The age of DIY personal finance

Posted by robin in Financial Articles Market Commentary Wednesday April 6, 2011 12:17 am


Indonesia has 250,000 life insurance agents.

One for every 1,000 head of population, according to its association.

Quite an army.

The UK doesn’t. Most of our life insurance agents are long gone.

The Man from the Pru has been shown the door and others have followed. Often the companies that hired them have disappeared too.

Back in the early ‘80s, twenty somethings in an ill-fitting suit and 20 minutes telesales training passed themselves off as financial advisers flogging 10-year savings plans in commission-frenzied hot houses. Social ostracism was a modest price to pay for the Rhino-skinned.

The law clamped down. The sales hordes moved on. The bow-tie wearing larger than life sales characters found other things to sell.

One time insurance brokers became independent financial advisers (IFAs) and filled the distribution gap left by the retreating sales forces. Now the tide has turned for them too.

Demand trends, regulation, simplification and technology together conspiring to squeeze the juice from their business. Eventually it seems likely a few “wealth managers” will remain, twiddling the online portfolios of cash rich time poor multi-millionaires in the manner of a personal concierge service.

For folks with less deep pockets, welcome to the age of DIY personal finance. Cheap non-advice services, aka “execution only”, are the future for those that won’t or can’t pay the £300/hour cost of tomorrow’s IFA.

So what’s killing the IFA?

Demand and Supply

Demand has had enough. It has been bamboozled and misled, if not ripped off, too many times. Its general demeanour at best is one of wary mistrust to the financial services business. Half the population want nothing to do with it. Even the regulator has noticed. If trust in all things financial was low, post banking crisis it’s on its knees.

The attitude has cause. The list of mishap stretches a long way…Equitable Life, endowment mortgage plans, precipice bonds, pension transfers, personal protection insurance, structured products…

And those are the headlines. Many others quietly siphoned into the poor personal financial product choices through incompetence, inattention or greed, never see the light of day. The FT reported in February savers had been “pushed” into risky products, with their survey finding four in 10 owned one.

Demand trends tell a story. Traditional “protection” products providing in the event of death and disability show little growth or are in decline. In the main we don’t buy life insurance products willingly and increasingly we don’t buy them at all except when our employer ponies up for it.

When demand has materialised, it has often succumbed to the kind of sales pressure that is disappearing and soon to be abolished. Supply is quick to point out, we are chronically underinsured and life insurance is sold not bought.

Demand invariably responds: money’s tight and I’ll take my chances. The desire to get rich may be strong, the desire to make someone else rich is less so.

Supply has adjusted accordingly in a Darwinian kind of way. Life companies have disappeared. Funds have closed. Predators pick up closed books of life insurance policies and cream off the top for shareholders.

The outlook for UK insurers is shared elsewhere according to Barclays Capital. In a sector research report it concluded sales decline was a feature shared across developed country life insurance markets.

Standard Life isn’t a life insurance company any more. It sold off its health insurance business and gave up on life insurance. Any interest is outsourced interest to another insurer.

The FT reports it is trying to transform itself in the face of “radical regulatory shifts” from traditional life and pensions’ company to a “high technology asset gathering and investment management business”. CEO David Nish is quoted as commenting:

“…the vast majority of the propositions we now develop could either be used by an individual directly or can be used by a broker…”

Wow! The Standard Life dam has broken. This one time staunch defender and supplier to the IFA market is going direct. Major shift.

Today the life insurance business is ever less Legal and General’s multi-coloured umbrella protecting people with life insurance from the proverbial rainy day, it is ever more NPI’s squirrel gathering nuts.

Demand has shifted and supply has shrunk. Increasingly people are more likely to buy their insurance from Sainsbury or online than through an IFA.  Increasingly they’re more likely to go DIY on their savings too.

The internet

Cyberspace’s creative destruction beats a brutal path to progress, but progress it is. Those unable to successfully navigate the future get dashed by it.

