporting period from UK stocks may further embolden those clients who are bullish of UK stocks.

They may be adhering to another adage, namely that “markets climb a wall of worry,” but they may also be looking forward to seeing the results of the second half of the “Sell in May” message, which is “Come back again on St. Leger day.”

Saturday 16 September was St. Leger day this year, as Doncaster’s Town Moor track hosts the final ‘Classic’ horse race of the Flat season, so invetors may now feel this is the time to assess their strategy as we prepare for the run-in to the year end.

Common mistakes UK expats make about tax

Research from Old Mutual International has uncovered some crucial misunderstandings among British expats when it comes to their domicile status and tax position. These misunderstandings could leave them and their loved ones financially exposed, and could even land them in trouble with HMRC if they are not paying the correct UK taxes.

1.British expats mistakenly believe they are no longer UK domiciled British expats are likely to have a UK domicile of origin, acquired at birth. They can try to acquire a new domicile (a domicile of choice) by settling in a new country with the intention of living there permanently. However, it is very difficult for someone to lose their UK domiciled status and acquire a new one. There are no fixed rules as to what is required to do this and the burden falls on the individual to prove they have acquired a new domicile, and often this isn’t finally decided by HMRC until someone passes away.

Living in another country for a long time, although an important factor does not prove a new domicile has been acquired. Among the many conditions that HMRC list, it states that all links with the UK must be severed and they must have no intention of returning to the UK.

Research shows 74% of UK expats who consider themselves no longer UK domiciled still hold assets in the UK, and 81% have not ruled out returning to the UK in the future. This means HMRC is likely to still consider them to be deemed UK domiciled.

2.British expats mistakenly believe they are only liable to UK inheritance tax (IHT) on their UK assets As most British expats will still be deemed UK domiciled on death, it is important that they understand that this means their worldwide assets will become subject to UK IHT. A common misconception is that just UK assets are caught. This lack of knowledge could have a profound impact on beneficiaries.

Before probate can be granted, the probate fee and any inheritance tax due on an estate must be paid. With UK IHT currently set at 40%, there could be a significant bill for beneficiaries to pay before they can access their inheritance. Setting up a life insurance policy could help ensure beneficiaries have access to cash to pay the required fees. Advisers setting up policies specifically for this purpose must ensure they place the policy in trust to enable funds to be paid out instantly without the need for probate.

Research shows a staggering 82% of UK expats do not realise that both their UK and world-wide assets could be subject to UK IHT.

3.British expats mistakenly believe they are no longer subject to UK taxes when they leave the UK All income and gains generated from UK assets or property continue to be subject to UK taxes. Some expats seem to think that just because they no longer live in the UK they don’t need to declare their income or capital gains from savings and investments or property held in the UK. By not declaring the correct taxes people can find they end up being investigated by HMRC, and the sanctions for non-disclosure are getting tougher.

Research* shows 11% of UK expats with UK property did not know that UK income tax may need to be paid if their property is rented out, and 27% were unaware that Capital Gains Tax may need to be paid if the property is sold.

4.British expats mistakenly believe that their spouse can sign documents on their behalf should anything happen to them The misconception that a spouse or child or a professional will be able to manage their affairs should they become mentally incapacitated is leading people to think they don’t need a Power of Attorney (POA) in place. This could result in families being left in a vulnerable position as their loved ones will not automatically be able to step in and act on their behalf. Instead, there will be a delay whilst they apply to the Court of Protection to obtain the necessary authority. This extra complication is all avoidable by completing a lasting POA form and registering it with the Court of Protection.

Research* shows 44% of UK expats wrongly believe their spouse will be able to sign on their behalf should they become mentally incapacitated.

5.British expats unsure if their will is automatically recognised in the country they have moved to It is wrong to assume a will or POA document is automatically recognised in the country in which they move to. Often overseas law is driven by where the person is habitually resident, and the laws of that country will apply. Therefore, people may require a UK will and POA for their UK assets and a separate one covering their assets in the country they live. The wills also need to acknowledge each other so as not to supersede each other.

Research* shows 50% of UK expats do not know if a will or POA is legally recognised in the country they have moved to.

Western Australia To Introduce Foreign Buyer Tax

The Western Australian Government has said that it will introduce a four percent foreign buyers surcharge, following the announcement of similar measures in other states.

