THE PROBLEM
Max Hastings: In 1982, keen to save for the future, I asked my fashionable accountant to recommend a pension scheme. He put me into Target Life and I was so innocent I didn’t even realise he took a commission. It was, of course, one of the worst performing schemes.
I got a new financial adviser in the 1990s who put my pension fund in the hands of another manager, who handled it appallingly. In 2001 I implored my adviser to ensure that I was not exposed to dotcoms, which she said she did, but when the collapse came my fund shrank by nearly half. After that I transferred all my affairs to a bank. But over the past 30 years, somehow, we have always seemed to underperform the booms and overperform the downturns.
By last year my fund was worth fractionally less that I had paid into it in paper money since 1982. Of course, it is all my own fault, rooted in hopeless innumeracy about investments. But I feel angry because I have tried to act prudently, yet have found it all but impossible to get good advice.
I deserve no personal sympathy because I am pretty well off, earn a good living, have other assets and no debt. But I have always asked myself: if this is what happens to somebody supposedly well equipped to take care of himself, what does the financial services industry do to more vulnerable people?
EVERYONE’S PROBLEM?
MH: You assume that any professional who you employ is going to want to be paid for their services. I don’t have any problem with that. But what seems intolerable is the scale of the rewards; and that they take the money whether their advice is successful or not. Even if the patient dies, they will still take their percentage.
John Kay: Well let’s be fair: your doctor is going to charge you—and he’s going to send a bill to your estate after you’re dead. You might be willing to pay your doctor a success fee but he would be quite insulted if you suggested it.
But part of your problem is that even if the charges you’re paying are reasonable by market standards, you will have been paying out about 3 per cent of your fund every year. On a pension fund accumulated over 20 to 30 years, that comes to a spectacular amount. At that kind of rate, whether you were doing well or badly, your adviser might well end up making more out of your investments than you.
MH: Why do we have to pay a percentage commission? Why not a fee?
JK: The Financial Services Authority is at last pushing for a fee-only basis for independent financial advisers, so we’re getting there. But I’m not sure how much difference it’s going to make, other than pushing IFAs to the very top of the market, because the idea that you can give individually-tailored advice to a mass market is, I think, wrong. It’s just too expensive. You can’t give most people personalised advice on their clothes or their furniture but they have retailers in whom they have confidence, and who provide a selection of decent products. What Tesco or Sainsbury’s offers you may not be the best on the market, but you would not expect to be ripped off.
MH: Now, is it an unreasonable aspiration for people like me to be able to hand money over to trusted professionals who will manage it sensibly and take a reasonable return?
JK: No. We are being told that what we need to deal with this problem is more financial literacy. But you and I—well, you may be different, though I suspect not—don’t have any idea what’s under the bonnet of our car. We get in and we drive it, and we believe that a combination of regulation and the manufacturer’s reputation guarantees the car will do what we want it to do and be reasonably safe. You don’t have that kind of expectation about financial products. Some might say we ought to learn what’s under the bonnet, but actually most people have better things to do with their time.
MH: I have a lot of friends who manage their own investments online very successfully. But the only thing I know how to do is write books. Why can’t IFAs be policed or managed so they become trusted in the same way we trust the garage with our car? It is the failure to do this that makes me so cross.
JK: The traditional regulatory response has been to say “don’t interfere with what people sell, but make sure customers are given all the information they need to make an intelligent decision.” This means the statements you get from these products contain masses of small print which you don’t want to read.
MH: My position is essentially rage and despair. I’m trying to work out whether I’m capable of coping with the practical problems of managing my own affairs online. Because you’re numerate, you say this is relatively easy, but I’m sceptical.
THE MAKEOVER
(Sitting at John Kay’s computer in his house in London)
JK: If you took it over yourself, you want to be getting that 3-4 per cent figure [of costs and charges] down to say half a per cent or less. That’s the most risk-free way you have of increasing the return you get.
MH: And how do I do that?
JK: By setting up your own online portfolio. The simplest way to do that is to mimic what a pension fund would do, using extremely low-cost products. What I’ll do is show you how to set up your own self-invested pension plan (Sipp). A Sipp is like any other pension fund in that it’s free of both income tax and capital gains tax.
MH: One problem, John. I have considerable self-confidence in my ability to do lots of things, but I don’t have a lot—and I don’t think I’m alone in this—in managing my own finances. But you sound convinced that if I am capable of buying things from Amazon I ought to be capable of managing an online portfolio.
JK: That’s right. It’s probably easier [to manage your own investments] than to be your own doctor or your own lawyer. If you just do the average of what other people would do, you will probably get the same returns a financial adviser would get for you, but more cheaply.
MH: Your point is that it’s not very difficult to come up with the same balance of investments as they would?