HMV has just issued its third profits warning as it shapes up to be the next high profile victim. It appears a subject in waiting for some nostalgic middle-aged journo to eulogise on. And of course slow moving life insurance providers are ripe for the taking.

Standard Life has spent £300mn on internet compatible technology for its new strategy and is opening the door to direct sales. CEO David Nish commented the alternative was “you cut costs and look for an exit”.

Aviva’s recent perky results highlighted growth in their UK life insurance operation. On closer inspection this is coming from their online operation and associated promotional activity that does away with intermediation.

In the US the president of LIMRA, a leading life insurance research organisation, Robert Kerzner, also issued a stark warning to US insurance executives:

“Many of the fundamentals of our business are out of balance, in the animal kingdom, failure to adapt means extinction. In the same way companies need to significantly transform their thinking and adapt their business models to remain competitive.”

Consumer empowerment may be an irritating term but technology has provided it in spades. We can now bank online, buy and sell shares and funds, manage our pensions and ISAs all more easily and at a much cheaper price than pre-internet days.

Information is free and in abundance and increases transparency. Why pay for advice when you can figure most of it out in your own time online. In 2010, 30mn plus accessing and transacted on the web according to the ONS, growth that has confounded even the optimists. There’s no shortage of great personal finance content from a range of sites online, not to mention in print.

The simple answer is for those who can read and are part of the online world can gain the knowledge needed to make sensible decisions on personal finance issues and manage them too.

The one bright spot technology brings for the IFA are online wealth management platforms “wrap accounts” to manage a range of investments easily online.

Intermediary platform administrators such as Transact, the first in 2000, Cofunds and Ascentric have taken vast sums under their wing. Market leader Cofunds announced in January 2011 it had reached £30bn from a standing start a decade before.

But just as these can be managed through an adviser, they can be managed direct, with the exception of one or two product areas where there remains a need for advice.

More confident consumers with straightforward requirements can get a cheaper price by cutting out the middleman altogether and setting up a platform direct.

Providers, such as TD Waterhouse, Barclays Stockbrokers, Selftrade and Sippdeal for pensions offer low fees, slick technology, free research and an “execution only” service straight to their customers.

The DIY investor has plenty of quality choices.

Simplification

Simple solutions often work best….but not for intermediaries. Something noted by George Bernard Shaw who considered “all professions are a conspiracy against the laity”.

It seems to have had little acknowledgement but much of the orbit of personal financial management has been simplified over the past decade.

This simplification trend has been countered by regulation moving the other way. Still, it was ever regulation’s lot to close the stable door after the horse has bolted.

ISA

One time Tory chancellor, Nigel Lawson, launched the personal equity plan (PEP) in 1986. Labour subsequently tweaked and rebadged it as the individual savings account (ISA). It has been a great success attracting billions and is the default first choice savings destination.

It is simpler, less expensive, more flexible and more accessible than a life insurance savings equivalent such as the old style maximum investment plans (MIPs) with a minimum 10 year saving commitment and possible penalties for early withdrawal.

Pensions

In April 2006 (dubbed “A Day”), pensions were simplified. A number of competing regimes were crushed into one and the high priests of pension obfuscation were finally sidelined.

While the Brown government did their best to muddy the waters later on, the Coalition has since straightened it out again.

Post A Day there is a single funding cap rule for all. Individuals can save in any kind of pension any way they wish.

Then of course old style defined benefit schemes are being replaced by defined contribution plans. While this may be less good value for employees, they are simpler.

Funds

There are thousands of funds of retail investors of one stripe or another. Most underperform, not least because they are expensive, never more so when bought through an IFA.

The as yet unpublished Financial Markets report was trailed in the FT yesterday (April 4) and said the global fund management industry is overpaid and destroying $1,300bn of value annually, equivalent to around 2% of global GDP.