The surcharge will apply from January 1, 2019. It will apply at a rate of four percent on all purchases of residential property in Western Australia by overseas buyers, including individuals, corporations, and trusts. It will be payable in addition to the normal transfer duty on property purchases.

The charge will be restricted to residential property. It will not apply to purchases of commercial or industrial property, residential developments of 10 or more properties, commercial residential property, or mixed-use properties that are used primarily for commercial purposes.

The state Government said that the 2019 implementation date will allow the market to adjust.

The Government estimates that the surcharge will raise AUD21m (USD16.8m) in its first full year (2019-20), and a total of AUD49m over the forward estimates period to 2020-2021. It said the revenue raised will pay for a freeze on fees for vocational education courses, and help repair the budget.

New South Wales, Victoria, and Queensland currently apply a surcharge on foreign buyers. South Australia will follow suit from January 1, 2018. The proposed Western Australian rate of four percent is in line with that to be introduced in South Australia, and is lower than the rates applied in New South Wales and Victoria.

Guest Post: Is preparing your own will a good idea?

Sadly last month, I attended the funeral of my aunt. She had been ill for some time and therefore was able to ensure her will was in order, and think about how she wanted her 'estate' to be distributed, and to who.

It was a stark reminder to my wife and I that we haven't got a will, so I have spent some time recently investigating the options. Below are some of my findings that you might find helpful.

Don't be one of the two-thirds of the British adult population that don't have a will.

Should you prepare your own will or get a professional to do it?

In theory, you could scribble your will on a piece of scrap paper and get a couple of witnesses to sign it. But that doesn’t mean you should attempt a makeshift will just because of the potential simplicity.

The flipside is also true. It is very important to have a will, in which ever form. It will avoid complications for potential beneficiaries and ensure your exact wishes are carried out.

But what happens if you don’t have a will and what are your options for doing it yourself or involving a solicitor?

What happens if you don’t have a will?

In the UK, if you die without a will, your estate will be divided according to common law. This means that your assets might be distributed to someone you didn’t intend for it to go to, and someone you wanted to inherent something to, doesn’t get anything.

Of course, every situation is unique. How the estate will be divided when dying without a will depends on various factors, including the size of the estate, whether there’s a surviving spouse/civil partner or any children.

The law doesn’t leave any room for negotiation and doesn’t take into consideration what your relationship was like with the surviving beneficiaries.

It also doesn’t recognise unmarried partnerships that have not been registered and there’s a risk that your entire estate might go to the Crown.

What are your options for preparing a will yourself?

There are certain legal requirements for writing a will which becomes your responsibility when you do your will yourself, so you should really only consider a DIY will if your estate doesn’t include any complex assets (like an overseas property for example) and if your wishes are very simple. Correct spelling of beneficiary names is key and inheritance tax consequences should also be considered.

As mentioned earlier, you can write your will on a piece of paper and get the proper signatures for it to be valid. However, wills follow a certain structure and use specific wording in order to avoid confusion.

It would therefore be a good idea to purchase an online template or will pack that will guide you in the right direction.

Other DIY options allow you to just fill out an online form with your details. A completed will is then emailed to you within a couple of days. Template options are relatively inexpensive because there are no solicitors involved, however, it does mean you carry all of the responsibility in case something goes wrong. Online templates generally range between £10 and a £100, with some services offering lifelong updates.

Getting a solicitor to write your will

Involving a lawyer or a solicitor when writing your will is probably the best option. This is especially true if your estate is more complex or if your situation is very unique.

Yes, it might be more expensive but a professional will ensure your will is executed exactly to your wishes. They can also ensure your estate is optimised for inheritance tax and the onus is on them should anything go wrong.

Although there are professional, free will writing charities (Free Wills Month) for qualifying couples or individuals, in most instances you will have to pay for a solicitor or lawyer to write your will.

If your affairs are relatively simple, you could opt for a low-cost, online solution. Similar to the DIY options above, these low-cost online options will provide you with a template to fill out.

The difference here is that it will be checked by a solicitor, regulated by the Solicitors Regulation Authority, should anything go wrong. The price would generally range between £100 to £300.

