Out of this world
This month I am going to address a subject that no-one really likes talking about but which I think I have a responsibility to address because I and my subscribers are all getting that little bit older.
As the Pink Floyd lyric goes ‘another day older, another day closer to death’, which is just a truism, but as we get into our 60s and 70s and beyond (and most of my subscribers are in that age group), the number of days is not so many as it was.
I know from you, my readers, that one of the principal concerns people have when they start running their own portfolios is that, although it is not so difficult when you have some training and have accumulated a bit of experience, it is unlikely (although not so in every case, I know) that a surviving partner would be comfortable taking over at short notice, especially as this would be an added responsibility during a period of grief and when other practical tasks of some complexity may need attention.
So, what would you want to happen to your portfolio management if you are still in charge when you die, or if you lose your mental capacity, which could be a slow and let’s face it, hard to accept or even recognise process?
Can we (I count myself in on this problem, naturally) do something now to prepare and make the situation easier for our loved ones?
Most of my subscribers are couples and one partner (male or female) is ‘running the money’. A small number of you are single, but there is still a problem that has to be resolved by someone else when you depart the scene. Older age may imply that the problem will arise sooner rather than later, but experience has shown me that even the relatively young can be hit by serious or even fatal health issues.
I believe we ought to at least do some logical thinking about this real issue and this article is an attempt to get you started. As always, I am happy to respond to feedback and suggestions and pass on good ideas and advice anonymously.
Some general ‘checklist’ items.
You will probably be aware of most if not all the items on this list and if you have dealt with everything already, give yourself a gold star.
These are things I would suggest you ought to have already done:
- Made a will with legal advice from a specialist probate lawyer, probably one who is a member of STEP (the professional body for probate specialists).
- Reviewed such a will recently (at least in the last 5 years) and amended it as necessary.
- Written a Letter of Wishes giving discretionary guidance to those who will have to sort things out after your death. With that should be any material that would be needed to implement those wishes, like photos, music for your funeral etc.
- Competed Lasting Powers of Attorney, probably both the financial and health versions and registered them.
- Made sure copies of the above are with the responsible people and that they know where the originals are to be found.
- Prepared a full list of your financial assets and the on-line services and passwords needed to access them. This list needs to be kept only in a secure place and copies only given to those who need to know and who can be absolutely trusted, obviously. Using an electronic password/data ‘safe’ from a reputable supplier is ideal, but that may require a little technical skill. As a minimum, having a document (eg Word or Excel) file with password protection, stored on at least 2 devices (eg PC and USB stick) is sensible. Or even a well laid out list on a piece of paper!
- Organised your important (both financially and sentimentally) assets in some way that your loved ones can find then easily and work out what they are. Keeping ownership documents together in a labelled brief case or filing box/cabinet, for example. Naturally, if you think your home is at a higher than usual risk of burglary/fire/flood, you need to take appropriate precautions.
If you have thought of other practical preparations, please let me know.
The options for your portfolio
At headline level, these are what I think are the main options:
- Liquidate the portfolio and move to simple deposit like assets, but that may create Capital Gains Tax liabilities and could be problematic for SIPPS where a pension is required. In the latter case purchasing an annuity may be appropriate.
- Move to multi-asset funds, either those built with passive index-tracker components, or managed variants.
- Continue to retain a portfolio of funds, but much simplified, using 6 -10 funds which cover all the main global markets, or purchase a single share (an Investment Trust) that claims it will achieve that objective.
- Do nothing – keep the existing fund selections and monitor returns – the ‘kick the can’ option.
- Appoint a professional adviser who may offer advisory or discretionary fund management services – at a price, of course.
- Take over the role of the incapacitated or deceased loved one, getting whatever training and support is available from the internet, blogs and other low cost or free resources.
I will look at these in turn and where the option includes a continuing investment strategy, provide some data on what sort of returns could have been obtained over the last 3 and 5 years, using data from Morningstar where that is available.
Now let’s look at those options in detail:
Liquidate the funds and retain the money in bank, building society or similar accounts
This option might appeal to someone who has no understanding of investments, has no wish to acquire such an understanding and in fact finds the whole concept of investing money pretty scary.
Liquidating a non tax-sheltered portfolio (ie not an ISA or SIPP) may give rise to Capital Gains Tax (CGT) if the original owner has become incapacitated but not died. If the person has died, the CGT clock will have been reset and only gains after inheritance will be assessed and they would likely be small, or even not exist at all!