To avoid adding to that waste a simple and relatively alternative is available. The Exchange Traded Fund (ETF) can cost as little as 0.2% a year against the average unit trust/OEIC weighing in at 1.5% a year.

Trusts

A complex area touching a small minority but here again it has become easier following an effectively narrowing in the varieties of trust that could be set up by the Finance Act 2006.

Following its implementation the choice narrowed to just two types.

Annuities

This is one area where good advice can make a considerable difference in income secured for retirement purposes. From 6 April 2011, the obligation to buy a pension annuity has been abolished.

The pending regime encourages income withdrawal directly from a pension fund and investment control of a pension plan for life.

The advice requirement here will not disappear but its necessity has been removed.

Regulation

The FSA has had its fill of the retail advisory community.

It has noted public mistrust in the industry and is fed up with the cost and aggravation of dealing with its miscreants.

It has also noted the stakes are higher these days. Advisers are no longer flogging endowment plans that will be someone else’s problem in 20 years time but advising on large lumps of savings from ageing baby boomer that could go more badly wrong much sooner.

Neil Woodford may be a fine fund manager but the quality of investment advice needs to step up a little from default calls for clients to pump yet more money into bloasted Invesco Perpetual income funds.

It has been working for some time on a plan to nail the problem once and for all. Something it thinks will kill out the root problem not just hack at the symptoms.

They call it the Retail Distribution Review (RDR) and its set to kick off in 2013. Among the investment advice community it is a big deal for three reasons.

1. Commission goes – for all retail investment products

2. Advisers must be professionally qualified to a higher standard

3. Increased capital adequacy requirements for advisory firms

The first point is the main point. An end to commission means fees…fees negotiated between client and adviser. Most advisers know too well clients are reluctant to dip into their own pockets directly for advice. This new arrangement is expected to lead to lower earnings.

Reports suggest a range of responses from the advisory community. The ones staying with the programme are working out what is worthwhile and what is not and setting out their stalls accordingly.

Smaller IFA practices have been hanging on, but eyeing the exit. It has been wait and see if a new government and a restructured regulator will make this go away…or at least water it down.

Judging by an email circular from Brian Spence, an adviser on IFA business practice sales, in late February, hope for a reprieve seems to be waning.  It reports the number of potential vendors has trebled.

It certainly appears vain hope. Australia, often a reference market for the UK, are banning commission too, six months ahead of the UK.

When it comes to retail investment product distribution, the IFA dominates the UK market place but their numbers are widely forecast to dwindle significantly by the time RDR is implemented.

FSA chief Hector Sants told the Treasury Select Committee:

“We have some suggestion that 10% to 20% reduction in capacity could flow from the RDR measures; we have obviously deemed that to be acceptable or we wouldn’t be going ahead.”

Barclays announced on 26 January it was throwing in the towel on its financial planning arm. The FT reported “profitability…had been falling over recent years”.

Looking ahead to the end of commission and increased training costs they concluded the economics no longer stacked up. They are throwing their weight instead behind an online execution only operation. The record £7.7mn FSA fine the week previously for fund mis-selling to elderly clients was reported as “unrelated”.

Others banks may follow. The history of banks selling retail insurance and investment products is not short of misadventure also. In June 2010, the FSA fined Alliance and Leicester £7mn for ripping off clients with overpriced life insurance to cover personal loans. In 2003, Lloyds TSB was fined £1.9mn for mis-selling so-called “precipice” bonds, a form of structured investment product where the risk of capital loss was tucked away in the small print.

The combination of the forces of techology, regulation and demand have witnessed the emasculation of the IFA. Radical regulatory change and NEST’s launch in 2012 will shape the new financial services landscape.

DIY personal finance will continue to thrive, NEST, by adding the magic ingredient of a compulsory employer contribution, will thrive. Providers will thrash around to replace lost distribution. Advice will retreat.

Welcome to the age of DIY personal finance.

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Impressions of Egypt

Posted by robin in Financial Articles Monday January 17, 2011 12:47 am


How did they do it?

