Bill is 56 and has been investing for 25 years, accumulating a portfolio worth £162,000. He has recently inherited a second portfolio worth £470,000 as a result of a family bereavement. He says: "My wife and I are at a crossroads. Our investment portfolio has increased in size but also in the range of inherited investments. We are holding a large amount of cash in the bank and in premium bonds. Some of this may be used to fund house deposits for our children, both in their early 20s.We need to make a decision on how to manage our future investments. We can live with market fluctuations over a number of years, but in the long term we don't want to lose money."
All their income requirements are met by income from their two mortgage-free buy-to-let properties, plus work pensions. They are seeking capital growth from their investments - any dividends are reinvested. They plan to draw from the portfolio one or two times every five years for one-off income requirements.
Bill thinks his choices are:
1. Continue to self invest
"The existing investments evolved over time, but the new portfolio is different. How do we structure the new portfolio. How should it be balanced?"
2. Move directly to a management company
"I am considering a bank, an independent company such as Hargreaves Lansdown's portfolio management service, 7IM or others."
3. Move to a local independent financial adviser (IFA)
"We would let them advise us and manage the investments, excluding the buy-to-let properties."
He asks: "If we step back from investing, what questions should we be asking an IFA/investment management firm or a wealth manager? What investment performance should we expect over the next 10 years?
"Our own portfolio (prior to inheritance) has achieved an annual growth rate of nearly 8 per cent over the past 10 years. This has been driven primarily by the performance of Fundsmith Equity (GB00B4Q5X527) in the past five years, InterContinental Hotels Group (IHG), Rolls-Royce Holdings (RR.) and latterly Howden Joinery Group (HWDN). I doubt we will be so lucky over the next 10 years."
|Bill's original portfolio: £161,898|
|Fidelity Isa: £58,385|
|Fidelity American Fund||19,030||3|
|Fidelity European Fund||17,569||3|
|Fidelity FF China Focus||1,430||0|
|Fidelity FF India Focus Fund||960||0|
|Fidelity Special Situations||10,318||2|
|Fidelity Global Special Situations||9,078||1|
|Barclays Equity Isa: £55,241|
|InterContinental Hotels Group||15,048||2|
|Mitchells & Butlers||8,299||1|
|Royal Bank of Scotland||595||0|
|Royal Dutch Shell Plc B||2,228||0|
|Newton Global Higher Income||4,076||1|
|Fundsmith Equity T Acc Isa||16,675||3|
|Various cash ISAs||31,597||5|
|Inherited portfolio: £469,814|
|Witan Pacific Investment trust||18,898||3|
|Aviva - Investors UK Growth Fund Class 1||2,088||0|
|F&C Capital & Income Investment Trust Plc||33,921||5|
|F&C Investment Trust||40,981||7|
|Henderson European Selected Opportunities Fund A Class Acc||12,622||2|
|Henderson UK Alpha Fund Share Class A (Acc)||4,165||1|
|Invesco Perpetual Income & Growth Accumulation Shares||20,198||3|
|Invesco Perpetual Income & Growth Income Shares||15,603||3|
|JPM Sterling Corp Bond A - net inc||2,778||1|
|JPM US A - Net Acc||8,694||1|
|JPM Claverhouse IT||6,378||1|
|JPM Income & Growth IT - Capital shares||285||0|
|JPM Income & Growth IT - Income||44,088||7|
|JPM Portfolio A - Net Acc||3,773||1|
|M&G Pan European Fund A Inc||8,298||1|
|M&G Gilt and Fixed Income Fund A Inc||3,559||1|
|M&G Corporate Bond Fund A Inc||3,688||1|
|M&G Dividend Fund A Inc||27,544||4|
|M&G Corporate Bond Fund X Inc||5,040||1|
|M&G Episode Growth Fund X Inc||11,153||2|
|M&G High Yield Corporate Bond Fund X Inc||3,060||1|
Source: Investors Chronicle
|Last three trades|
Shoe Zone (buy)
Newton Global Higher Income (buy)
M&G Recovery (sell)Watchlist
Fundsmith Equity, increasing existing investment
iShares UK Dividend ETF
Dunedin Small Companies Investment Trust
TAX PLANNING COMES FIRST
Matt Pitcher, executive partner, Towry, says:
The immediate financial planning consideration suggested by the story of your capital is connected to inheritance tax (IHT). From the value of your portfolio it looks as though, on death, your two children will have to pay quite a large IHT bill. IHT is paid if a person's estate (their property, money and possessions) is worth more than £325,000 when they die. The rate of IHT is 40 per cent on anything above the threshold.
There is a simple and partial solution to this problem, though, as you mention that you have recently inherited.
If you inherited within the past two years and this capital is surplus to your needs then you should consider a deed of variation on your relatives' will. This allows you to pass some of the inheritance into a trust directly to your two children, without it coming into your estate and ultimately being liable to IHT.
Note, however, that Chancellor George Osborne has pledged to review deeds of variation as part of his crackdown on tax avoidance.
Making sure that when you need to draw from the portfolio you withdraw capital and use your capital gains tax allowances (CGT) is a good strategy. Now that your portfolio has grown, it is worth considering whether to sell assets every tax year to make sure you use the CGT annual exemption each and every year, otherwise gains may build up too quickly. Remember also to take advantage of the increases in national savings allowances such as individual savings accounts (Isas) and even National Savings & Investments Premium Bonds.