JK: Right, and you don’t have to trade very often; indeed, it’s a mistake to do that. I think with a pension fund, if you looked at it once a year, that would be plenty [turning to the keyboard]. Let’s go to one of my online brokers and look at a portfolio. This is Barclays Stockbrokers, which I often use, and we have a complete listing. If we wanted to trade in this investment, you press the green button; it’s bought, and in five minutes it will be on the screen.
MH: How do I open an online account?
JK: You want one that is “execution only,” and which costs about £10 for a trade. You have to fill in an online application but you can complete the process in half an hour. Now we need to look at the kind of fund you’ll need. It’s good to have exchange traded funds. An ETF is simply an index. You’re just buying the whole British or US stock market, or a batch of bonds, and there are very low charges.
MH: You’re saying it’s easy to establish a balanced fund. What would be the overall shape of it?
JK: Replication of a pension fund might involve putting 30 per cent of your money in UK equities, 30 per cent in global equities, and then some in property and bonds. The easiest way to invest in property is to buy shares in property companies. If you wanted you could put more into insurance or property as they don’t track the economic cycle in the way consumer stocks do. It is not necessary to invest in individual stocks. The main reason to do so would be to get more diversity into your fund than you can through these indices.
MH: I don’t want you to accuse me of megalomania, but I have always been struck by my ability to move the markets—I only have to look at a stock to make it go down. What sort of percentage return would you think realistic?
JK: The sort of target I would have for the moment is 7 or 8 per cent a year.
MH: As much as that?
JK: Yes. That’s what it has been possible to get from a balanced portfolio of investments over the long term.
MH: I’ve never got anything like that. What have you achieved [on your investments] over the past ten years?
JK: I should think about 10 per cent. I am incredibly conservative.
THE VERDICT
MH: You’re a successful crusader, John. You’ve fired me up. I will go straight home and open an online trading account myself. But I do think it’s like taking tennis lessons from Andre Agassi—I’m not persuaded that I’m thereafter going to stun my partners playing doubles down in Wiltshire. I can probably do it but if somebody is a bit older than me, and even less good at it, if that’s possible, it’s a very moot point.
Also in Prospect's investment special:
Alistair Darling: what is financial literacy?
Jim O'Neill: A great American revival
Charles Batchelor: Where to put your money
Best and worst investments
Jim Rogers: The Chinese century
Vicky Pryce: Stop the Greek exit
Max Hastings: In 1982, keen to save for the future, I asked my fashionable accountant to recommend a pension scheme. He put me into Target Life and I was so innocent I didn’t even realise he took a commission. It was, of course, one of the worst performing schemes.
I got a new financial adviser in the 1990s who put my pension fund in the hands of another manager, who handled it appallingly. In 2001 I implored my adviser to ensure that I was not exposed to dotcoms, which she said she did, but when the collapse came my fund shrank by nearly half. After that I transferred all my affairs to a bank. But over the past 30 years, somehow, we have always seemed to underperform the booms and overperform the downturns.
By last year my fund was worth fractionally less that I had paid into it in paper money since 1982. Of course, it is all my own fault, rooted in hopeless innumeracy about investments. But I feel angry because I have tried to act prudently, yet have found it all but impossible to get good advice.
I deserve no personal sympathy because I am pretty well off, earn a good living, have other assets and no debt. But I have always asked myself: if this is what happens to somebody supposedly well equipped to take care of himself, what does the financial services industry do to more vulnerable people?
EVERYONE’S PROBLEM?
MH: You assume that any professional who you employ is going to want to be paid for their services. I don’t have any problem with that. But what seems intolerable is the scale of the rewards; and that they take the money whether their advice is successful or not. Even if the patient dies, they will still take their percentage.
John Kay: Well let’s be fair: your doctor is going to charge you—and he’s going to send a bill to your estate after you’re dead. You might be willing to pay your doctor a success fee but he would be quite insulted if you suggested it.
But part of your problem is that even if the charges you’re paying are reasonable by market standards, you will have been paying out about 3 per cent of your fund every year. On a pension fund accumulated over 20 to 30 years, that comes to a spectacular amount. At that kind of rate, whether you were doing well or badly, your adviser might well end up making more out of your investments than you.
MH: Why do we have to pay a percentage commission? Why not a fee?
JK: The Financial Services Authority is at last pushing for a fee-only basis for independent financial advisers, so we’re getting there. But I’m not sure how much difference it’s going to make, other than pushing IFAs to the very top of the market, because the idea that you can give individually-tailored advice to a mass market is, I think, wrong. It’s just too expensive. You can’t give most people personalised advice on their clothes or their furniture but they have retailers in whom they have confidence, and who provide a selection of decent products. What Tesco or Sainsbury’s offers you may not be the best on the market, but you would not expect to be ripped off.