 

Theories abound but no one seems to know for sure…  Well, it was a very long time ago.

 

No earthmovers…no cranes…no computers.  Just blood, sweat and many years of mass toil under a baking sun.

 

Somehow they cut, moved and arranged with remarkable precision 2.3 million blocks of limestone weighing an average 2.5 tonnes each.  With it they built what would become the tallest construction for nigh on four millenia.  Inside the stone was heavier still. Granite slabs of between 25 and 80 tonnes, yomped from Aswan 500 miles away. 

 

Egypt’s Coptic Christians believe Christ passed through their country.  If he did perhaps, like tourists today, he stood in wonder at the pyramids of Giza, already standing for 2,500 years in his day.  It wasn’t until 1300 that Cheops, the tallest, was finally topped by Lincoln Cathedral apparently.

 

Tens of thousands of unfortunates toiled in their construction.  As many as 400,000 claimed the Greek historian Herodotus and they survived on a diet of onions, garlic and radishes.    

 

Somehow it’s easier to think of Egypt as ancient, than modern, the preserve of bespectacled academics soft-shoeing panelled libraries.  How is Egypt still around when other ancient empires crashed, shrunk and rebranded long ago?

 

In spite of being a popular invasion choice for many of history’s leading hooligans du jour, Egypt remains Egypt.  The Persians….the Greeks…the Romans…the Arabs….the Ottomans…the French…the British…have all turned up uninvited. 

 

Napoleon arrived in 1798 and his soldiers shot the nose off the Sphinx advised our self-appointed tour guide. Others beg to differ and say it was gone long before. 

 

Two millenia plus years before Napoleon, Alexander had landed and his governor Ptolemy would go on to found a dynasty lasting almost three centuries. 

 

It ended with the legendary Cleopatra, the only one of the dynasty polite enough to bother learning the local language apparently (the rest spoke Greek).  History tells of asps and bosoms and Mark Anthony and the battle of Actium.

 

She packed a lot into her 39 years and even had a previous with Julius Caesar and a little ankle biter to show for it.  It all ended in tears as we know and the winner, Augustus, wasted little time in disposing of little Caesarian.    

 

There is a modern Egypt too.  It’s patchy but it’s in there mixed with scenes that can’t have changed much for a very long time.

 

This is a developing market they say, an up and coming MENA (Middle East and North Africa) country.  A visitor doesn’t need to be around too long to point out which parts need developing…much of it.  The pollution for one, from Cairo’s traffic choked streets and much of the infrastructure for another.       

 

An Egyptian’s home is his marriage ticket

 

The pyramids at Giza, about a half hour drive from central Cairo on a week-end, takes in acres of concrete, steel rods and bare brick.  These densely packed apartments, it is said, remain unfinished on account of a building completion tax.  Many properties have unregistered title and an estimated 40% of Cairo properties are vacant.

 

“There are no tenancy laws here,” asserted one expat breezily.

 

“Once they move in you can’t get them out. One squatter moved in to this guy’s house and changed the locks and that was it.”

 

Getting on the housing ladder is a pressing need for young Egyptians with ambitions of marriage but by no easy task if money is tight. 

 

 A mortgage market only got going in 2001 and it has been slow going.  The first mortgage company did not open its doors until three years after and the system initially lacked certain basics like a regulator and a system of foreclosure.  

 

While a reported nineteen banks and six companies were providing mortgage finance by September 2009, total lending was a modest $790mn by the end of 2009, “a drop in the bucket.”   

 

The innovation of mortgages also runs up against a cultural antipathy rooted in Islamic distaste for money lending.  Most homes are bought using savings and income rather than borrowing.  

 

 The Mortgage Finance Authority told the FT “People believe the banks are ruthless and charge high interest rates.”  Now where might we have heard that before?

 

Then there’s the business of property registration in a town where it is scant and the process itself mired in bureaucracy and expense.   Much housing was built illegally and “more than half Cairo’s inhabitants live in teeming ‘informal areas’ that surround the city.”

