A hot and fairly quiet week in the financial G.P’s surgery – so managed to do two blogs.

* New client signs up for a personal pension at £450 per month which will give him a fund of about £500,000 at his selected retirement age. Sounds a lot but the pension will be about £13,500 a year in today’s terms after taking tax-free cash and assuming inflation of 2.5% p.a. Client will need to make additional contributions but he has made a start. I point out that the contributions made now will have most time to grow.

* Mortgage referral informs me that he has a repossession hearing on 18 July and has not heard anything from the previous broker he had dealt with – there are CCJs and arrears. He wants to raise extra capital to pay off second mortgage and other bills. I do an on-line Agreement-in-Principle and get him 85% loan to value at 7.8% p.a.

* Finally speak to a lady about an inter vivos 7 year term policy to cover the IHT liability since her mother gave her a large sum of money. Have not done one for ages and client is happy with quoted premium. Ask her to send correspondence, as sum-assured requested seems low.

* Take a break in the middle of the week to watch two colleagues from mortgage department compete in the Veuve Cliquot clock croquet tournament at Exchange Square near Liverpool Street. They won that day but lose out next day when one opponent gets a hoop from a long distance and at a crazy angle. Might enter myself next year.

* We again finish off the week with an investment presentation delivered by a very bright young Chinese lady. She represents an American investment house which advocates a Manager of Managers approach compared to a Fund of Funds approach. They have £83 billion under management and aim for a smoothed consistent approach rather than trying to beat everyone every month. It is based on an actuary’s asset model and their input is in selecting the sub asset classes in which fund managers are selected.
Links in very well to my favourite risk analysis model. Interestingly, the smallest asset sub-class (US Small Cap) which only amounts to 0.6% of the portfolio has the most investment managers – 5 of them.

Home Information Packs are the latest example from a Government that thinks it knows how we ought to live our lives better than we do. The stated aim is to reduce the time and stress involved in moving but the actual product will do the opposite. The effect is more bureaucracy and more non-jobs created for people who add nothing to our quality of life at all.

What is the point if two valuations have to be done? What is the point if the pack does not contain ALL the information required by a lender? What is the point of an unqualified second inspector visiting your home when there is a whole profession that does this job already? First time buyers are going to be hindered with this extra expense and not helped as the Government spin says.

Even the Energy Performance Certificates could be done by adding another section to a home survey report. A professional surveyor would be much better qualified to give a grade for how well insulated a home was, than someone who has had a one week course and never worked anywhere near property in their previous working lives.

It all reminds me of a story from the Space Race in the sixties. The Americans found that ball point pens would not work in zero gravity when the space craft were in orbit. They then spent about US$ 3 million on a pressurised “space pen” that would actually write underwater as well – they were very expensive when offered for sale on the mass market. The Russians found a simpler solution – they used a pencil! **

One very simple solution to keep away timewasters from the housing market would be a rule that the sellers must have an up to date local search when they put their house on the market. A letter from the solicitor or conveyancer confirming this would suffice. Estate Agents in particular would avoid a lot of wasted time since someone who is not prepared to spend the £150 – £200 for a local search is obviously not serious about selling.

** If you like gadgets, you can still buy the original type of space pen – US$ 49.95 + packing – http://www.thespacestore.com/fisppe.html

Protection, IHT and Investment issues in the financial surgery this week.

* Had a second meeting with client to arrange £300,000 Critical Illness protection. Do not like term basis for Critical Illness cover since my nightmare scenario is the client having the cover run out shortly after the term finishes – if their health has deteriorated, then they may be uninsurable. But whole-of-life contracts have an investment element which makes them more complicated. It takes time to explain the different ways of funding a whole-of -life contract but client agrees with my philosophy here.

After this is sorted, I then have to check with the various insurance companies to find what trust forms to use. We have to have a trust form for this client, since IHT is one of the considerations and a death claim without the proceeds being in trust would only inflate the value of the estate. Recent uncertainty thanks to the Budget makes this research much more protracted than previously. Finally find a company that still offers a “split trust” where the Critical Illness Benefit would be paid directly to the client BUT the death benefit would be paid to client’s representatives. Now the client needs to find trustees.

* Interesting investment seminar from an American investment house with US$ 100 billion under management and which has been in the UK since 1992. The average return for unit trust/OEIC funds is 1.35% p.a. below the median line. The average Annual Management Charge is about 1.6% p.a. so the average return figure is very close to what you would expect – very near the top of the third quartile in investment performance.
Comparing the above average return to a random result, roughly two-thirds of of the funds under perform the average while one third out perform the average.

It appears that active management rarely works – so why not aim for the average which can be done with a Passive investment style? This means that the charges on the fund are very low since the money is invested according to a model e.g. smaller companies in the bottom 10 per cent of fully-listed stocks.
Makes sense when the investment terms are 18 years plus since the longer the period, the more likely that equities will outperform bonds and cash as the Barclays Gilt/Equity study shows us every year.

More difficult to use this interesting model where the investment term is shorter.