Finally, there’s the more traditional will writing service of contacting a local lawyer and having an in depth discussion about your wishes. This is the best option if your estate is more complicated and you are concerned about the inheritance tax consequences.

The cost of getting a local lawyer will vary greatly depending on your location. In the UK, The Law Society’s website will provide you with a list of solicitors near you.

Whatever route you decide on, everyone should have a will to ensure there are no complications for your loved ones to deal with in, which is bound to be, an already difficult time.

Max Keeling The Investing Coach

What is the best way to maximise your retirement income?

Generating Income versus taking capital

Investing for retirement is a hugely complex business and potentially fraught with risks. Principle among these risks for savers who are taking an income is ensuring withdrawals are sustainable.

Sustainable will, of course, mean different things to different people. One person might feel comfortable making large withdrawals from their investment fund safe in the knowledge they have a chunky defined-benefit pension to fall back on if it runs out early.

Another, however, might be relying on their pension to live on in retirement and so needs to carefully manage withdrawals, so they don’t run out of pension too quickly.

When deciding how to manage withdrawals, two strategies leap to mind – ‘natural yield’ and ‘total return’. But which delivers the best outcomes? And is there a single ‘right way’ to devise a retirement income strategy?

Natural yield

The theory behind the natural yield approach to investing has been around for generations. Under natural yield rather than selling your investments to fund retirement spending, you simply live off the income these investments produce. This could be dividends if you’re invested in stocks and shares, the coupons paid on bonds or interest on cash.

You can see the inherent attractiveness of this approach. By not selling the underlying investments they can continue to grow and, crucially, you won’t face the prospect of so-called ‘pound cost ravaging’. This is the idea that withdrawals made during falling markets will be more difficult to recover in the future - particularly where investments are sold just as a client enters drawdown.

By living off the natural yield of these investments – and again remember this is just the theory – you give your pot a better chance of riding out any downturns and in the process maximise the chances of making it last throughout retirement. If dividends keep on delivering, you might even have enough left over to pay for exceptional costs (such as long-term care) or to leave to loved ones.


It is when you get into a practical application that a natural yield approach can, in some circumstances, run into problems. The majority of people will have a set amount they need to spend to fund their day-to-day lifestyles (and any additional luxuries) in retirement.

Let’s assume a 65-year-old has a portfolio worth £500,000 and, after carrying out a full review of her spending priorities, requires a budget for the year of £25,000.

If the portfolio generates a dividend yield of 5% then happy days! That’s £25,000 in the investors pocket, and the underlying capital left entirely untouched.

However, rigidly following a natural yield strategy hits choppy waters when things don’t go so well. What if the same portfolio delivered a yield of just 2%? Is the same investor really going to be able to manage on £10,000 – less than half the budget they originally set out?

Low yields on traditional investments present a challenge for income-focused investors

While historically dividend yields of 5% or more were not uncommon, for many investors it is the low-yield scenario that has been closer to their experience in recent years as bond coupons have hit new lows and the hunt for reliable dividends has become ever more difficult. The FTSE 100 is forecast to yield around 4% in 2017, although after fees you might be looking at a real yield of around 3%.

If this is what plays out, the natural yield won’t be enough to fund their retirement needs.

Furthermore, the yield is by its very nature only a percentage term, and so the actual amount the investor gets will also depend on how the underlying assets perform. So there is volatility (uncertainty of yield) layered on volatility (uncertainty of performance of the underlying funds).

Some will also be tempted to chase yield by upping the risk in their portfolio. While clearly, it is sensible to review investments regularly, the obvious danger in taking extra risk is that performance could go the other way or anticipated dividends fail to materialise.

Total return – the solution?

To generate the required income without taking on unwanted risks, many investors adopt a total return approach to income. As you might expect, this involves combining both the income generated through dividends and coupons with some capital depletion to maximise retirement income.

Investment giant Vanguard points to two principle advantages of a total return approach versus natural yield:

  • Maintains a portfolio’s diversification – by focusing entirely on generating an income, there is a risk the underlying portfolio won’t be as diversified as it could otherwise be. This could mean that overall returns are lower or more volatile under a natural yield approach as a result.

  • Allows more control over the size and timing of portfolio withdrawals – by shifting away from the straightjacket of a natural yield strategy, investors can supplement income from investments by drawing from their capital appreciation to ensure they have enough money to fund their retirement spending needs.

