Welcome back, Dear Reader, to the latest quarterly missive from Nick Lincoln. This edition has FIVE articles.
If for some bizarre reason you enjoy “The Hat-Tip Newsletter” please do forward it to family and friends.
TOLKIEN AS FINANCIAL ADVISER
"One ring to rule them all, one ring to find them, one ring to bring them all, and in the darkness bind them; In the Land of Mordor where the shadows lie."
Setting the scene: CUC
I hang out with a louche-crowd of like-minded financial planners. Low-lifes to a man (yes, we’re nearly all men), our one redeeming shared trait is a wholehearted devotion to doing right by our clients.
A lot of the time, “doing right” translates as “protecting from”. From what? From the relentless sweeping waves of financial filth that threaten to wash people’s money away in a sea of completely unnecessary complications (CUC).
CUC are everywhere in financial services. Retail investors (that’s you, Dear Reader) are deliberately and regularly sold products and services that are over-engineered and complex. Already blinded by arcane acronyms and industry jargon (“Tapered Annual Allowance”, “Lifetime Individual Savings Account”, etc.), a blinking Joe Public stumbles into a lair primed to trap him from the get-go.
Five obvious examples of CUC:
Self-Invested Personal Pensions (SIPPs): the only reason for having a SIPP over a conventional Personal Pension Plan (PPP) is if you’ve taken a severe blow to the head and wish to use your pension fund to buy a commercial property or, more legitimately, to have various cash savings deposits within it. Otherwise, there is no need to have a SIPP. Ever. A SIPP is a classic example of CUC.
Owning too many financial products: only a pension plan, an ISA and maybe a General Investment Account (GIA)? What on earth is your adviser doing? You need an onshore investment bond, possibly an offshore one too. And both should be wrapped in trusts. Lots of trusts. And where are your structured products offering you 32% of the growth in the FTSE-100 over ten years if Venus straddles Uranus through the next Equinoxe? All filth and all prime CUC.
Fancy pants wills. If you have property, it will form part of your estate for Inheritance Tax (IHT). Suck it up. A will where your share in property has been “carved out” for someone else’s benefit and supposedly protects the value from IHT will probably irk HMRC. HMRC has a nose for CUC and will dismiss convoluted tax-avoidance schemes. See also: endless trusts (have I mentioned them?). A married couple using available exemptions can shield £1,000,000 from IHT. Personal pension funds are also exempt from IHT. Everything else may get clobbered with IHT at 40%. So get spending that “everything else”! Heaven forbid - give some of that dosh to causes close to your heart: better to give with a warm hand than a cold one.
Overloaded investment portfolios. Why one or two funds in your portfolio when you can have 30? This might be the most common and egregious CUC. I have taken on clients with SIPPs (it’s always SIPPs) where there are literally pages and pages of differing investments on their annual pension statements. For added fun, the adviser might outsource the guesswork fund picking to a third-party investment “specialist” such as a Discretionary Fund Manager. Most of the time, it’s beyond me to decipher the total ongoing costs the investor is paying, and I’m the pro in this relationship. Joe Pubilc? Not a chance. The excuse for such nonsense is diversification. That’s a lie (see the next article in this missive).
Regular market updates typically go hand in hand with CUC number four above. Lengthy screeds about economics and market returns over the last week or month. Utterly useless. But they contain many graphs and phrases such as “macro-driven events inhibiting GDP” and so forth. You read this drivel and, although still clueless at heart, feel part of the informed set.
““Simplicity is the keynote of all true elegance.””
Why CUC?
We live in a world where activity and being seen to do stuff are rewarded. Want to earn money? Work and do stuff.
That’s all well and good. But in the world of money - specifically, your money - once your financial plan is created and the concurrent portfolio to fuel it is designed and implemented, doing little with your money is often the best advice. But many advisers are nervous about telling clients to do very little. How can they justify their fees if they are not seen as “doing stuff”? More importantly, how on earth can they hide their fees, if not behind CUC and reams of accompanying paperwork and annual statements resembling the meatier parts of “War and Peace”?