MH: Now, is it an unreasonable aspiration for people like me to be able to hand money over to trusted professionals who will manage it sensibly and take a reasonable return?
JK: No. We are being told that what we need to deal with this problem is more financial literacy. But you and I—well, you may be different, though I suspect not—don’t have any idea what’s under the bonnet of our car. We get in and we drive it, and we believe that a combination of regulation and the manufacturer’s reputation guarantees the car will do what we want it to do and be reasonably safe. You don’t have that kind of expectation about financial products. Some might say we ought to learn what’s under the bonnet, but actually most people have better things to do with their time.
MH: I have a lot of friends who manage their own investments online very successfully. But the only thing I know how to do is write books. Why can’t IFAs be policed or managed so they become trusted in the same way we trust the garage with our car? It is the failure to do this that makes me so cross.
JK: The traditional regulatory response has been to say “don’t interfere with what people sell, but make sure customers are given all the information they need to make an intelligent decision.” This means the statements you get from these products contain masses of small print which you don’t want to read.
MH: My position is essentially rage and despair. I’m trying to work out whether I’m capable of coping with the practical problems of managing my own affairs online. Because you’re numerate, you say this is relatively easy, but I’m sceptical.
THE MAKEOVER
(Sitting at John Kay’s computer in his house in London)
JK: If you took it over yourself, you want to be getting that 3-4 per cent figure [of costs and charges] down to say half a per cent or less. That’s the most risk-free way you have of increasing the return you get.
MH: And how do I do that?
JK: By setting up your own online portfolio. The simplest way to do that is to mimic what a pension fund would do, using extremely low-cost products. What I’ll do is show you how to set up your own self-invested pension plan (Sipp). A Sipp is like any other pension fund in that it’s free of both income tax and capital gains tax.
MH: One problem, John. I have considerable self-confidence in my ability to do lots of things, but I don’t have a lot—and I don’t think I’m alone in this—in managing my own finances. But you sound convinced that if I am capable of buying things from Amazon I ought to be capable of managing an online portfolio.
JK: That’s right. It’s probably easier [to manage your own investments] than to be your own doctor or your own lawyer. If you just do the average of what other people would do, you will probably get the same returns a financial adviser would get for you, but more cheaply.
MH: Your point is that it’s not very difficult to come up with the same balance of investments as they would?
JK: Right, and you don’t have to trade very often; indeed, it’s a mistake to do that. I think with a pension fund, if you looked at it once a year, that would be plenty [turning to the keyboard]. Let’s go to one of my online brokers and look at a portfolio. This is Barclays Stockbrokers, which I often use, and we have a complete listing. If we wanted to trade in this investment, you press the green button; it’s bought, and in five minutes it will be on the screen.
MH: How do I open an online account?
JK: You want one that is “execution only,” and which costs about £10 for a trade. You have to fill in an online application but you can complete the process in half an hour. Now we need to look at the kind of fund you’ll need. It’s good to have exchange traded funds. An ETF is simply an index. You’re just buying the whole British or US stock market, or a batch of bonds, and there are very low charges.
MH: You’re saying it’s easy to establish a balanced fund. What would be the overall shape of it?
JK: Replication of a pension fund might involve putting 30 per cent of your money in UK equities, 30 per cent in global equities, and then some in property and bonds. The easiest way to invest in property is to buy shares in property companies. If you wanted you could put more into insurance or property as they don’t track the economic cycle in the way consumer stocks do. It is not necessary to invest in individual stocks. The main reason to do so would be to get more diversity into your fund than you can through these indices.
MH: I don’t want you to accuse me of megalomania, but I have always been struck by my ability to move the markets—I only have to look at a stock to make it go down. What sort of percentage return would you think realistic?
JK: The sort of target I would have for the moment is 7 or 8 per cent a year.
MH: As much as that?
JK: Yes. That’s what it has been possible to get from a balanced portfolio of investments over the long term.
MH: I’ve never got anything like that. What have you achieved [on your investments] over the past ten years?
JK: I should think about 10 per cent. I am incredibly conservative.
THE VERDICT
MH: You’re a successful crusader, John. You’ve fired me up. I will go straight home and open an online trading account myself. But I do think it’s like taking tennis lessons from Andre Agassi—I’m not persuaded that I’m thereafter going to stun my partners playing doubles down in Wiltshire. I can probably do it but if somebody is a bit older than me, and even less good at it, if that’s possible, it’s a very moot point.
Also in Prospect's investment special:
Alistair Darling: what is financial literacy?
Jim O'Neill: A great American revival
Charles Batchelor: Where to put your money
Best and worst investments
Jim Rogers: The Chinese century
Vicky Pryce: Stop the Greek exit
