Surviving Covid-19 on a personal level is, of course, paramount to everyone in terms of health but soon attention will swap to surviving financially. Whilst, for all our national economies financial confidence enables them to function in the future, each different sector will have more or less opportunities. This article focuses on Surviving Covid-19 as an Investment or Adviser firm or network.
For clients of these firms or networks that hold pensions and investments, there are other questions that arise about not only their investments but the security of the firm in the future. The reasonable questions we anticipate are:
- How will my pension fund and investments be affected moving forward?
- Will my international financial advice firm, adviser or network survive?
- How will they be able to provide ongoing advice to me if we cannot meet?
- How will they make back the losses I have recently incurred, and will I have to change my retirement plans or investment plans?
Surviving Covid-19 – Investments
Let us deal with the last 2 questions first.
Most people that money invested have seen a fall in the markets and a similar fall in their fund values, but not all have fared as badly as the market would suggest.
For reference (with the usual caveats about not relying of past performance as a guide to the future – especially in the current client) this is how our portfolios have performed. We have analysed the actual performance of our model portfolios over the last three years, on a rolling 12-month basis. In the table below, next to each month, we have shown the performance for the last 12 months (after charges), i.e. January 2019 to January 2020, February 2019 to February 2020 and so on. The four figures in bold are the only cases where the FTSE has performed better than the portfolios.
|Month||FTSE 100||Defensive 3||Cautious 4||Balanced 5||Growth 6||Speculative 7||Adventurous 8|
While the negative figures across the board for the past two months may initially seem worrying, the significant difference in loss between the FTSE 100 and our portfolios speaks wonders about the benefits of having well managed portfolios over index trackers alone. Comparing the FTSE 100 against our highest risk level portfolio (Adventurous 8) between April 2019 and April 2020, we took a substantially lower loss outperforming the FTSE by 13.55%.
Surviving Covid-19- High Fees / Bad Products
At some point in the future, the market returns will improve and this is where a well-priced investment portfolio has the best chance of recovering losses.
Unfortunately, many investors outside of the UK were sold expensive QROPS– and International SIPPS – with the investments held inside an insurance bond
Many insurance bonds were sold with a large up-front commission that ties the investor into the product for up to 10 years. The annual management fee is typically 1% to 1.2% but based on the higher of the original investment made or current value. This is critical to understanding what is a poor bad product.
With hearsay coming through in early April 2020 that many QROPS and International SIPP bond holders suffered losses even before the Pandemic, then this is exacerbated by further falls of circa 27% ( FTSE 100 as an example ) since early February. This tragedy means that an original investment of £250,000 to £127,750 in this example. An example we have recently seen!
If we assume the fees for the insurance bond are £2,500 pa, then the initial fees (based on the higher of the original investment of £250,000) become 1.97%. Typically, the QROPS charge £750 pa (0.05%) and the funds at least 1.5% pa. To add insult to injury, the original adviser is charging another 1% annual advice fee. Finally, there are policy fees on the insurance bond of circa £400 pa (0.03%)
This true-life example, puts the total annual charge at a whopping 4.55% for the reduced value.
With steady investment returns, the client will NEVER make their money back. Therefore, this situation will make this all the more difficult to recover losses.
People in this situation should review their investment and adviser .
This leads me onto the other issue regarding surviving Covid-19.
Surviving Covid-19- Offshore IFAs and IFA networks
One of the benefits to clients and advisers of transparent fee-based charges is that the business model is sustainable for the advice firm, when run professionally, with clearer and lower ultimate cost for the investor. Such IFA firms and networks that operate like our network have a good chance of surviving Covid-19.
An adviser firm in the real life example in the last section has not only destroyed their client’s money, but they have also destroyed their own earnings from £2,500 per annum to £1,278 and this will never recover, and will eventually be lost as the client transfers adviser or network.
Not only that, with the removal of EU passporting for firms that have licences for investments from the UK (incl Gibraltar), some IFA firms and networks will no longer be able to provide advice to their non-UK clients. We have heard of one such network in Gibraltar that has closed its doors for business since Covid-19 struck- where does that leave its clients?
Others that run on the upfront commission fee-model, even if they have licences for the EU after the withdrawal Agreement, will also suffer at the moment and many may not make it.
How will my pension fund and investments be affected moving forward?
We left the first question asked to last. The answer to this question is really determined by the answers to the other questions. Only a client can make a decision that can change the future when put into these circumstances. Make that decision now!
Before engaging your new adviser or firm, ask the following questions:
- What model do you operate? (A fee-based sustainable model or upfront commission-based business).
- What is your current balance sheet? (How strong is the company or network)
- What about the plans for the firm post-Brexit?
- What is your current investment performance?
- How transparent will you be with me moving forward about service and fees?
Only deal with established advisers as investors are at risk from those firms that operate expensive commission-based business requiring large initial sums from your investments to survive.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was republished on 17th April 2020.
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