Mr Pitcher says:
Risk management should be properly assessed using one of the many tools available in the market and compared with the asset allocation you currently have. In addition, consider how much growth to target from the capital (linked to an objective such as care fees), and how much impact a financial loss would have on you and 'Mrs Bill', should something happen to you and vice versa.
You point to consolidating your investments and I assume this is to reduce the burden of administration on yourselves. Finding a single platform for your investments would make sense, and if you choose to continue self-managing, opt for a platform that can handle all of your funds and holdings, and that charges appropriately for your portfolio size. Platforms tend to have different charging structures according to their target market, and some will be cheaper than others. Cost is one of the key considerations when selecting your platform as a self-investor as this will reduce your return. Diversifying and rebalancing your portfolio is also important; it would probably be a mistake to over rely on one asset class.
USE A PROFESSIONAL?
Mr Pitcher says:
Your most fundamental decision is whether to carry on down the path of self-investment or whether to engage a professional to help you and free up some time to enjoy your retirement. Employing an adviser is likely to be an added cost, but can add value through tax planning, simplified administration, asset management and strategic cash-flow planning. With your level of assets and their degree of complexity, it is worth considering. You should look for a fee-based professional adviser who can forecast future cash flows that take into account the worries you have about funding care, and show to what extent any surplus capital can be given away.
Colin Low, a chartered financial planner and managing director of Kingsfleet Wealth, says:
Your greatest concern is whether you should continue to self-invest or whether you should seek assistance from either a discretionary investment manager (DM) or a financial planner (FP).
Key issues to consider in your decision would be as follows.
Can I achieve this by myself through stock or fund purchases? Alternatively, will there be a need to have this managed by a professional DM or FP?
2. Tax implications
Can you maximise the tax efficiency of your own portfolio or ensure you use new solutions which may help to reduce your income tax, capital gains tax or inheritance tax?
A DM will have a focus purely on the investment returns derived from an investment portfolio, and not necessarily the most suitable tax wrapper or investment vehicle that is appropriate for the client's assets.
Any financial planner worth their salt will overlay the tax considerations of an individual on their investment strategy.
3. Ongoing investment management
How do you decide, as an individual, which stocks or funds to buy, and when to sell?
The benefit of a DM is that they should be spending their time looking for appropriate assets into which their clients can be invested. However, on what basis do they determine their trades and their regularity? Are they trying to time markets?
Many FPs choose not to be involved in the investment decisions of their clients and outsource their clients' investments to either a DM, a multi-manager fund or index vehicles as a means of meeting asset allocation targets. They consider the aspect of tax and financial planning to be where their skills lie.
However, some independent financial advisers (IFAs) still see the benefit of active participation in the client's underlying investment strategy. Look for an FP who has higher qualifications in investment planning, is chartered or certified, and has a documented investment process.
4. Reviews, benchmarking and cost
How often will the portfolio be reviewed and against which benchmark should this be assessed? What will the manager/adviser charge to guide you and can they demonstrate that the additional costs have benefited clients in the past? Ask for a couple of case studies to demonstrate their skills.
DO IT YOURSELF?
Moira O'Neill, personal finance editor at Investors Chronicle, says:
You have been very confident in managing your investments until now. Why should inheriting more money alter this? I can see why an 80-year-old might want to hand over the responsibility for managing money to a third party, but you are still relatively young at 56.
By using a professional investor, be acutely aware of ongoing advice fees, which can dwarf the initial advice fees over time. Many financial advisers charge between 0.75 per cent and 1 per cent a year for investment advice alone (tax planning is often extra), which, on larger portfolios, is nothing short of daylight robbery. Do you really want to pay more than £6,000 a year for investment advice and monitoring of your portfolio? It's no more work than that required on a £100,000 portfolio.
Is there a specific reason why you don't want to invest it yourself any more? Valid reasons could include health issues, if you've stopped enjoying investing or want to free up time to do other things.
However, if you're simply daunted by the size of your portfolio and the administrative burden, consider that many DIY investors manage to invest larger portfolios very simply. They do this by establishing a low-cost core holding, alongside 10 to 15 satellite holdings.
You could use a tracker fund or exchange-traded fund (ETF) for your core. Or three actively managed funds that you already hold in your portfolio would also make good core holdings: F&C Investment Trust, Fundsmith Equity and Newton Global Higher Income.
Your 28 holdings that are worth 1 per cent or less of your investment portfolio are confusing the picture. Consider selling these and adding to the fund options that I have mentioned.
I asked experts at Lloyds Private Banking to calculate the overall asset allocation of your combined portfolio. It shows that your major positions are in cash (40 per cent) and UK equities (38 per cent).
Take a look at the Wealth Management Association's five private investor indices. These will give you a useful perspective on how the asset allocation of your portfolio could look. As you are a bit risk-averse, let's look at the balanced index.
Private investor balanced index asset allocation
Source: Wealth Management Association
Comparing your current asset allocation with this index indicates that you should increase your exposure to bonds, international equities and commercial property. Or you could go to a professional who might charge you £6,000 a year to tell you the same thing.