Investing – Why take the risk?
Since 2008 many private client investors have been very concerned at the significant fall in the United Kingdom base interest rate, to at present 0.5% where it has remained for over 5 years. Because of the above many traditional low risk investments such as banks and building societies are presently offering interest rates, certainly for short-dated investments, which are extremely low. Even for longer dated investments, many accounts with such institutions are still offering rates considerably beneath those offered pre the financial meltdown of 2007. It is therefore necessary for investors to carefully consider the level of investment risk which they are prepared to accept to achieve the investment income which they require. Put another way, risk vs reward. By contrast to cash accounts the stockmarket at the present time, especially in the United Kingdom, in selected investments, offers rates of income through dividends and other payments which are often considerably higher than those on offer from lower risk investing in banks, building societies or even National Savings. However, there is higher risk because capital value can fall as well as rise. Virtually all investments carry risk however, even cash deposits if a balance invested exceeds £85,000, so it is important that appropriate advice is sought from professionals who are properly qualified. The Financial Conduct Authority has detailed information for consumers on its website, which is very helpful and can be referred to for the above purpose. If professional advice is taken, it is important that the advisor is provided with enough information to enable the correct advice to be given. Important will be to ascertain exactly the aims and objectives of the investor and should include a comprehensive explanation of the differing types of investment risk. To put the above into a practical context, if an investor is able to adopt a time horizon of in excess of 5 years, some measure of market investment could be appropriate. If funds are needed earlier however options will be more limited, because market investing cannot take place over the short term. If market investing is decided upon, it is still not entirely straightforward because there are investments which may provide more income than others and investments which may produce more growth than others. It is as always a question of balance, so even when the investment portfolio has been established, it cannot be left to languish. Regular reviews must be undertaken and the recent difficulties of Tesco point firmly to the argument that no individual investment is ever so perfect as to be excluded from being reviewed regularly and carefully. In terms of tax, all individuals have a Capital Gains Tax exemption of presently £11,000 per annum. This means that gains can be made in market investments, eg. equities, but not including Government stocks, of up to this exemption for which gains would be CGT free. Obviously if investment is only in cash deposits, the CGT exemption will not be used. Any investment strategy accordingly requires careful consideration to ensure that it is both suitable and appropriate for an investor, not to mention within the bounds of investor affordability. Regarding charges, over the years there have been a number of financial scandals linked to mis-selling practices. These have been well documented in the media and have often been driven by the pursuit of commission. It is accordingly important to ascertain how any adviser is paid. The ideal in my opinion is an adviser who charges by way of fee only. This could either be as a percentage of the value of an investment portfolio or it can be by fixed fee or hourly time charge. The most important factor in charging is that it is fully transparent, in line with the regulator’s requirements so that an investor can be comprehensively informed before any decision is made to proceed. Finally, if things go wrong there is recourse to the Financial Services Compensation Scheme. Care should accordingly be taken to ascertain from any adviser which is proposed to instruct that they have fully compliant systems to deal with complaints should the need arise. John Atkinson, Head of Trusts & Investment AdviceGeorge Ide