Of course, the extent to which a total return strategy will work depends on the combination of capital returns and dividend yield delivered by the underlying investments. When withdrawing from capital investors will also need to factor in inflation, which is currently running at 2.6% in the UK and a lot more in other countries.

A post-charges capital return of 3%, for example, would equate to the real capital appreciation of just 0.4% - withdrawing any more than this would then eat into the real value of the fund.

Ultimately which of these strategies works best will depend on the individual circumstances. In an ideal world everyone would be able to adopt a natural yield strategy but, in the realms of reality, most will need to dip into their capital at certain points in their retirement

Source: Tom Selby, AJ Bell Invest Centre

Tax Tips: Saving tax on UK property rental income

There is a 20% withholding tax on the rent. If a firm of letting agents looks after your property, they are responsible for paying the withheld income tax to Revenue and Customs. Where there is no letting agent, it is the responsibility of the tenant. The letting agent/tenant has to account for this basic rate tax each quarter.

Where a tenant’s gross rent is less than £100 per week, there is no requirement to deduct tax unless instructed to do so by HMRC. Any tax withheld is allowed as a credit against your eventual UK tax liability calculated on yourself assessment tax return.

Non-residents can also obtain permission to self-assess any UK tax liability. This option avoids the withholding tax and is applied for by using form NRL1 ( Separate forms must be submitted for jointly held properties.

What does the "rise of the robots" mean for asset prices?

The world could be heading for a dystopian or booming future thanks to the incredible advances being made in automation. What might it mean for investors?

From journalism to medicine, robots are playing an increasingly important role in modern business.

If handled well, the rise of the robots will create neither widespread joblessness nor rampant inequality in the long term.

Over the course of the 20th century, not only has technology led to huge productivity improvements that raised living standards for all. Reuters, the news agency, has recently revealed that as many as 400 of its news stories are written every day by robots. And if that wasn’t depressing enough for journalists, the really bad news is that the feedback from clients is that much of the robotic output is more readable than the production of human writers.

Meanwhile, IBM has developed an artificial intelligence “engine” which is beating human oncology specialists in its diagnosis and treatment of cancer in nearly one in three cases.

Is the future bright or bleak?

With developments like these, it isn’t hard to paint a bleak picture of further breathtaking advances in automation creating an increasingly divided society, where a so-called “second machine age” prompts mass displacement of labour accompanied by an increasingly wealthy robot-owning class. Yet the history of technological change offers a decidedly more sanguine prognosis.

If handled well, the rise of the robots will create neither widespread joblessness nor rampant inequality in the long term, despite some unavoidable transitional costs.

The effects so far

Many would argue that the ill effects of automation are already becoming evident in the US, where recent decades have seen a “hollowing out” of manufacturing employment, driven by technology and globalisation. Now automation is also making rapid progress in both low-skilled services roles and areas that have traditionally been the preserve of highly-skilled white-collar workers (as the Reuters and IBM examples highlight).

The resultant rise in inequality could dampen consumer demand, put pressure on government finances, and even precipitate a further lurch towards populism in the developed world.

Hope from history

However, the history of technological change offers plenty of hope. Over the course of the 20th century, not only has technology led to huge productivity improvements that raised living standards for all, it has almost certainly created more jobs than it has destroyed. Moreover, an automation revolution should bring a much-needed boost to productivity, raising trend growth rates.

Such a fillip would not only help offset recent poor productivity growth in many countries, but also the downward pressure on growth from ageing populations. This is particularly true in developed countries, which are more likely to have the resources and expertise to embrace the automation technology.

If this outlook proves accurate, it could challenge the conventional wisdom that developing countries with large, young populations have significant demographic advantages over developed economies.

Techno-dystopia vs positive productivity shock

Firm conclusions are difficult to make. Given the huge uncertainties, to look at a range of potential outcomes between two extremes: “techno-dystopia”, in which high unemployment and rising inequality prevail, and “positive productivity shock”, where automation facilitates a widely-distributed productivity boom..

Of course, sequencing is important, and we may shift closer to “techno-dystopia” before policymakers and labour markets have time to adapt.