A SIPP can hold all its assets in cash, but if a pension is being drawn, the return from deposit funds, after the pension provider’s fees, may be so low that purchasing an annuity might make more sense. There are a lot of ‘ifs and buts’ about that and professional advice would likely make sense.
We are currently not long out of a period when interest rates have been at record lows, so retrospective data may not be representative, but here is some for completeness.
The most recent 3 year mean average annual return on the Fidelity Cash fund (a good benchmark and the sort of asset that can be owned by a SIPP) is 2.46%. The 5 year return is 1.6% per annum. The quoted standard deviation, a measure of volatility is super low at 0.63%, unsurprisingly.
Assuming current rates might be more typical, the Building Societies Association quotes average February 2024 interest rates on cash ISAs at 2.43% for a variable rate product and 4.51% for a fixed rate product.
Move to multi-asset funds
There is a great deal that can be said about multi-asset funds and for that reason there is a whole section of the NotHarry web site dedicated to the subject under the heading ’Multi-asset Academy’. If you have time, I recommend you read it – it comes in bite sized chunks.
At the simplest level, there are 2 options: a more or less fixed asset mix picked from a short menu of options with varying equity share content where all the money is used to buy a selection of very low cost index trackers (eg Vanguard LifeStrategy); or a fully managed risk rated portfolio that may include active and passive assets and will be tailored by some sort of wealth management firm but generally targeted for a stated risk preference.
The latter are nowadays the typical offering of IFAs who delegate out fund management to third party discretionary fund managers (DFMs). Naturally the latter are significantly higher cost than the former computer regulated options, but there are thousands of options and arguably a more ‘custom’ fit might be found.
Because there are a multitude of offerings in this market segment, I can only offer some example returns.
It is reasonable to assume that someone not confident that they understand investment markets is unlikely to select a multi-asset fund with high volatility, so my examples are based on a classic 60% equity/40% fixed income mix.
The well known Vanguard Lifestrategy 60 fund returned an average 2.19% over the last 3 years and 4.7% over 5 years at a standard deviation of 8.76% which I would classify as lowish, bordering on medium risk.
Interactive Investor lists 197 funds in the 40-60% equity IA sector that would compare with the above Vanguard fund, most of which are actively managed for higher fees. The Morningstar benchmark for GBP 40-60% allocation (to equities) returned an average 0.71% per annum over 3 years and 2.22% over 5 years. Vanguard’s claim to beat the average seems well supported!
The best performing fund in the above mentioned II list as at the date of the research (April 2024) was the Artemis Monthly Distribution fund. This is a large cap value fund as far as its equity components go and was 48% in bonds at the time of the research. It is a good example of the sort of fund one might buy if one wanted a fund that did the same job as a discretionary wealth manager at lower cost and possibly with more transparency. It had produced an average of 5.6% per annum over the last 3 years and 5.51% over 5 years at a low standard deviation of 6.82%.
A portfolio of 6-8 funds, or thereabouts, or a single global focus Investment Trust (IT)
Clearly such a portfolio could have an infinite variety of components, but a sensible investor would likely aim for moderate volatility, achieved by asset class diversification and a geographical spread, biased towards the larger markets of the USA, Europe, the Asia Pacific region and the UK.
I quickly constructed an 8 fund portfolio using my experience and judgement and it came out when analysed by Morningstar X-Ray as being around 80% equities, mostly large cap. Normally, I would like some mid and small cap elements, but with only 8 funds, one does not have that luxury.
The overall ‘look’ of the portfolio was fine in most respects, and I did not fine tune my first attempt. Of course, the results benefit from hindsight to a degree and from a professional input to a greater extent, but I did try to build a portfolio from mostly big name managers and keep some ESG considerations. I am not publishing the portfolio because it might be taken as guidance or even a recommendation and I am not able to offer that on a personal basis. I am happy to let subscribers who are curious see the X-Ray, on request.
The 3 year average annualized return was a healthy 9.56%, the 5 year return would have been 11.18% and the standard deviation was what I would call medium risk at 9.64%
Clearly this portfolio benefited from having more equities over recent years, but that is probably something that will always be the case longer term, so someone wanting to have a ‘buy it and leave it’ portfolio might well be happy with the extra volatility, which they may not even notice if they are not really interested.