It could also be plain insecurity: some advisers are not confident in their offering. Maybe they don’t have a “purpose” or a “why”. So they ladle up plate upon plate of CUC to give their advice pizzaz, some sparkle.
It’s a sham.
By no means whatsoever am I saying all advisers indulge in CUC for the sake of obfuscation and fee justification. I’m saying nearly all of them
Stand down, legal types.
So what on God’s green planet has this got to do with JRR Tolkien?
I became a financial adviser in 2001. It took me about five years to learn all the tricks of CUC. Like other professional newbies, I hoovered up seminars, conferences, and product provider freebies. I did all the exams. I tried to pick “winning” fund managers. I did what the insurance companies wanted me to: avoiding simplicity and focusing on complexity, implementing complex solutions to “solve” client “problems”.
In other words, I did all the required learning. And then, around 2008, I had an epiphany: real financial advice is about helping people achieve their goals and satisfy their values without fear of running out of money later on. Everything else is noise.
When that light bulb went off, I began unlearning everything I'd accumulated. I honed my message and stripped out the CUC. My practice now only concerns helping people reach and maintain Financial Independence on their own terms.
The vast majority of people like you and me are brilliantly served in this by living the 1-3-1 life:
ONE Financial Master Plan centred around a detailed, personalised lifetime cash flow forecast;
THREE Growth Pots (pension, ISA, GIA) to drive the Master Plan;
“One plan to guide them all, three pots to drive them, one fund to fuel them all, and in the simplicity, mind them.”
All overseen by a caring, empathetic financial adviser who puts successful client outcomes at the core of what he or she does for clients by helping them avoid the Big Mistakes. An adviser who puts the relationship emphasis on behavioural coaching over investment and technical esoterica and the dreaded CUC.
The 1-3-1 system works. It’s absolutely transparent. With few moving parts, it is robust. The costs are easy for people to comprehend. Once the client knows the cost, she can then determine the value. Price is what you pay. Value is what you get.
Contrast this with the world of CUC, where the investor costs are unclear, and thus value is impossible to determine. And that’s just how vast swathes of the financial services industry - the “Pirates In Pinstripes” - like and want it to remain.
Not on my watch. I will call out CUC where I see it. I’m not here to make friends; I’ve been remarkably good at this.
Saving client families from the financial wilderness is my calling. Do you think your friends and family have CUC in their financial lives? Do they even have a plan?
with a bespoke, crafted financial plan, you and I can conquer our own mount doom - the fear of running out of money before running out of life. let’s do it with elegant simplicity and zero unnecessary complications.
“Simplicity is the final achievement. After one has played a vast quantity of notes and more notes, it is simplicity that emerges as the crowning reward of art”
THREE POTS TO DRIVE THE PLAN
YOU HAVE A FINANCIAL PLAN. WHAT’S GOING TO DRIVE IT TO A SUCCESSFUL CONCLUSION?
So you have your Financial Master Plan, which has a pretty Cash Flow graph. For clients starting off on their journey with me, the graph often shows a decent amount of “Red”, where you outlive the money in retirement.
This is a distinctly sub-optimal outcome, as we finance boffins say. It’s an emergency, a sort of financial “Code Red”. We don’t want Code Red. Code Red is a danger. It is to be avoided wherever possible, and that’s where I put on my cape.
A client Financial Master Plan that, before we work the magic, isn’t panning out well down the line.
Sometimes, despite my innate brilliance, the cash flow graph will still show Code Red at the end of a client planning situation. There are four final elements at play to get over this - the nuclear options - and all of these can be applied in some sort of combination to get us over the hurdle and wipe out the red:
Work longer
Spend less
Save more into your “pots”
Die earlier (drastic, to be avoided if possible)
On point three and “pots”, I mean pensions, ISAs, and General Investment Accounts (GIAs). Such dull, generic words. Even now, I feel somewhat soiled typing them.
Be that as it may, everybody (me included) must use these products. They are the essential elements that drive our financial plans to successful conclusions, where the money outlives you and Code Red is averted.
Going forward, let’s use descriptives that add colour and meaning to these boring product labels.
So what shall we call these pots?