The investment angle

From an investment perspective, techno-dystopia represents the world where many of the current issues facing the global economy – weak demand, subdued inflation, low wage growth and inequality – are intensified. With inflation remaining permanently lower, developed world bond yields would likely fall further. This is because the premium that bond investors typically demand to compensate them for the risk of inflation would be greatly reduced.

Carry trades (i.e., targeting the return obtained from just holding an asset), particularly corporate bonds, would remain in vogue. But flare-ups of populism and political uncertainty could see risk assets (i.e., equities, commodities, corporate bonds, real estate, or any asset that is not considered risk-free) suffer periodically.

If the future is brighter, and automation helps the global economy emerge from its current malaise, developed bond yields should finally break out upward from their five-year range, and improved sentiment could even drive buoyant, demand-driven, inflation. In a sense that would represent an amplification of the “reflation trade” witnessed following the election of President Trump.

This should be a very good environment for developed world risk assets, with commodities and inflation-protected assets also doing well. It would certainly warrant an underweight (or short) position in developed world bonds.

To determine which way the wind is blowing, investors will need to keep a close eye on how policymakers and the beneficiaries of automation rise to the challenge of spreading its financial benefits more widely and be ready to act accordingly.

Source: Alice Leedale, fixed income strategist at Schroders

Megatrends: An index approach to thematic investing

What are megatrends?

Megatrends – powerful, transformative forces that could change the global economy, business and society – have the potential to affect all of our personal lives and influence the outcome of our investment decisions.

Some megatrends have been with us for many years; others are at an earlier stage in terms of their impact on the world.

Cynics might dismiss megatrends as the stuff of think tanks and policy makers. We, however, believe that the use of megatrends in investment processes offers real investment opportunities and the potential for attractive risk and return profiles.

In this article, we will highlight five key megatrends, outline how those megatrends relate to four investment themes, and explore how you might implement the investment themes we have identified in the context of a portfolio.

Five major megatrends

Changing economic power The growing economic strength of emerging economies, such as China and India, is changing the balance of power in the global economy. In the February 2015 report, The World in 2050, PwC predicts that, by 2050, seven out of ten of the world’s biggest economies will be emerging economies.

Climate change and resource scarcity An expanding global population is increasing the demand for energy, food and water, putting pressure on finite global resources. Demand for fossil fuels, in particular, leads to higher carbon emissions and a more volatile world climate. The United Nations World Water Development Report 2014 estimates that global energy demand will increase by one-third over the period to 2035, with the majority of that demand coming from China, India and the Middle East

Demographics and social change

The increasing age and size of the world’s population is fundamentally changing the needs of its inhabitants. In the 2015 revision to its World Population Prospects report, The UN Population Division expects there will be an additional 1.2 billion people on the planet by 2030. However, the distribution of those one billion people will not be equal across age groups or regions – 30% of the increase is predicted to consist of those aged 65 or over; by 2050, 50% of population growth overall is likely to come from Africa.

Technological breakthrough

We are in the midst of a technological revolution that is having a profound impact on the global economy, the extent of which is yet to be truly understood. According to PwC analysis of Facebook data from 2014, if Facebook were a country, it would be the second most populous in the world (after China).

Rapid urbanisation

In a 2012 report, the UN Population Division predicted that by 2030 almost two-thirds of the world’s population will reside in cities. As strong population growth puts increasing pressure on the infrastructure and social welfare of cities, its forecast that New York, Beijing, Shanghai and London alone will need $8 trillion in infrastructure investments over the next 10 years

Investing in themes

We believe there are a number of investment themes that emerge at the intersection of the five megatrends that we have outlined.

Some investors may want to consider employing the skills of an active fund manager to select stocks that provide exposure to a particular theme – as long as they are prepared to pay the associated costs that may come with such investments. Others may want to consider a rules-based approach to thematic investing, whereby a set of rules – rather than a fund manager making an active decision – determine whether a company is connected to a theme or not. Today, investors can benefit from this new, low cost, approach to thematic investing.

Source: Blackrock iShares

A welcome pause in life expectancy rises?

Increases in life expectancy are stalling, after 100 years of continuous progress, according to new research from University College London. There has been much hand-wringing about why this might be – is it the legacy of austerity? Or the obesity crisis? Or have we simply reached the outer limits of the human lifespan? Either way, it has implications for investors.