Pensions, Tax and History in the financial G.P’s casebook this week.

* Interesting seminar at an insurance company about final salary pensions which are a dying breed – apart from in the public sector. One large employer is now offering its employees a 15 per cent pay increase to opt out of its final salary scheme. This gives an idea of how much funding a decent pension of up to 2/3rds of one’s final earnings actually costs.
Interesting contrast with the more common funding figure of “half your age as a percentage of earnings” as the cost of saving for a pension – see my earlier blog http://www.georgeemsden.co.uk/?p=17. It makes final salary schemes look quite efficient and makes Government’s killing off of final salary schemes, look even more silly.
The target market for the seminar is pension schemes with funds of £5 – £45 million and they can typically save the employer about 1/3rd of the annual fees.
* A network member is looking for finance for a disinfectant product which kills MRSA and is already being used in two hospitals. Refer him to a wholesaler who may be interested in distributing it. It will be much easier for him to raise finance when sales are higher than if it is a start-up. He will probably need around £300,000 in a few months time.
* Amazing networking meeting hosted by Clerkenwell Business Junction http://www.businessjunction.co.uk/areanews/clerkenwell at The Charterhouse in Clerkenwell. http://www.charterhouse.org.uk/general_information/suttonshospital/suttons_hospital.asp
A very interesting part of London:
- Charterhouse Square itself was originally a burial pit for people who died during the great plague, as all the other cemeteries were full!
- Part of Charterhouse was used in the film The Ipcress File
- Charterhouse was the first London home of Queen Elizabeth I after her accession to the throne
- If you watch Poirot on TV (David Suchet) you will recognise the art deco building on the east side of Charterhouse Square
* Second meeting with a retired client who has over £200,000 on deposit. He is earning 4.6% p.a. now but after our first meeting, he has realised that he really needs 6 per cent p.a. to maintain his standard of living. Quote for fee-based report and fee-offset if he does the business through us.
* Amusing tax planning seminar. Recent tax changes to trusts make it pointless for insurance companies to offer many kinds of trust forms. Since many of them are now taxed as discretionary trusts, that type will do the job in many cases. A simple way to avoid the: initial charge, periodic charge and exit charge is to have a Bare trust BUT this does have the disadvantage of not being able to change the beneficiaries.
Fortunately, the tax exemption between spouses has not been lost. The speaker pointed out that with the Civil Partnerships Act, two guys or gals could get “married” and use this very useful exemption – there is nothing in the legislation which says that the parties concerned have to be gay.
Puts a new angle on the old saying “You only married me for my money!”

Another interesting week in the financial surgery:

* Have an interesting presentation from a City institution that has a new structured product. These products typically have a life of 5 – 6 years and a return related to an index e.g. FT-SE 100. They can be very complicated and I have never sold one.
This new product has been designed to exploit an anomaly in the interest rate yield curve where short term interest rates are usually lower than long term interest rates. This “yield curve” is inverted currently in the UK with long term rates lower than some short term rates, a situation which has not been seen since the late 1990s when it only lasted for 17 months.
The product will pay 7% p.a. for three years and will repay the principal when the above anomaly corrects itself, plus a very small margin. According to their calculations, this correction has an 80% chance of occurring in year 4.
Not suitable for widows and orphans but could be part of a proper income portfolio.

* Call a client about development finance but he has his hands full, as the builders next door to his office have cut through the phone and power cables three times in one week. This means he is “losing money hand over fist” as clients cannot call him. Refer him to a litigation specialist.

* Interesting meeting with the potential client who has seen 3 advisers. Before the meeting I ask him to check with his bank what interest rate he is receiving on his funds. It turns out that the rate has dropped by 1.3% p.a. so he has lost nearly £2,000 in interest. Although the bank has now increased the interest rate back to over 4.5% p.a. he is very disillusioned with them.
We are looking at low-risk investments which pay between 6 and 7 % p.a and will increase his pension income.

* No sign of the forms for terminally-ill client to pay out his pensions in cash. Call the insurance companies myself and they will now pay out the pension funds directly to his bank account, without deduction of tax and no need for any more paperwork. Fee-based advice here.

* Meet a solicitor at a networking group whose speciality is acting for the RSPCA in animal cruelty cases!

* On Thursday, go to salsa http://www.salsa-fusion.co.uk/ at its new location near the British Museum where there is a shortage of men, so we four guys each have to dance with two ladies at the same time. Great fun!

There seem to be a lot of businesses out there which need outside capital to acquire other businesses or expand their own. The information required is fairly standard and would include:

1) Headline numbers: turnover, gross/net profit etc and how much finance wanted

2) Long-form Business Plan

3) CV of owner(s)

4) Brief outline of revenue risk spread profile

5) Full Financials (preferably separate to Headline numbers)

6) Any existing Investment Memorandum already prepared.

Documents should be in standard MS (Word/Excel) format and not .pdf

A request for further information is usually positive as it indicates an interest on the part of any potential investor.