ONE: The Free Money Growth Pot (FMGP)
You put, for example, £1,000 into an FMGP, and - as a 40% taxpayer - the Government instantly gives you a 67% uplift in value. Put another £1,000 in, and the same thing happens again. And again.
No investment risk. No quibbles. Your £1,000 becomes £1,667 almost overnight (in truth, it can take a bit longer and may involve a Self-Assessment return. But I’m keeping things simple - as ever!)
Factor in decent (not guaranteed) long-term investment growth via The One Fund on top of the 67% guaranteed free money uplift, and keep on paying into your FMGP over the years and decades, and you’ll be well on your way to financial salvation.
Big Reveal Number One: The FMGP is a personal pension plan. Doesn’t Free Money Growth Pot sound nicer?
“A little simplification would be the first step toward rational living, I think.”
TWO: The Tax-Free Growth Pot (TFGP)
Next of the three pots is the Tax-Free Growth Pot, or TFGP. Unlike the FMGP above, this doesn’t give you any tax breaks going in. If you want to pay (again, an example amount only) £1,000 a month into this, crack on. But the Government won’t top up your contribution (note: there are stunted siblings of the TFGP where you can get a little bit of free money, but let’s keep things….. simple).
You pay your £1,000 a month or whatever. Again, this gets invested in The One Fund. Over the years and decades, the TFGP grows handsomely (not guaranteed). All the growth is free of Capital Gains Tax. All the dividends received within the TFGP are tax-free.
When your Financial Master Plan indicates you need to start taking an income from your TFGP, you can do so, and the income is also completely tax-free. There are no age restrictions or complicated access rules around the TFGP.
Am I making the “tax-free” point enough?
Big Reveal Number Two: the TFGP is a “Stocks and Shares Individual Savings Account”, or S&S ISA. Somewhere in the seven circles of hell is a berth reserved for the Civil Servants who come up with these acronyms.
One plan to guide them all, three pots to drive them, one fund to fuel them all, and in the simplicity, mind them.
THREE: The Growth Pot (GP)
Pots One and Two have restrictions on the amount you can shovel into them each year. When these allowances have been used up (we’ll monitor this for you), we turn to the humble Growth Pot (GP).
Unlike the Free Money Growth Pot, the GP has no tax breaks going in. Nor does it have the tax-free sexiness of the Tax-Free Growth Pot. This is why, once you’ve used up your annual allowances in these two pots, we move on to the GP.
If you pay, for example, £1,000 a month into the GP, it will be invested (have a guess) in The One Fund. Over the years and decades, the GP will grow (not guaranteed). As and when you take money out of the GP in later life, some of this growth (subject to small exemptions) will be liable to Capital Gains Tax. You may also have to pay some taxes over the life of the GP from dividends generated by The One Fund.
But it is still a “growth” pot. Your hard-earned readies love being in the long-term GP rather than languishing in the riskiest long-term investment, which, of course, is cash.
Big Reveal Number Three: the GP is a “General Investment Account”, or GIA.
fund your three growth pots as the terms of your bespoke financial plan dictate. stir occasionally. rinse and repeat until financially independent.
“Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity.”
SUMMER PRACTICE UPDATE
IT TOOK A WHILE BUT HERE COMES THE SUN
Nick Lincoln, IFA and owner of V2VFP Ltd
If Spring ever arrived, I must have slept through it. We went from a pretty mild and wet Winter and then stayed in that state for months before the sunshine of the last week or so.
During this time, we went through the end of the tax year and the attendant tax planning such events necessitate.
As I've stated before, the current administration is under no illusions about your wealth: it sees it as theirs and will tax you left, right, and centre to get it.
And so, from 6th April on, various tax allowances were slashed whilst a raft of others were kept at existing levels, allowing inflation to erode their real value. This is why so many people are now 40% (higher-rate) taxpayers. When this tax was introduced in 1988 by the late great Nigel Lawson, to be paying this tax was quite a sign of success. Not anymore.
More than ever, pay close attention to the amount of tax you are paying: after mortgage/rent, for most people, tax is their biggest outgoing. Anything you can do to legally mitigate this is absolutely essential and something we continually help our clients achieve.