It may be controversial, but a stalling of life expectancy rises removes an enormous financial burden on the individual and on the state It could spell higher annuity rates and lower care home costs It also means that the burden of paying for ever-longer retirements diminishes There are those who will argue that longer life expectancy is unreservedly a good thing, it is clear that many people are not enjoying these final few years. Too often they are spent in poor health, reliant on expensive nursing care with little quality of life. As such, while it may be controversial to argue it, perhaps a slowing of life expectancy rises is to be welcome.

It certainly removes an enormous financial burden. While some will find the conflation of human life and money distasteful, those extra years of life place an enormous burden on the state, on families, and on individuals themselves as they are saving for retirement. Any stalling of the relentless rise in longevity expectations eases that burden somewhat First, it may mean higher annuity rates. While insurance companies are unlikely to adjust their assumptions just yet, if the slowdown proves sustained, investors may be able to expect better options when they hit retirement. Coupled with a rising bond yields, this could make a meaningful difference to pensioners’ incomes in the next few years.

Then there are care costs. Care costs are a huge burden for many families, setting them back around £50,000 a year. They are difficult to plan for, and can rapidly reduce an inheritance to near-zero. This has been a huge political football, but any change in government policy looks unlikely in the shorter-term. Although the problem does not disappear with stalling longevity, at least it would not get meaningfully worse.

It also means that the burden of paying for ever-longer retirements diminishes. A recent report by the International Longevity Centre, found that the next generation would need to save 18% of their income to achieve an ‘adequate’ income in retirement. Only 12.4% are currently saving more than 15%. With ever-increasing longevity, this gap threatened to get worse and worse.

Healthy longevity is a great thing, but that is not what is happening and until it does, any pause in the march of increasing life expectancy may be welcome.

How Are Financial Advisers Paid?

Let’s look at some different ways in which advisors get remunerated. Financial advisors can get paid in several ways and here are some of the more prevalent ways for payment in the offshore world.

Percent of Account Value

Often associated with investments it is also referred to as Asset Under Management (or AUM). This is where an advisor charges a percentage annual fee based on the value of assets invested with them. This charging method generally ranges between 0.5 - 2.0% per annum, typically the more assets under management, the lower the fee. The annual percentage fee is generally ‘fixed’ regardless of prevailing market conditions. So the advisor is effectively charging an ongoing ‘management’ fee to continuously manage the investment portfolio on your behalf The most popular investment platforms will allow financial advisors the flexibility to vary this fee percentage to reflect the level of service provided. For example, an advisor providing a full financial planning service usually charges a higher rate than one just executing for a knowledgeable investor.

Commission Fees

This is the most common way that financial professionals are paid across all financial products in the offshore world. The commissions are generally specific to different types of products and can range from 1-8%, either upfront or throughout the life of the product. For example, when you buy an Unit-linked insurance product, a certain percentage charge maybe deducted by the financial product provider and a percentage of that will be paid as a commission to the advisor. Although difficult to avoid for pure insurance products, regular savings, investments and various hybrid insurance products can generate ongoing ‘trailing commissions’

Combination of Fees and Commissions

Finally, you will find that some advisors will offer a combination of the above remuneration structures and sometimes call it “fee-based”. This a hybrid approach that allows the advisor to charge an agreed fee for the financial plan or advice while still collecting some commissions. This approach generally aims to minimise any ‘upfront’ commissions in return for an objective financial plan or advice. Any subsequent commissions earned via the execution of the plan are generally minimised or reimbursed to recoup the planning fee.

Hour Rates

An hourly fee approach is generally used where only specific advice is sought or if you are willing to do some work yourself and implement the advice given. Similar to other professions such as lawyers and accountants; an hourly rate approach is generally free of any commissions. And just like solicitors or accountants, hourly rates will be expected to vary widely from adviser to adviser. Expect to pay a higher hourly rate for experienced advisors, or advisors who have an area of specialty.

Fixed (Flatted) Fees

Similar to an hourly rate advisor can be compensated by charging a ‘professional’ consultation fee for the performance of an agreed financial task or advice. The scope of work is typically agreed beforehand and the fee quoted is generally a fixed fee representing the time and effort required to prepare the financial advice. The charges can range from $500 to $10,000 or more.

