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A bank’s investment advice for an elderly couple has set alarm bells ringing

My father and mother are both aged over 75. He is in quite frail and decreasing health. They now need to employ their capital to generate income. They may need to fund care fees later on. Their bank has suggested 50 per cent of their capital should go into the bank’s balanced fund, 10 per cent into the bank’s property syndicate and 40 per cent into a structured product yielding 5 per cent and tied up for five years. What do you think?

The warning bells are ringing loud and clear in my office. The banking sector has a pretty poor reputation when it comes to investment advice and, of course, as you have identified, are restricted to their own funds and products. It is pretty clear that they are not always the most suitable for the consumer.

A good starting point would be to identify how much income your parents need. Interest rates are at a pretty low level but imagine if by keeping all of their money in cash earning interest that would satisfy their income needs. Why would they need to take any investment risk at all?
Cash is itself not without risk and, leaving aside any institutional risk, (they would be well advised to use a number of banking institutions if they have significant capital), the single biggest risk to cash at the moment is inflation.

I have always held the view that people do not really notice inflation in the short term but it is a real and present risk.

You might want to sit down with your parents and work out a realistic budget for, say, the next three years. Possibly then you could set aside enough cash for the next three years so they can live the life they want without having to worry about disinvesting their capital at an inappropriate time (perhaps when the markets have fallen).

Assuming that cash simply will not do the job that they need it to do, then it would make sense to look at other asset classes. The next step up would be fixed-interest securities, Government and corporate bonds. These are not without risk to capital and/or interest, they might at the moment yield a better return than cash. Inflation is also a threat to fixed-interest securities so do not think of these as any kind of guaranteed return assets.

Property might also be a good income-producing asset and I am assuming the bank’s property portfolio is made up of commercial property.
Certainly, some of their capital might be applied to a growth portfolio, with the expectation that in three years, they can cash in some of that growth to fund the next few years of income. The challenge is to identify exactly how much risk they are prepared to take. The question is really, how much of their capital could they afford to lose and yet still maintain their lifestyle?

I may be being unfair but I would avoid the bank’s balanced fund until you can prove it is balanced. My scepticism is that man- aged funds are designed for whole groups of people but are rarely suitable for an individual. What is balanced to one person may be either too adven- turous or indeed too cautious for the next.

And do your parents really want all their investments with one institution? If they were my parents, I would lecture them in the same way they lectured me when I was younger about not keeping all my investment eggs in one basket

Nick Bamford is chief exec- utive of Informed Choice



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