As the Conservatives continue to do everything in their power to fritter away a handsome majority, the prospect of Keir Starmer as PM becomes ever more real. I’m not saying this is a good or bad thing: just be clear that taxes are not going to be cut anytime soon (save for the obvious pre-electing bung or two).
Our new garden fence. Exciting or what?
On the home front, all is well. The Lovely Penelope (TLP) is starting to run on fumes as the school academic year just about crawls over the line. A six-week break with me as her constant companion is just what any sane person needs to recharge their batteries, said nobody, ever.
As TLP and I celebrate the impending first anniversary of our still-intact union, I got all romantic and bought her a posh new garden fence. Who says romance is dead?
Practicing Gratitude
We have had a flurry (by our standards) of new introductions over the past months. All were referred by existing clients, so we must be doing something right (in no way guaranteed etc.).
To my clients: I thank all of you for your continuing faith in my services. To the casual reader: thank you for your time.
Until the Autumn, then, Dear Reader. Take care.
“My brother thinks he’s a chicken but we don’t discourage him. We need the eggs.”
ONE FUND TO FUEL THEM ALL
THE ESSENCE OF SIMPLICITY: THE ONE-FUND PORTFOLIO
Note: What follows is not advice. It is me musing on an aspect of my advice. My clients are people whose individual circumstances, goals and financial information I know in great detail. As such, my advice is tailored to their unique circumstances. Having got that guff off my chest, you should know that I invest my capital exactly how I advise my clients: I take my own medicine.
If you define real risk not as the permanent loss of capital (nearly impossible with a well-diversified investment and plenty of time) but the permanent loss of purchasing power - and I do - then everything else falls into line. To help clients enter into and then maintain and enjoy a dignified, independent retirement - where, bluntly, the money outlives them - we do everything we can to protect the purchasing power of their capital (be that in ISAs, pensions etc.).
This typically means their invested capital is nearly or wholly invested into owning shares in The Great Companies of The World (GCOTW). As far as over 120 years of history tells us, there ain't no better place.
But how to best get exposed to these GCOTW?
There are around 4,500 UK-registered investment funds (and a host more registered overseas in places like Dublin, also available to UK investors).
Most of these will be so-called active funds.
How does anyone choose from that vast smorgasbord? Answer: with a lot of “miss” thrown in with a sliver of “hit”.
“Simplicity is the ultimate sophistication.”
Historically, having done their due diligence and spent countless hours researching which funds to use, advisers would recommend a handful of investment funds to give their clients broad exposure to the GCTOW. These funds would cover domestic and overseas stock markets. There would be quite an amount of overlap between the funds, and the moving parts meant you were never quite sure what the overall “tone” of the portfolio was, especially if you used (the predominant) active fund managers to run the underlying funds.
Being human, these whizzos could change the nature of their portfolios on a whim, a hunch, or following an argument over breakfast with their spouse - or - tragically - by mental illness.
Cutting Out The Completely Unnecessary Complications
I ditched active fund management about 15 years ago for reasons too tiresome to go into here. Since 2008 client portfolios have been comprised of four to five low-cost “factor” funds that look to capture broad swathes of the GCTOW, with a bias to small cap and value shares (wake up at the back).
In the constant drive to simplify, I’ve refined things further. Going forward, nearly all financial planning clients - and certainly all younger ones - will have their invested capital in one fund. We will be rolling out this refinement to client portfolios during Annual Planning Meetings through the course of 2023. Clients need to give their informed consent before any portfolio alterations are executed.
Some clients will have one or two other funds in their portfolios for short-term cash flow exigencies. Otherwise, it’s The One Fund all the way, all the time.
You can see how we are explaining this to clients using video:
So one fund. Across all client investments (ISAs, personal pensions etc.).
Crikey.
I won’t name the fund, although you can watch the video to find out. The fund itself is almost not important. It’s more the concept. It’s about simplicity. It’s about cutting out the CUC mentioned earlier.