 

The FT reported in 2007 that “poorer Egyptians have for decades found a solution to their needs by building in slums.  But this cannot be registered because it is built in breach of laws banning buildings on agricultural land. Experts say the informal sector accounts for 45% of new units in Cairo.”

 

More orderly building projects can be found in the smart satellite towns outside Cairo, but these are affordable only for the affluent.

 

Trouble in paradise: “Sharm” sharks  

 

The Nile has flooded the fertile plains for millennia and provides for a significant agricultural industry which accounts for around 14% of the economy and a third of its labour force.  Egyptian strawberries are to be found in English supermarkets.

 

But tourism is a bigger ticket item for the economy and leading foreign currency earner.  In 2009 it earned $10.5bn.  No small potatoes with government budget revenue of around $50bn. 

 

Egyptian tourism offers year round sun and the ancient history mentioned. 

 

Year round sun can be found at the Red Sea resort of Sharm el Sheikh.  “Sharm” to its devotees persuaded by a hot oasis seaside town with little beyond five star hotels and sun loungers.

 

Sharm’s charms were severely dented in December 2010 when an Oceanic white tip reportedly ripped limbs from a 70 year old German snorkeler.  Worse it was only a few days after separate attacks on three Russians and a Ukrainian.  Life imitating Jaws was unwelcome for its promoters. 

 

Worse still British eye witness Ellen Barnes, snorkelling nearby, was underwhelmed with the rescue effort reported the Daily Mail.  After her desperate swim to shore to escape the same fate “lifeguards failed to react” to her pleas to get swimmers out of the water she said.  “They were useless and petrified. They waited five minutes until the attack was over and just watched until the corpse drifted into shore.” 

 

For the more inquisitive visitor, Egypt is also pyramids, Nile cruises and the Valley of the Kings.   

 

Dictatorships built on sand..?

 

For the dispassionate observer, Egyptian politics could get interesting…

 

Hosni Mubarak is an ageing octogenarian autocrat who celebrates thirty years in the saddle this year. 

 

His people might not be celebrating so hard.  Popular sentiment towards him is grudging and resigned for a country that has been in a state of emergency for decades and where the word corruption appears never far from anyone’s lips. 

 

A presidential election looms in September.   His son Gamal, waits in the wings. 

 

Perhaps the people have other ideas?  

 

Steve, a businessman arriving from Iran, has travelled the region for years proffered this opinion:

 

 “Egypt’s getting worse too. More burqas these days and the Parliamentary elections looming in 2011 are scaring the pants off the middle class.”

 

Those same Egyptian middle class pants will likely be further removed following the recent events in Tunisia on 14 January, 2011.

 

Zine El Abidine Ben Ali was until recently the ageing septuagenarian autocrat of Tunisia for the past 23 years. 

 

Then he wasn’t.  He fled popular protest. 

 

Sectarian tension

 

Egypt is predominantly Muslim with an ancient minority Christian sect, the Copts, of which former UN Secretary General Boutros Boutros Ghali is a member.  Estimates of their number suggest 10%of the population  but vary widely between 5% and 23%. 

 

Sectarian tension is part of the furniture and can get very ugly.  Twenty-three people died and 70 were injured when a bomb exploded at an Alexandrian church on New Year’s Eve. 

 

Since the 1970s when Islamic extremism began to rise, there have been periodic outbursts of violence between Muslims and Copts.

 

In 2008 in Upper Egypt, the poorest region south of Cairo, a land dispute saw Muslim Bedouin Arabs attack buildings and kidnap three Coptic monks, who were tortured and told to convert to Islam and spit on their crosses.

 

In September 2010, a fearless op-ed piece by Mohssen Arishie in the Egyptian Gazette condemned fundamentalist Muslims who publicly supported a Coptic Christian woman who had converted to Islam. 