But, you maybe thinking…….
A pertinent question arises: in the event that a competent DIY investor is no longer on hand, how would even a simple portfolio like this one even get built? The answer is that it would have been built BEFORE the event of death or ill-health by the same competent individual.
Investment trusts are not compared for risk rating purposes by calculating a standard deviation from a peer group mean return. To exemplify your options, I have selected one ‘grandaddy’ trust that is classified as ‘core’ and one upstart that is most definitely correctly classified as ‘adventurous’. Both of the ones I mention are in the II Super 60 list so you can read the rationale data online if you want to know more.
Bear in mind that even though people who ought to know better write that investment trusts are no riskier than OEICs, they most definitely can be because they are run as companies by directors (who can and do make daft decisions), they can borrow lots of money and their share price can become totally disconnected from the valuation of the assets they own. Although they appear on casual inspection to be similar to collective funds, they are in fact exactly what the ‘plc’ on the end of their name tells you, a single public company with all the risks that entails.
Of course, just like all other companies, there are good, bad and plain ugly variants to be found!
The F&C Investment Trust is one of the oldest listed shares of its type and arguably was designed as a ‘one size fits all’ investment. Over the last 3 years, it averaged 6.79% and over 5 years 8.92%.
Scottish Mortgage is in a sense still Scottish, being run by Baille Gifford, but it seems to be nothing to do with mortgages and all the security that implies. It has returned an average of MINUS 12.52% over the last 3 years but still can report 5 year returns averaging 10.22% – a perfect example of reversion to mean. even without any numbers or charts, you will realise that this is a high volatility investment where purchase timing risk is quite scary.
Do nothing
Once again, it not possible to assess quantitively the impact of just sticking one’s head in the sand (or taking a long-term view, if you want to gloss it that way!) in general terms because every portfolio will be different.
I can assume for my actual very small readership that the portfolio will always have been maintained and be in good shape, suitably balanced for the owners’ objectives at the time of any sad event. So the starting point would be a strong one.
As it happens, I have retained watch lists of funds built for assessment or training purposes that are now a few years old and by definition ‘neglected’. Here are some high-level data about two of these portfolios, which were well diversified at the start and contained between 10 and 20 funds.
Portfolio one is now roughly 90% equities and 10% bonds and cash, likely more weighted to equities than it was at outset. It is also quite heavily biased to large cap growth stocks and tech. No surprise there as without any profit banking or rebalancing, the successful elements of a portfolio automatically grow in weighting. The 3 year mean return is 7.82%, tbe 5 year return is a very credible 10.54% and the standard deviation is now defintely at least medium risk at 10.92%.
Portfolio two is almost 100% equities and heavily biased to larger cap stocks but with a good spread from value to growth through blend. Notably it still has 44% in Greater Asia and so the results include the dismal recent performance from its main Asia fund which is down a mean annual 9.09% over the last 3 years. Nonetheless, the overall 3-year return is reported at a healthy 8.7% per annum, 5 years at 10.04% per annum and the standard deviation at 10.04 is actually a little lower than portfolio one with its bond exposure.
Can we conclude anything from this rather unscientific pair of examples? I would suggest, having looked at more detail in the X-rays than I am reporting here, that there is some evidence of a drift to higher risk and a limited dilution of returns, but a possible implication that if a portfolio is focused on higher risk growth, even when it is neglected, then risk taking over time will more often than not enhance returns enough to make up for a lack of attention.
3- and 5-year time periods are of course shorter than one would expect to be the remaining investing lifetime of an investor who inherited a portfolio, but who knows?
Employ a professional adviser
This option is the one that will cost the most, even into the tens of thousands of Pounds per annum if you have a large portfolio. How actually would such costs accrue and what do you get for your money?
The latter ought to be: investment expertise and a well-run portfolio delivering returns at the level of risk you are comfortable with.
In truth, some people will get that and are happy, most people won’t really know what they are getting and yet be more or less satisfied because it is quite difficult not to make money long-term investing in funds, and plenty of people will get very little more than is offered by earlier solutions, or in fact actually do worse due to adviser incompetence.
The costs will come in at least 3 tranches and there may even be 4 tiers.
