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Financial planning case study: Triple effect for long term

The problem. The clients are a married couple who are trustees for monies their three children inherited eight years ago from their grandfather. The assets are held in a discretionary managed portfolio. They are concerned about the volatility of the investments, particularly as one of the children may need their share in less than two years.

Issues to look out for:

  • The different investment timescales for the three children
  • Whether different investment timescales necessitate splitting the investment into several different parts
  • Whether the current investment strategy still meets the needs of the three beneficiaries

The solution.

If you can take a long-term view with each child’s portion of the investment, then it is not unreasonable to have the monies managed collectively. However, when you reach the stage you are at now, whereby each child’s timeline is markedly different, then different strategies most certainly need to be incorporated for each share.

You are right to focus on the levels of volatility, particularly for a remaining investment term potentially as short as two years. Tolerance to volatility is a fundamental aspect of the risk assessment process.

Simply completing a risk-profile questionnaire will not be a sufficiently comprehensive assessment, we need to ascertain your ability to take risk as well as your willingness to take risk.

Although the proportions of the monies which have a longer time-scale can tolerate greater volatility in exchange for potentially greater returns, this is still a strategy which you need to be willing to adopt.

I suggest that a third of the portfolio should be managed with a very cautious strategy. This could include a blend of low volatility equities, fixed interest, fixed-term deposits and cash management. The remaining two-thirds can be managed higher up the risk scale, to be determined by timescales, the outcome of the risk-profile questionnaire and your expressed sentiments.

Periodically, each segmented strategy will need to be de-risked as the remaining time reduces.

The review process will incorporate the following options for restructure:

1: Keep the portfolio with the current discretionary manager provided we are satisfied they truly understand our objectives and their service can incorporate segmenting the portfolio into three “shares” with different investment strategies.

2: Transfer to an alternative manager if they can better meet our requirements.

3: Adopt a part and part strategy by using two or more managers.

In considering the merits of each option we need to understand and factor in restrictions and permissions of the trust, confidence in the manager’s ability to deliver the service required, initial charges, ongoing costs and any tax implications for which accountancy advice should be sought.

By adopting a de-risked strategy, you may lose out on potential growth in overall value, particularly if there are sharp market upturns in the next few years. However, if no action is taken, there remains the real risk that market downturns lead to capital loss which cannot be recovered in the remaining time before partial withdrawal is required. It is strongly advised that the exercise of reviewing and effecting a revised strategy is not a one-off exercise.

Trustees are obligated to conduct regular reviews to ensure that the financial planning arrangements remain appropriate for the trust objectives and the beneficiary’s evolving requirements.

Peter Chadborn is director at Plan Money


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