In the 1-3-1 world (one plan, three growth pots to drive the plan, and one fund to fuel them), the investment part is relegated to exactly where it should be: at the bottom of the pecking order. Most advisers put it at the top. Most advisers are busy fools. You connect the dots.
One plan to guide them all, three pots to drive them, one fund to fuel them all, and in the simplicity, mind them.
The Best Reward Card Ever
We drop our filthy lucre on the GCOTW. We love their products. Through this love, we drive their profits. Why not own tiny slivers of all these GCTOW and get a slice of the action? If we can do this via The One Fund, then all the better. We should call it The Shopping List Fund: every time you shop, you are helping drive the returns of your own investment. Who needs reward cards?!
“But Nick, isn’t having all my money in one fund a bit, er, risky?”
No.
“OK, that’s on me for asking a closed question. Let me try again, you truculent bastard. Why is this not risky?”
In The One Fund, you get exposure to nearly 13,000 of the GCOTW. I know of no other global equity fund offering such massive diversification. It includes emerging markets. It has a bias toward small-cap and value stocks. It’s organised on a market-cap weighting (sorry, UK, but your ever-shrinking stock market is about 3-4% of the fund’s composition). No one fund manager is making arbitrary decisions.
Perhaps most importantly, we can invest in this fund and - figuratively - walk away and stare out the window for decades, doing nothing with our portfolio. Via this one fund, we are buying world capitalism. With a prevailing wind, the capital markets will return “enough” over time to ensure our financial plans reach a successful outcome where the money outlives the people.
That’s all we’re trying to do. Get the money to outlive the people. It’s not catchy and definitely a bit grip reaper, but it’s what I do for you. It’s what I do for me: to repeat, I take my own medicine. All of my family’s wealth is in The One Fund.
ONE FUND to fuel the three pots that will drive your financial plan to a successful conclusion. simple? yes. easy? no. let me help.
INFLATION IS TO RETIREMENT WHAT CARBON MONOXIDE IS TO HEALTH
This is a recurring piece. Each quarter the figures will be appropriately updated. Why? because while the numbers will change around the edges, the message is eternal!
A typical retired couple may well see one partner live for three decades or more. Over such a long period, the annual cost of Lifestyle could more than triple. Says who? Says me: financial planning involves enormous ambiguity. If you want certainty, die now.
So an example Lifestyle cost of £50,000 per annum entering retirement could later escalate to £150,000 a year, just to keep standing still, to keep buying the exact same amount of “stuff”.
If you really must, some prosaic evidence: in 1993 a First Class stamp cost 25p. Now? £1.10. See the detailed graph below:
Some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):
Three decades ago - Summer of 1993 - the S&P 500 (The Great Companies of The USA) was valued at 448;
Today, 30 years on - Summer of 2023 - The Great Companies of The USA are valued at c.4,200;
In three decades, these Great Companies have grown in value by a factor of nine;
In addition, the dividends paid by these Great Companies have risen five-fold in those 30 years.
The last three decades have seen four "get me out of here I can't stand it anymore" bear markets (2001-3, 2007-9, Q1 2020 and right now) and numerous smaller temporary declines.
Source for US market figures here. Why US data and not the UK? Because the Yanks have this kind of thing publicly available and we don't - yet. Also, the US market is enormous. By comparison, the UK market - at under 5% of worldwide market capitalisation - is tiny.
Dear Reader, the big risk to a dignified, independent retirement Lifestyle is the destruction of purchasing power via inflation. Like carbon monoxide, you can't hear it, smell it, see it, taste it. Yet inflation will silently, stealthily kill your wealth.
The cure? Possessing a Financial Plan fueled by ownership of The Great Companies of The World: equities.
The problem with the cure? It's really really hard to stick with your Plan and stay invested through the horrendous-but-always-temporary-declines. The cure for the cure? Having a tough-loving, empathetic counsellor to stand between you and "the big mistake".
Having stated the problem, and maybe scared you witless, I hope the above figures give you a glimpse as to the only rational, moral solution for a healthy couple facing a three-decade plus retirement!
“Inflation: odourless, tasteless, and utterly poisonous to a dignified, independent retirement.”
“Whatever it is, the way you tell your story online can make all the difference.”