See my earlier blog about this: http://www.georgeemsden.co.uk/?p=20

A colleague had the brainwave to have a pithy, short, interview style article in our regular internal newsletter as a way of improving internal communication – my name came out of the hat first.

1) Favourite city or holiday destination?? Bangkok in Thailand where I spent a fabulous 5 months in 1970 or maybe Las Vegas, as it is like nowhere else on earth
2) Dream job? astronaut or Space Shuttle pilot
3) Most overrated virtue? Chastity!
4) Favourite hero of fiction? Dan Dare from Eagle magazine
5) Talent I would like to have? The ability to sell!
6) Who would I like to have been in history? Frank T Courtney. He had an amazing career flying and his autobiography “Flight Path” is a good read – ISBN 0718304829
7) Most dangerous place? Kohat pass near Peshawar in Pakistan. Tribal area where you can buy opium, hashish and guns. Michael Palin visited there in his recent Himalayas series.
Most dangerous thing I have ever done? See my blog – http://www.georgeemsden.co.uk/?p=21 Favourite film? 2001 directed by Stanley Kubrick
9) Favourite Book? Dr Strangelove’s Game. A Brief History of Economic Genius
by Paul Strathern. ISBN: 0140299866 The only funny book on economics I have ever read. The chapter on Karl Marx is a hoot.
Favourite writer? Nevil Shute
10) Perfect Day? Flying in mountain wave at Chos Malal in Argentina http://www.patagoniagliding.org.ar/english.htm or over the Sierra Nevada
11) Pet Hate? bulls**t
12) Favourite album? Sergeant Pepper’s Lonely Hearts Club Band by the Beatles or maybe Dark Side of the Moon by Pink Floyd.

A Quiet Week in the financial surgery:

* Had an e-mail from the son of lady I met at my last tango session. Her son works overseas and he has been thinking of getting an IFA. Appointment arranged for next week when he is back in the UK.

* An accountant referred a gentleman to me who had seen three previous advisers about investing a large lump-sum. After a long chat with the gentleman concerned, appointment arranged for next week.

* Took a lady who has given me good business introductions to see Tango Por Dos http://www.sadlerswells.com/peacock/2005_2006/tango.asp as I know she is interested in learning to dance at some point. Beautiful show which she enjoyed a lot – they make it look so easy!

* Introduced an insolvency practitioner to a private investigator who also does process serving and asset tracing. As I suspected, they got on well and will be giving each other business and both should be good sources for future divorce or subprime mortgage business.
Previously, the investigator had told me he needed £300,000 capital to expand another side of the business. Because of his large order book for this new line, he was able to get this money from his bank – very unusual.

* Had usual compliance visit – this time looking at two VCT investments totalling nearly £300,000 from a few weeks ago. Files signed off.

Recent figures for Consumer debt in the UK are frightening and total lending including mortgage lending passed the £1 Trillion mark in May 2006 – that is £1,000,000 million.

For people with equity in their homes, a simple solution to pay off short-term debt accumulated with store cards, credit cards etc can be to take out a second mortgage, secured loan or else increase their existing mortgage. Getting a mortgage for someone with: mortgage arrears, defaults, CCJs etc can be done too but the rates are obviously higher than normal. But another mortgage is only a short-term solution – see my earlier blog http://www.georgeemsden.co.uk/?p=4 as continued spending greater than one’s income will only result in the same thing happening again later on.

For people who do not have this financial cushion or have a structural problem in their finances – e.g. not enough income, the alternatives are less appealing. One is to come to an informal arrangement with people you owe money to. The next is a formal arrangement called an Individual Voluntary Arrangement or IVA** and the worst is bankruptcy.

With an informal arrangement, you write to your creditors (the people you owe money to) and arrange to pay off the outstanding debt at an agreed figure per month. Whether the creditors will accept this depends on who they are, how much the debt is and how bad your situation is.

A formal arrangement like an IVA is where you take the initiative in setting up the arrangement BUT it is registered with the High Court. This costs money to set up and the hourly rates in London can easily be over £300 per hour and can cost £2,000 or more to set up. The IVA is managed by a Supervisor who is a qualified Insolvency Practitioner.

With bankruptcy, you do NOT have the initiative and your assets will be sold to pay off the creditors by a Receiver or Trustee in Bankruptcy. There are some goods you can keep like the “tools of your trade” or a modest car but you do not really have any control. For a professional person like an accountant, solicitor or IFA, there is a very good chance that they will lose their licence to practice as well.

Circumstances like this are scary for most people and it is easy to go for a soft option which turns out to be hideously expensive and may not address the underlying issues – why is your business failing for example, when others are thriving? Business or career counselling is not the issue here but there are organisations which will help people who are in financial difficulties. The Citizens Advice Bureau is the obvious one but appointments certainly in London have to be booked in advance http://www.citizensadvice.org.uk/winnn6/index

Another is the Consumer Credit Counselling Service http://www.cccs.co.uk/

These organisations are rather busy at the moment.

** Voluntary Arrangements can also be done for Partnerships (PVAs) or Companies (CVAs).