Our Founder and Director, Cathi Harrison, recently took part in The Lang Cat DEADx event and spoke on the panel – she made some important points about value, specifically around MiFID II and investments. Catch up on what Cathi had to say below…

“The question of value, and the role of active and passive management within that, is something that came up at one of our recent training academy events.

At one of our sessions earlier this month, the point was made that when you compare a passive investment with an active one, why would you not be choosing the passive strategy in order to deliver the best outcomes for your client?

This was argued not just on the cost front, but in terms of performance as well.

Schroders were representing the active side of the debate, and they accepted that if you look over the past 10 years, passives were a good place to be.

But they also argued the value they add is when the market turns and we find ourselves in another downward market cycle. In that situation, they argue, active management has an important role to play.

What I think is interesting is when that turn does happen, which it inevitably will in the not-too-distant future, the speed at which markets change is very different now compared with even what we saw in the financial crisis.

The message we give to people who are new to the profession is there’s no single right answer when it comes to active versus passive.

But there is a potential advantage that active managers have in that when they are tested by tough markets, that could well be their chance to shine.

Explaining charges, and what is reasonable

There are many layers to the cost of investment, from advice charges and platform fees to various investment management costs. It’s easy for us to forget how difficult this can be for clients to understand.

Costs and charges disclosure is much clearer now than it ever used to be, particularly as the breakdown is now given in pounds and pence.

Yet it can still be quite hard for clients to really ‘get’ what it is they are paying for. And if they can’t really understand what charge covers what service, then how can they truly understand value and what good value looks like?

Given the adviser or planner is the one who’s closest to the client, arguably the advice charge is the easiest part to explain as it’s where firms can articulate their value.

It’s not about markets, or complex things that clients don’t necessarily understand.

It’s about the relationship, and sitting with that person through challenging times and helping them plan. That is intrinsically what value is all about.

The funds and the platform should offer value too, but that can be harder to explain.

Of course, there is then the issue of how you define what is a ‘reasonable’ total cost of investing.

On the paraplanning side of our business, you do still see some total charges that make you take a sharp intake of breath.

It’s not for us to say what’s right or wrong, but sometimes we do suggest alternative approaches.

Equally, there are some advisers where we’ve argued an increase in fees is justified for the amount of work they are doing.

There are people who are so scared of being seen as ‘overcharging’ their clients that they are not making any profit, and don’t have a viable business model as a result.

Value is subjective, but I think there are clear lines around where certain levels of charges aren’t viable.

The role of regulation and Mifid II 

We are well versed in the reality of costs and charges, and just how complex these can be.

Our admin team spends a huge amount of time on the phone to providers trying to get an accurate picture on costs, and having to deal with the fact that every company calls charges something different.

We’ll get a headline cost figure, but then when we double-check this and ask further questions, it can take a lot of work to get to the true cost figure.

So what chance has the client got in understanding this, or taking any kind of interest in financial services more broadly?

Whether more regulation would be helpful here, or even whether the regulations we have now are working, is debatable.

Take Mifid II as an example.

Mifid II was undoubtedly well-intentioned, and if its aims of greater transparency had actually been delivered as a result of its introduction then that would have been great to see.

Unfortunately, so far it’s been a mess and has just caused more headaches.

I’ve seen a whole load of extra work for advisers and paraplanners, and presumably the same goes for providers. But I haven’t really seen any positive outcomes for clients.

If there was a way we could cut through all of that, and get to one clear, all-in total charge, that would be much more meaningful for clients than whether one particular product, recommendation or strategy offered value over another.”

Just how does our Director, Jo Campbell, manage our growing team of paraplanners? She spoke to Professional Paraplanner to explain all… 

Click here for the article.

After speaking at a seminar recently, it became scarily apparent to our Founder and Director, Cathi Harrison, how little notice adviser firms had taken of the FCA’s PROD (Product Intervention and Product Governance) regime. 

She spoke to Money Marketing about the issue in this article.

It’s a full-time job keeping up with the changes and developments in any one area of financial planning, let alone all the major areas. We tend to find that people focusing on one particular type of planning can mean forgetting about more niche aspects that can have quite an impact in other areas.

We’ve considered what might be some of the ‘forgotten’ areas in planning and created a small list. This first one will focus on estate planning. People are by now familiar with the complexities of the Nil Rate Band (and especially the RNRB) and the use of trusts/insurance/gifts and business relief (BR) to mitigate tax. There are three things, however, that we have identified as either causing an unintended problem for clients, or being aspects not always accounted for in inheritance tax planning.