 

 “These homes of fundamentalists are…inexhaustible sources of disgusting stories of mistreatment, injustice and humiliation, with their spouses and daughters being the helpless victims, treacherously prevented from airing their grievances at anyone, including their families.

 

“Nor are they allowed to get divorced if they find the humiliation and other abuse unbearable. Nor is the spouse of a fundamentalist permitted to protest if her new husband comes home one day with a new wife on his arm.

 

“The niqab is part of the cruellest assault on the human rights of women under the authority of Muslim fundamentalists.

 

“The niqab is an extension of the prison-like home, in which the wearers are shut up and are not allowed to appear on the balcony or look out from the window on the outside world.

 

This grotesque headdress transforms the wearer into a dark shadow, with no character or identity in public places. Women coerced into wearing the niqab are barred from communications with the outside world.”

 

Divorce is possible in more liberal quarters of Egypt evidently, this again courtesy of the Egyptian Gazette.

 

Cairo Wife Divorces Dirty Spouse 

 

The wife, a Cairo engineer, was granted a khulaa (no-fault divorce) a month after their marriage after she complained her husband had not had a shower for a month.  The woman testified that “her husband was a freak, who is obsessed with hydrophobia that prevented him from taking a shower for 30 days.”

 

Gruelling Ramadan

 

“I quite like the thinking behind Ramadan,” my travelling companion comments.  “It’s a collective union with the poor to appreciate their suffering.”

 

Mustafa, our faithful taxi driver (at a price) explains the basics…

 

“No food, no water, no touch your woman,” he says in a kind of rasping cut and paste English.  “from four in ze morning, to seex o’clock at night time.”

 

Ramadan lasts a month.  Fourteen hours straight in the Cairo sweatbox without water must certainly heighten the senses to suffering.  Mustafa claims compensatory health benefits, not least for those needing to shed a few pounds 

 

 Al Mouez Street

 

“You must go to Al Mouez street. This is very nice,” we were advised.

 

We did. It was magical. No Hollywood set could have done it justice.  This moonlit market in Islamic Cairo was filled with beads and bangles, clothes and papyrus paintings, leather, gilded furniture and spices.  A Nubian blend at this cultural crossroads between Africa and Arabia.

 

Alighting from our battered taxi we are quickly engaged by traders perceiving dollar imprints on our foreheads.  Their persuasive banter soon had us ambling in the opposite direction to our intentions. 

 

Treading ever narrower and darker dirt alleys where emaciated kittens rummage trash between crumbling high walls, we had visions of innocents abroad making tomorrow headlines.  

 

The most persistent trader leads us to his workshop, a tiny open store front in a narrow alley.  It faces a former building that collapsed in an earthquake in 1992 and has remained undisturbed rubble since.

 

His constant banter gives us unrequested instruction on the difference between fake and real gilded boxes, his stock in trade.  Real boxes have in-lined Rhino horn he advises. 

 

Memories of a long past safari Zimbabwean safari come to mind.  Poachers there had withered the Rhino population from 30,000 to 300 to help satisfy demand for such trinkets.   

 

With no small effort we detach ourselves eventually from a papyrus painting showroom in some back alley Cairo loft, feel for our wallets and retrace our steps, passing as we did a magnificent spice store.

 

Bulging sacks of exotic frankincense and eyes of the devil incense overflowed into the alley way and lined its entrance.  Inside this den was a magical array of alchemy jars, decorated erratically with stuffed and desiccated cobra, shark, bat and crocodile.  Health and safety has yet to greet Cairo.

 

Finally back on track we resume our intended route and eventually contribute to the local rag trade - no doubt over generously given poor haggling skills.

 

While vendors are persistent, Cairo feels safe and is friendly and welcoming. 

 

Not every tourist visitor is prepared to chance it, evidently.  A vast tourist coaches squeezes down these narrow market stall-lined streets. All gawping faces and red-eyed video cameras.

 

Weird.   

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