Retainer Fee

A task or advice scope that involves ongoing servicing or advice may require an ongoing fee arrangement. For instance — managing small business complexities, regular income streams from investments, ongoing stock options and others. This is effectively an ongoing professional fee arrangement and should be distinct from AUM fee or any trailing commission, which are only triggered when a product is purchased or invested in. A written contract detailing the fee and services is usually provided.


A trust is a legal mechanism, which can be created during your lifetime or by your Will on death, where you place assets under the control of the trustees for the benefit of a beneficiary or class of beneficiaries.

It enables you to give away assets but keep some control. Trusts offer flexibility and wealth protection and, crucially, offer protection against the possible insolvency or divorce of the intended beneficiaries.

Trusts are widely used and come in many forms; the two most common are Interest in Possession trusts and Discretionary trusts.

In an Interest in Possession trust, the beneficiary is entitled to receive the income from the trust fund or enjoy the use of the trust assets. If you set one up for your children, they won’t be able to cash in the assets in the trust but will receive the income from it for their lifetime. The assets can be protected and passed onto your grandchildren, either on your child’s death or if they decide to give up their right to the income. Tax issues relating to your children’s estates would need to be considered, as the asset will form part of their estate for inheritance tax purposes.

In a Discretionary trust, the trustees have a pool of potential beneficiaries and have absolute discretion to decide which of the beneficiaries may benefit from the trust fund, in what way and when. For example, the assets and income could be slowly released to your children when necessary or held back completely. If a child’s relationship breaks down, the assets and income can be diverted to your grandchildren or any other beneficiary in your trust pool.

The tax treatment of trusts is complex and you should take advice before embarking on a trust route; however, that should not be a reason to avoid them, as the flexibility and protection they offer you can often outweigh the tax implications.

The law and tax regulations change frequently, so if you already have a Will or trust we advise you to review them at least every five years

Cycle and seasonality

The current economic cycle seems to be on course to beat longevity records. This is worrying investors, who think that the days are numbered for this unusual ‘Goldilocks’ environment (not too hot, not too cold) and that we are perhaps headed for a slump.

The key to understanding where we now stand lies in focusing on what caused the last recession in 2008 – an anomaly in the history of recessions, as it saw capital injection from the world’s central banks and ultra-low interest rates.

Normally, a recession means central banks raise interest rates to stem the excesses of an overheating economy. It was a financial crisis of the kind we read about in history books – those that happened before WWII and government intervention and where economic cycles were extremely long, lasting a generation and taking 20-25 years to recover. This cycle is longer than other post-WWII cycles due to the following unusual characteristics:

– After the Lehman Brothers bankruptcy in 2008, everything stopped at once: industrial activity, corporate investment, consumer spending and credit flows; businesses and individuals alike were staring into the abyss, leaving a lasting mark on them as economic agents

– The reaction by central banks increased the feeling of panic, as they resorted to policies which had not been used in living memory

– Because the crisis was sparked by something people didn’t even know existed (subprime mortgages), it heightened worries about other, equally unexpected crises in the future.

No wonder the recovery was so patchy and slow. Companies and banks deleveraged for years, consumers continued saving as if the recession was still on, and investors did not trust the stability of the market, being reluctant to take risks as they had in previous cycles.

The net result was slow growth, low inflation and lagging standards of living. Although unemployment has fallen to very low levels in the US, Japan, the UK and Germany, it hasn’t led to wage inflation, causing many economists to reassess the standard relationship between prices and joblessness. The Federal Reserve Bank (Fed) was the first central bank to raise interest rates, to ‘normalise’ monetary policy (as if the cycle had been normal). Other developed central banks are still sitting on the sidelines, watching the Fed before committing to policy changes. That’s why this economic cycle is continuing – but when will it end?

Our US-based Canaccord manager, Tony Dwyer, recently visited our shores and delivered a simple message: the US is not about to go into a recession. None of the conditions of a recession are present (inverted yield curve, high real rates, market stress). If, against all odds, President Trump can deliver a massive fiscal stimulus (tax changes, deregulation and infrastructure spending), inflation could soar and foreshorten the economic cycle – if not, we still have some room ahead.

Source: Cannacord