  1. Annuity guarantee periods and value protected lump sums can form part of the estate for inheritance tax purposes

Unless the beneficiary of a guaranteed period under an annuity is the legal spouse, a value needs to be attributed to the estate for inheritance tax purposes. HMRC provide a calculator for calculating the ‘open market value’ of the outstanding income. This figure would be included in the individual’s estate for inheritance tax purposes.

For those aiming to minimise Inheritance Tax and with Defined Benefit/Annuity pensions and no spouse, this is something to consider. For example, if an individual died 5 years into the guarantee period, and the annual income was £25,000 per annum (increasing at 2.50% per annum), the HMRC calculator yields a figure to be included in their estate of £83,738.

What this means is that it is not simply a case of the assets in the estate that need considering for inheritance tax planning, but also the ‘notional value’ of a guaranteed income.

Value protection is another popular form of annuity protection available. This is more straightforward and represents the net payment to the estate. The ‘net’ aspect is due to whether the benefit is taxed or not (death before or after 75). As much as value protection aids in annuity purchase planning, potentially 40% of the ‘tax-free’ benefit paid back can be lost to IHT which would otherwise have not been the case within a pension! Again, this supposes there is no spouse to receive the value protection lump sum.

  1. The two-year IHT rule on pension switches does not benefit from the spousal exemption

Pension death benefits and IHT again. The calculation of the ‘transfer of value’ has been somewhat simplified by the ability to use UFPLS in place of a 10-year guarantee period, but it’s worth noting that even if the spouse receives the value of the pension death benefits from the new scheme, the ‘transfer of value’ is not exempt.

This is because the transfer of value is between two trust (pension) schemes.

Some good news to counteract this though, the calculation of the ‘transfer of value’ is usually a LOT lower than the fund value or CETV.

Essentially, you are working out the net UFPLS value (based on the individual’s actual tax rate) and subtracting this from the Fund Value/CETV to find the ‘transfer of value’

You can also discount the original value to reflect the time of life expectancy – though this is unlikely to be by more than 5% / 10% based on the 2-year aspect.

A very simple example of this is if an individual had no taxable income and accepted a CETV of £170,000, the net UFPLS could be:

£42,500 is tax-free as 25% of the fund

£127,500 is taxed as:

  • £37,500 at basic rate = £7,500
  • £90,000 at higher rate (no Personal Allowance) = £36,000

Net value = £170,000 minus £43,500 tax = £126,500

The transfer of value, before considering any ‘discount’ factor, is £43,500 as this is the ‘loss to the estate’ in this calculation. This is despite that in reality, this isn’t a loss to the estate as the calculation uses the CETV in both instances, instead of the actual Defined Benefit death benefit structure!

The two-year rule, and the calculation to check the value is ultimately something to be aware though, in reality, it is unlikely to be a significant figure relative to the CETV that a client is securing for their estate by transferring.

  1. Too much cash (or investments) within a business can impact eligibility for Business Relief

Successful companies can end up with quite large retained profits on deposit, particularly if the proprietor is not drawing much of the profit as remuneration or reinvesting into the company. Whether this cash is invested on the company’s behalf or retained on deposit, there can be tax issues down the line for the owner(s).

In terms of Business Relief, and hence efficiency for inheritance tax planning, excess cash in the company can all foul of ‘excepted assets’ rules. This seeks to prevent personal assets held within a company to provide shelter from inheritance tax.

While many businesses’ legitimately keep reserves in place for a variety of reasons, including not least as a buffer against a future economic downturn, HMRC takes the view that this is not sufficient reason for cash to be retained with the company.

What HMRC appear to look for is evidence of business planning for the funds and this could take the form of written plans for future cash use.

The ultimate implication is that the value of the business assets made up by this proportion may not qualify for Business Relief. This could introduce a potentially large amount of assets in the estate value and derail some of the planning otherwise made!

The same is potentially true of general corporate investments. There is no general distinction between cash or investments in this manner so if cash held by a business is deemed not to be for legitimate business use, investments will likely be so too (it would probably be harder to prove legitimate business use for an investment).

This obviously doesn’t mean a business should not hold surplus cash or invest, but it does mean business owners cannot necessarily be assumed as having 100% exception to IHT.

Grant Callaghan – Head of Paraplanning

Next up: Forgotten planning points around pensions (unrelated to Inheritance tax this time).