Firstly, you will be paying an ‘advice’ fee. This is in theory negotiable and may be either fixed in amount or a percentage. What advice you actually get is a moot point as many ‘advisers’ don’t count investment portfolio maintenance as advice and will select a third party to do that work, more of which later. They will tell you that their fee is for holistic financial planning.
You may think that you are at the stage in life where most financial planning has been done and now you are enjoying the results!
Possibly you could use some expert help on nursing care fees planning or Inheritance Tax mitigation. Or some help in mitigating taxation generally.
That advice may well be on offer (more likely from an IFA than a wealth manager) but surprise, surprise, it is not included in your annual service fee and will be subject to you agreeing another fee, likely well into the thousands, for this ‘ad hoc’ work.
The level of IFA and wealth manager annual fees vary a little but expect to pay from a 0.5% per annum of your invested portfolio to 1.5%, with 0.75% being around the average from what I have read recently.
Secondly, you will pay fees relating specifically to the management of investments. If your ‘adviser’ uses an external discretionary fund manager (DFM), and nearly all of them do, you will pay their fee which may be another 0.3% and upwards.
If you have a very large portfolio, well into the millions, you can become a direct client of a DFM, missing out the IFA stage and saving that fee, but because the DFM will take on all sorts of compliance responsibilities if you are their direct client, you won’t be paying the ‘wholesale’ 0.3% or so fee, but a retail fee that will be closer to 1%, although that is covering both the first and second tiers, so not so expensive as a percentage, which is surely appropriate if the portfolio is significant.
Thirdly, you pay the fees attaching to the specific investments that you get to actually buy. These fees will vary according to what the DFM or IFA proposes. The fees for collective funds (OEICS) will be much the same as you pay as a direct investor – the OFC or ongoing fund charge, usually either side of 0.75%. Fees for managed multi-asset funds may be much higher, as much as another 2%, but such funds may have been selected by an IFA instead of appointing a DFM, so there is not total double charging (although it happens!).
If your DFM buys securities direct, like equities and bonds, you don’t pay the OFC that funds charge, but will pay the market fees and spreads for trading plus any extra that the DFM charges for making deals. Such fees are usually paid on purchase and sale, so although they appear relatively small, they occur rather more often than people expect. As a percentage, they will vary widely because some are fixed, so are more relatively expensive in percentage terms for smaller trades.
The final potential further charge is for IT (trading) platform support. You are likely used to paying a fixed monthly fee to the likes of II or AJ Bell and that is very good value if you have a large portfolio, say into 6 figures or more. A professional adviser may insist that you use their platform at an explicit extra cost, or the cost may be built into their other fees and so not visible, but it is much more likely to be a percentage.
In summary, it would not be unusual to pay EXTRA fees (excluding the third and possible fourth categories that you pay anyway as a DIY investor) of as much as 2% or so of your portfolio. Will you get better results than you would from any of the cheaper solutions suggested above? Frankly I doubt it but I am an old cynic! In truth, there is no way of knowing because there are many hundreds of DFMs, thousands of IFAs and tens of thousands of potential solutions that they could recommend.
If you think this is the right route for you and it may on the face of it seem to offer peace of mind, then you need to make sure you monitor performance, ideally against some lower cost benchmark, like a passive multi-asset fund with a similar asset mix and volatility pattern. For the novice who has just inherited a portfolio, even that may be challenging.
Carry on as a DIY investor
Amongst my subscribers, there are some couples who are jointly involved in the investment portfolio management process, so the mental incapacity or death of one would simply leave the other in charge and that would not create any difficulties.
In cases where the surviving partner or heir has taken no interest in the portfolio but has the inclination and time to learn, then, if I am around, they can take my course and, in a few months, would at least be in a much better position to review the above options and keep an eye on things, even if they don’t want a ‘hands on’ role.
Of course, I am as likely as any of you, given my age, to be out of the picture! There are other ways of learning to manage investments using Youtube and online training, both free and paid for. That might suit some individuals.
Conclusion
Deteriorating mental health and eventually death are facets of human existence that we cannot ignore, especially as we get older. Taking some time to discuss what issues could arise with close family, friends and most specifically those who are going to be responsible for our financial affairs when we can’t do it any more ourselves is the responsible and prudent thing to do.
I hope the notes above at least give you a starting point. As ever, I am happy to reply to questions and any extra detail, without venturing into making personal recommendations.
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